March 10, 2016

Lifetime Value

You should know that Lifetime Value projects are currently the second-most popular, after Merchandise Forensics projects. When you talk a lot about customer acquisition, people want to learn more about the customers they are acquiring.

Most companies don't measure lifetime value. Which is interesting, of course, because your investment strategy is 100% dependent upon lifetime value calculations.

I tend to create two different analyses ... one being a twelve-month value analysis ... the other a five year customer migration simulation, designed to measure how lifetime value declines as the customer changes/ages.

In any lifetime value analysis, we care about repurchase rates and customer spend ... but we care much more about profit. This is the other interesting thing about lifetime value work in the industry ... most lifetime value projects measure annual demand or downstream demand ... which makes it impossible to measure the trade-off between how much you invest acquiring a customer and how much the customer pays you back.

In my twelve-month profit models, I evaluate many different attributes. Here is a sample, based on real data from a real company.


Here, we observe a customer with a set of attributes. This customer generates $6.54 downstream profit. This would not be the kind of customer you want to lose $30.00 profit acquiring, do you?

I've mentioned the "December Effect". The example above is for a customer acquired in June. Watch what happens when we acquire a customer in November.


We've already lost three dollars of profit. Now look at what happens in December.


#OhBoy.

Let me state this differently ... for this company, they have to acquire ten times as many customers in December as they have to in June to obtain the same amount of future profit.

Is it any wonder it is so hard for companies to generate profit? I work with many companies that generate half or more of their new buyers in November/December, because that is when it is "easy" to acquire a customer.

Think about this. Is it any wonder we work so hard to encourage "loyal" behavior? If we keep acquiring disloyal buyers in November/December, prospects who are looking to meet a Christmas need at a point in time, it is going to be very hard to move the customer along to loyalty.

Run your lifetime value analytics at a modeled level - combine many interesting attributes, and learn where you are succeeding and where business isn't so good.