Customer Lifetime Value: What You Don’t Know Can Hurt Your Growth (and Profits)
- Customer lifetime value is coming back into vogue with B2B companies – and this is a positive step
- A strategic view of LTV helps marketing, sales and other functions make smart investments both pre- and post-sale
- Account-based and customer marketers should use LTV to help direct efforts where they’ll have the best impact
Nothing makes me happier than seeing a good metric come back into favor with the B2B crowd (well, okay, maybe a really great cup of coffee makes me happier). Recently, I’ve heard from more and more companies that they are looking at customer lifetime value (CLV or LTV – no one seems to agree on the acronym) as a key performance indicator (KPI). Good for them, I say, because this is one KPI that keeps everyone focused on the right things to grow a profitable business that customers love. In the SiriusDecisions 2016 State of Account-Based Marketing Study, 12 percent of companies said they track LTV, and we expect that number to go up considerably in the next 12 to 18 months.
How can one number do all that? Well, it’s a number with a lot going on. A strategic understanding of LTV is about a great deal more than how much a customer is worth to the business at the time of first sale. It’s also about more than looking at opportunistic cross-sell or upsell deals. Strategic LTV gives a business the big picture of what it’s worth to invest in and grow customer relationships over time, and what resources it will take to deliver on that potential. In case you’d like a refresher, here’s a post we shared on the definition of LTV for B2B .
Beyond getting the calculation, LTV is what you do with the numbers and how they are interpreted for planning, investment and action. Smart customer lifetime value insights take into consideration three scenarios:
- Current value and cost to win. The first scenario is the customer’s current value to the business and what it cost to get there. The “what it cost to get there” part is commonly called customer acquisition cost (CAC) – another smart metric that’s taken hold in B2B. LTV and CAC go hand-in-hand.
- Full-future potential. The second scenario is the theoretical potential of what a company of that size and type could ever buy over the course of being a customer, or what you could call an “account persona.” An account persona is similar to a role-based persona, but rather than being seen as a person in a company, the account persona defines common characteristics at the full account level, involving all possible buying centers and their potential wallet share.
- Likely outcomes and timelines (aka reality check). The third scenario is how much of that potential value the business is typically able to realize from companies of that type – and over what time horizon based on past results and predictive analytics. Knowing these, plus knowing the cost to keep and grow that customer relationship over time (not just customer acquisition cost), allows the business to make smarter account plans. These account plans make it easier and more cost-effective to integrate the toolkits of sales, marketing and other functions to maximize retention and growth, and not to over- or under-invest in specific account relationships.
How do we get to these three scenarios? That’s the beauty of the metric: LTV looks at both future revenue and cost to serve. Most of the time, marketers (and sometimes even sales reps!) don’t have a good estimate of cost to serve beyond acquisition cost, so they don’t get the complete view of the customer’s value less what it will take to keep them. Marketers sometimes don’t have the complete picture of account potential, including all business units or buying centers, so they may under-estimate that account potential. In addition, not having good information about retention rates can also create overly optimistic CLV estimates. Finally, many marketers don’t have account-level insights on even their largest accounts to put a reality check on CLV potential. This can result in spending time on accounts where some business won’t be possible to win in the near term (e.g. where the buying center recently signed with and is happy to stay with a competitor). Sometimes marketers shy away from CLV estimates because the near term may not look very good given the high cost of customer acquisition in some industries; just looking at demand creation outcomes may be friendlier to marketing’s reporting model and goals.
Having a clear definition of CLV is important because in most businesses, customer relationships only become profitable over time. If there are retention issues or high post-sale costs, cost-to-serve issues that impact how long a customer stays, marketing may not be focused enough on post-sale engagement to get to that profitable point. All the work and expense that went into acquiring the customer won’t matter if they defect and never live up to their potential value. There’s a reason cell phone companies used to make you sign up for that two-year contract in return for a cheap phone – they need to lock in some guaranteed profits! In B2B, we often don’t have the luxury of locking customers into contracts (not even cell carriers do anymore), so we must ensure our marketing investments, especially account-based marketing, have a smart balance of pre- and post-sale support so the customer stays for the longest lifetime possible. Remember that in B2B, customer value (and cost to serve) really shows up at the buying center level inside an account, as opposed to B2C, where it’s an individual person.
Side note: ABM actually helps with this if marketers can work with sales and finance to take the long view of customer potential and make strategic investments to realize that lifetime value, including post-sale engagement and retention activities as well as demand creation and sales enablement – but more on that another day!
Join us at both our EMEA Summit and our TechX event to learn more about account-based and customer lifecycle marketing and the new role marketing can play in ensuring customers reach their full lifetime value.