Are Lifetime Value Models Outdated?

by Winnifred Knight of theMARKETINGSITE.com

With the Direct Marketing Association's Assegai Awards coming up in August, we are often asked the question, how do you deal with the Lifetime Value (LTV) of customers. We went searching for some answers and Bart Foreman from Group 3 Marketing's condensed article - Are Lifetime Value Models Outdated? - covers the topic well.

Companies now have to deal with many more touch points and channels than they did just 5 years ago. While this creates more opportunities to reach customers, it also makes it easier for them to defect, increasing the pressure on marketers to build relationships that last.

The constant evolution of the marketing process further complicates the matter. Dynamic and integrated touch points and channels (virtual and real) are re-defining how we reach our customers. There are no longer any walls; we are all interconnected through Intranets and the Internet. And speed is measured in broadband width, not kilometres per hour.

Lifetime value (LTV) models
Lifetime value models - once an important component of marketing - are an expectation of future revenue based on past performance and a series of "what if" formulas. However, in today's environment, we're finding that by the time a question is asked, often the relevant factors have changed and the model is waiting for a new set of variables.

LTV models are outdated because it's difficult to focus on speeding bullets. They were not designed to interact with the dynamic technologies and marketing innovations that now directly impact every marketing decision.

A constantly evolving business environment
Retailing began with bricks, then clicks, and then bricks and clicks. Today, everyone is wireless, interactive and virtual. Previously, companies spoke of never-satisfied consumers; then they became never-satisfied, real-time consumers.

Today, it's the customer who controls the selling process - often times, by the click of a mouse. Although there are numerous ways companies can influence real-time buying decisions, a better price, better service or a wider selection could be just a keystroke away. This makes customers less committed, not to mention completely
undermines the LTV model.

So, savvy marketers have to create relationships that last. To do this, a marketer must measure each customer's dynamics - including demographics, lifestyles and purchasing history. The critical dynamic is not lifetime value, but where customers are in their lifecycles of buying.

And most important, the marketer must know when customers have defected and initiate actions to regain them.

New marketing models for a new marketing environment
Many marketers believe retention is the hardest part of marketing. I disagree. If relationships with customers are built through a database-driven, marketing-focused initiative, marketers can reward patronage; they can recognise and thank loyal customers while communicating value and reasons for the next sale.

New marketing models are focusing on forging relationships with customers based on a growth scenario of building share of wallet, not share of market. It begins by making every touch point a positive experience through exemplary service, timely and meaningful communications and rewards that are easy to understand and use. It demands a customer-centric, enterprise-wide, management-led campaign that is as close to real time as technology and budgets allow.

The turnaround!
It is important to consider whose lifetime value should be measured. Traditionally, marketers have measured the customer's lifetime value to the company. Maybe it would be better to turn the model around and measure the company's lifetime value to the customer. If defections are a problem in a company, the lifetime value to its customers isn't very high. Management's challenge in today's real-time global economy is to maximise the company's current value to each of its customers based on where each is in their buying lifecycle.

This requires understanding where customers are in their buying lifecycle through an "eyes open" focus that incorporates the following steps:

(1) Knowing your customers is not enough. You have to understand them - intimately. The first step is to create a database of known customers that includes demographics, as well as buying habits and patterns. Build a box and then discard the walls, because canned programs don't work.
(2) Employ direct marketing tactics to reward and communicate with customers while tracking their buying behaviour patterns. Then, through a variety of reporting models, look for changes.
(3) Because all customers are not the same, it is important to group them into volume clusters to identify changes. It is easier to work with 10 clusters ranked in order of sales importance than with one seemingly homogeneous group. Clusters exhibit different buying patterns representing where customers in the cluster may be in their lifecycles with your company. Further segmentation - utilising known demographics coupled with recency and frequency information - may help build a very accurate picture of customers in varying lifecycle stages.
(4) Survey customers to get a better understanding of the reasons for buying pattern shifts. Regional shifts, age shifts and gender shifts can all be identified and quickly targeted.
(5) Implement an 'eyes open' and focused approach. The strategy of employing a database driven, relationship-marketing focus applies to all business segments. Through segmenting and reporting techniques, companies can utilise their database to identify and understand their customers and to market back to them with the goal of transforming future purchases directly from the company.

An "eyes (and mind) opened" focused strategy revolutionises the concept of lifetime value, using database and direct marketing tactics to turn "customers for the moment" into "customers for life" and boost retention (and share of wallet) of your most valuable customers.

Let us not only turn our thinking around but also think 'out of the box.'

Winnifred Knight and Luisa Mazinter, email winn@themarketingsite.com or phone 082 575 9922

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