Lenskold Article Series
by Jim Lenskold
The Metric that Matters Most to the CMO
There are many metrics that are relevant and critical for a Chief Marketing Officer (CMO) to monitor and manage the organization’s performance. The CMO must have access to marketing metrics that are highly relevant to the corporate executives who are concerned with sustaining and growing revenues and profits. Many metrics, including revenues and profits, work well for the current state of the business but provide little or no insight into long term performance. The metric or the set of metrics that is best owned at the CMO level to manage both short term and long term performance is Customer Lifetime Value.
Customer Lifetime Value (CLV) is the one metric that reflects most of marketing’s financial outcomes. CLV is driven by targeting high value customers, maximizing the value across product/service categories and business units, maintaining efficiency across marketing touchpoints, and balancing short term purchases with long term satisfaction and brand health. CLV is dependent on so many aspects of the business – including functions outside of marketing – that it would be hard for anyone other than the CMO to own. Even when companies cannot capture and project a specific CLV metric, the CMO focus on managing lifetime value will generate the set of metrics most closely aligned to CLV.
Defining CLV and Related Metrics
Customer lifetime value represents the net present value of future cash flow, which consists of the profit margins from the stream of purchases over time, less the costs for managing the relationship and delivering that stream of purchases. There are variations on the exact calculation but there are three versions to define customer lifetime value, depending on intended use.
Historical CLV accounts for each customer’s actual lifetime value going back to the very start of the relationship. Historical CLV is used to create predictors of Projected CLV. Projected CLV is the predicted future lifetime value of a given prospect or customer. It supports targeting and can be a key metric for evaluating performance. (Note that this CLV can be further modified to have a unique value for each specific type of purchase outcome.) Incremental Customer Value (ICV) represents the customer value that is expected without additional investment to retain or grow the customer. It is a more narrowly defined time period (not their full lifetime) and is the better metric to assess specific marketing initiatives. It ensures that the stream of profits that may be generated from future marketing contacts is not all attributed to one current marketing initiative. In this article, we are referring to Projected CLV unless otherwise noted, since the CMO benefits from managing forward-looking metrics.
Why is this a high priority metric for the CMO?
Many financial drivers align to and influence CLV CLV serves as a predictive, early indicator metric that allows corrective action CLV maintains focus on short term and long term performance drivers CLV is a strategic metric driven by customer needs and behaviors The CMO has more influence with non-marketing functions that influence CLV The need for the CMO to own the CLV metric and influence non-marketing organizations is not just for the benefit of expanding the role of the CMO. Any step to improve CLV makes it easier for marketing to generate positive ROI by converting higher value customers. CLV is still present even in business models that work on unit volume without insight into the customer relationship, such as consumer package good companies. In this case, marketing needs to understand CLV drivers using market research studies for insights such as knowing if first-time buyers will repeat purchase or if customer loyalty is so low that the customers you attract are switching brands based on price offers that keep margins low.
CMO benefits from monitoring customer lifetime value and knowing how changes in other metrics will ultimately lead to changes in CLV. The set of metrics closely associated to CLV are very actionable since they are generally tied to actual and likely behaviors.
Primary drivers of CLV include:
Acquisition of higher lifetime value customers Retention to extend the lifetime and value of current customers Upsell to increase purchase activity and value Cross-sell to extend the relationship and value Customer value optimization from integrated initiatives Efficiency from reductions in cost to serve Profitability from shifts to higher margin products/services Customer experience and brand health for long term preference Customer referrals and advocacy to drive new buyers Other metrics also feed into customer lifetime metrics. Take for example metrics that relate to growing and retaining existing customers, such as post-purchase satisfaction and brand preference. These drivers of customer lifetime value can further cascade down to metrics on the customer experience or product quality, which influence satisfaction and brand preference.
Where CMO Involvement Influences CLV
Here are some examples of where greater CMO involvement has advantages in managing and improving customer lifetime value.
Customer Experience
Perhaps the most fundamental and critical driver of CLV is the quality of the customer experience relative to expectations. Every interaction from the marketing communications and sales contacts, to product/service delivery and customer service becomes highly relevant. CMOs must have access to the customer experience feedback loop through Voice of the Customer research or social media monitoring to quickly act on any threats that will impact future purchase behaviors.
Marketing & Sales Relationship
The CMO must guide the organization to optimize customer lifetime value collectively, looking across the various silos of the organization to map out the most profitable long term relationship. That may mean prioritizing marketing contacts to first sell lower margin products and services that can lead to increased conversion rates on high end solutions. Or it may lead to one part of the organization acquiring customers at a loss to win high potential customers likely to cross-purchase. The sum of the sales across organizational silos can easily add to more than working independently.
Brand Health
Monitoring brand perceptions across a broad audience is good but monitoring brand perception among current and recent customers has much more meaning. These perceptions of what your brand stands for and delivers, and how it compares relative to competitors, will influence the future revenue stream and CLV of those customers. Brand shortfalls that are not addressed will have a cumulative effect that can significantly impact future revenue streams. Managing the brand health aspect and its impact on CLV ensures that the long-term performance is considered along with short-term performance.
Trade-Offs that Decrease CLV
From a strictly financial perspective, it is possible to grow the business by generating a higher volume of lower CLV customers. This may be a temporary decline based on entering new markets, or it may be a strategic move necessary to succeed against stronger competitors. Even though it is possible that decreasing customer lifetime value is beneficial to the company, CLV remains a primary metric for the CMO. The company will need CLV insights to weigh the trade-offs of volume vs. value, will need to ensure the CLV does not decrease below certain thresholds, and will want to identify actions that increase CLV.
Four Steps to Monitor and Manage CLV Metrics
Customer lifetime value is a forward looking value, so it requires intelligence and a methodology for projecting future value. Here are the four steps necessary to calculate and manage CLV.
1. Analyze Historical CLV
A customer lifetime value calculation must be carefully constructed to take into account customer purchases/revenue/profits as well as costs over time. Since sales growth is generated from marketing and sales team efforts, there should be some estimate of those costs as well. The calculation should allow you to generate an actual CLV to date for current and past customers. Once customers can be ranked based on their Historical CLV, a predictive analysis can be completed to determine which purchase, profile, and interaction data are the best indicators of future value. More data points and more sophisticated predictive modeling will clearly provide more accurate future projections.
2. Score Customers and Prospects
The predictive models or data mining findings are used to determine the scoring criteria which will calculate the Projected CLV of prospects and customers. The Projected CLV is very actionable for targeting marketing initiatives to win higher value customers.
3. Track Effectiveness
The same scoring methodology is also beneficial to assess the Projected CLV upon acquiring new customers or generating incremental sales from existing customers. The scoring will identify if the marketing is attracting new buyers above or below the average CLV. The Projected CLV should also be tracked for defecting customers (leaving or becoming inactive). These CLV metrics are excellent for CMO tracking since they are indicators of current marketing effectiveness and how marketing performance today is likely to influence the future revenue stream. CLV provides much more valuable information than strictly tracking current period purchases.
4. Manage CLV Metrics
With better insight into the core metrics driving CLV, the CMO can maintain a consistent focus of the marketing organization on driving the right behaviors and outcomes. These metrics can ensure alignment within marketing and across extended teams (such as product, service, technical, and finance) whose actions influence CLV. It is the right set of metrics to facilitate a strategic dialogue among executives with a direct link to financial results.
As with the introduction of any new set of metrics, the approach must be developed in stages to get the right definitions and interpretations to effectively guide management decisions that improve performance and profitability.