Marketers often discuss the life time value of a customer as a key metric to compare alongside customer acquisition costs, customer retention and churn rate.
To be clear, let's establish a few definitions:
Customer Life-time value: The total profit or loss seen from an individual customer over the 'life time' of their use of your product.
Customer acquisition costs: Dollar amount your brand invests to acquire a single customer.
Customer retention: The percentage of customers retained against the number of customers that approached you for a cancellation of service.
Churn Rate: The rate at which customers churn, or cancel use of your service, over a specific period of time.
Now that we have defined a few of the key terms to be discussed in this article, we wanted to pose this question: How is your brand actually measuring the full life-time value of your customers?
There are three key factors needed to measure customer lifetime value in this digital age:Ability to measure across devices and marketing tacticUnderstanding anonymous vs. known users
Tools needed to tie these points together Let's dive into the weeds and walk through the factors noted above.
Measuring across devices In this digital day and age, one of the biggest tasks involved in measuring lifetime value is:
How are you measuring performance across devices? Capturing and measuring life-time value across devices is most commonly performed through aliasing, which in detail includes: Your website provides an anonymous identifier, "user123" for example, each time a unique individual visits from a new device (iPhone, iPad, PC)
When the anonymous user finally signs in, using an email form for example, they authenticate themselvesAs the user continues to log in across devices (iPhone, iPad, PC) using their email address, that authentication process brings the disparate aliases together to create a complete picture of that individual user Measuring across marketing channels
Building on the concept of aliases & authentication to measure users across devices, it's equally important to understand the lifetime value of the marketing channel that drove each user to originally purchase your product.
For the sake of argument, let's discuss channel measurement in terms of last click attribution (as opposed to multichannel attribution).Using aliases and authentication, your brand can measure individual customer value down to the unique marketing channel that drove customer acquisition in the following format: Customer acquisition: How much investment did it take to acquire that customer originally?
Retention rate: Did she stay a customer following a free trial / initial sign up period? Or ...Churn rate: Was she part of the percent of users who cancelled their service following sign up? Tools needed to tie tools togetherYour brand is ready to begin measuring customer lifetime value: Fantastic!
Now what tools do you need? Let's outline a short list showing of the type of tools you'll need as well as a few examples of vendors that provide these capabilities: Web analytics: A web analytics tool will allow you to create goal conversions & events to measure site engagement, marketing channel performance and product purchases. Examples include Google Analytics, Omniture or WebTrendsData management platform: A management platform provides you with the ability to create aliases and communicate authentication.
A low-fi (yet powerful) example is KISSmetrics, while a more robust data management platform like x+1 would provide a little more muscle in terms of capabilities A sample calculation of "Customer life-time value"Now I'll caveat this calculation up front: There are a number of ways to calculate customer lifetime value.
Every brand likes to see their data in a specific way, so I'll just walk through a simple, yet traditional way to make this calculation.
First up, let's get some definitions established:
Span=Average number of years customers remain loyal to 'Client XYZ'. For this example, let's assume average span is 20 years.
Revenue=Measured in months, this is the revenue the individual customer spends on your product. Let's assume your product costs $20 per month.
Months=measurement on an annual basis. Just as a reminder, there are 12 months in a year.
And now let's walk through a sample equation:(months x revenue) x spanNow when we fill in some data pulled from the 'Client XYZ' archives:(12 x $20) x 20=$4,800There you have it: Client XYZ's average lifetime customer value is $4,800.Your turn!
Try plugging in your own company data into the model outlined above and see what comes out.Keywords: Churn rate, Customer life-time, Customer retention, How to keep your customers,How to measure customer life-time valueraph.