Grant Arnott, Managing Director – Mediapad
Lifetime customer value – what does it mean to your sales strategy?
Understanding the value of client loyalty is a fundamental yet often overlooked component of successful media sales management. Here we examine how to analyze and implement lifetime value metrics to improve long-term profitability.
What is Lifetime Customer Value (LTV)?
In an increasingly volatile and competitive media sales environment, nurturing and building client relationships is fundamental to achieving business success. Yet acquiring a precise picture of the true lifetime value of a client relationship is a concept that eludes many media sales teams.
Daily, weekly and monthly sales targets regularly push the relationship-building and long-term value imperative aside in favor of short-term revenue goals. However, all successful businesses, media and non-media, must understand lifetime value (LTV) metrics and implement strategies to build and grow LTV. To break it down, the lifetime value of an account is the net present value of the future stream of cash flow attributable to that account. The formula looks like this:
Estimated Average Lifetime Value = (Average Sale) X (Estimated Number of Sales)
The objective of lifetime value is to take the sum of all of your interactions with a client, in terms of both revenue and cost, and develop strategies to grow that relationship for maximum profit.
What does this mean in the context of media sales? Lifetime value will help your sales team understand what each client costs, where the breakeven point is and what each client’s lifetime contribution should be based on present levels. This will help improve marketing efficiency and sales profit.
Understanding LTV also allows for:
• more accurate revenue forecasting
• improved ability for long-term planning
• more focused growth strategies
• increased long-term profitability of each client
This knowledge will have a significant influence on your sales planning and decision-making and will reveal which clients are most valuable and which clients are least profitable. Incentives and strategies for increasing the value and profitability of existing clients can be implemented more easily, to both increase present value and increase the long-term loyalty of clients. Statistically it costs up to seven times more to acquire a new account than it does to renew an existing account, yet few media businesses invest the same resources into growing existing accounts as they do into finding new ones.
Return on Customer (ROC) – the new school of thought
The newest school of thinking on the subject is being driven by one of the world’s most recognized authorities on loyalty marketing, Don Peppers. Return-on-customer (ROC) is Peppers’ latest methodology for tracking client value.
“Too often, businesses have not been looking at the future contribution a client would make, and the way that contribution might increase if the client was happy with the business,” says Peppers. “Our goal was to come up with a solution that would simplify how businesses can take better account of the way clients create value in the future, as well as in the present.”
Peppers suggests that while businesses tend to focus on return-on-investment (ROI), this is based on a presumption that cash is the scarcest resource, when in actual fact it is customers that are the scarcest resource for any business.
“For customers to create any kind of value at all they must engage with a business,” he says. “In that respect, customers are scarcer than cash. A business can go to a bank and borrow against an investment and get a return. However, there’s no secondary market for customers – you can’t go to a bank, borrow some customers, create some value and pay it back later with interest.
“We realized that if businesses were going to create long-term value from clients, they needed a financial metric that addressed three fundamental issues – that clients create all value; that they create both long-term and short-term value; and that clients are a scarce resource, so you must maximize the value you create from each one.”
The formula Peppers uses for measuring ROC is this: the profit made on a customer for a particular period, plus the change in lifetime value of that customer over the same period, divided by the original lifetime value.
Bring it all together
Monitoring LTV and ROC undoubtedly present significant challenges for a media business focused on direct sales. The analytics required to truly leverage the full value of these metrics is beyond the scope of many media businesses. However, an understanding of the principles of lifetime value and return-on-customer will lead to a greater focus on retention and increasing existing client spend.
By becoming increasingly client-centric and long-term focused, you have an opportunity to build trust, actively encourage repeat business and loyalty. The long-term impact of a positive experience your client has with your media brand is of far greater value than short-term cash gains made via a ‘quick sale’ approach.
There are always going to be external factors that will positively or negatively impact LTV, but by controlling what you can control (that is, your interaction with clients and the incentives you can apply to encourage more spending), you can better predict future revenues.
Grant Arnott is Managing Director of The Media Pad, a specialist content agency delivering business information and thought leadership across a range of sectors. Grant is editor and publisher of both Power Retail and Power Marketer, online resources for e-commerce, digital, mobile and marketing professionals. He is regularly sought after by leading business media for comment on marketing, media and e-commerce issues.