Measuring Marketing ROI through Lifetime Value

This is the Future – Get Started!

Out of all the metrics that you are monitoring in your business dashboard, there is one that captures the heart, soul, and ROI of your efforts: lifetime value (LTV) of your customers. For many businesses—especially those with frequent customer touch points—everyone from senior executives, right up to the CEO, can use cumulative LTV as the core calculation around which shareholder value is created and measured. It would go something like this:

Measuring Marketing ROI through Lifetime Value - Ben Legg / 02-26In essence, all business activity could be measured in terms of how the collective LTV of your current customer database has changed over time, minus the marketing costs required to drive that change. This metric shines light into marketing’s biggest blind spot—the junction where long-term value begins to outpace short-term gain. By monitoring LTV, businesses can connect the otherwise separate dots of their marketing activity, and think beyond driving one sale at a time, to driving multiple sales from loyal customers.

But few CMOs are taking the leap to position this metric as the core, key performance indicator (KPI) of their marketing teams’ successes. Why?

1 Lack of Awareness

It’s a common misconception that LTV is impossible to calculate. The fact, however, is that the process requires continuous experimentation. CMOs, CIOs, and CFOs need to come together to build, test, and refine unique quantitative models. This process takes time. And we’re not talking weeks or months; developing a true understanding of LTV can take years.

2 High Barrier to Entry

How do you even begin to quantify a concept that is so ambiguous, expensive (IT costs, data purchasing, manpower, etc.) and time consuming? It’s this question that stops marketers from even beginning to tackle the challenge. The path between instant gratification (e.g., driving single sales) and LTV will be bumpy. It will lead your marketing team to more dead ends than you’re probably used to. Is this journey worth it, when your bonus is paid based on quarterly or annual achievements? If you’re reading this blog post, you can probably guess that my answer is YES. However, many marketers can’t seem to reconcile the effort required to power through the journey.

3 Need for Quick Wins

Given the rapid change in the definition of marketing, a CMO—on average—is currently lasting less than three years on the job before being fired or headhunted. Therefore, as this (measuring and driving LTV) might take more than a few years to prove itself, it won’t help the CMO to keep a job or get promoted in the short-term. CMOs won’t want to start processes they can’t finish. They need to show results now. They don’t have time to wait, experiment, and craft complex mathematical models that show progress over time. They don’t have, well, a lifetime to calculate lifetime value.


HOW TO GET STARTED

Without a doubt, the ability to calculate LTV is the biggest challenge in digital advertising, but it’s also the biggest opportunity. The ability to develop a true, long-term view of your marketing spend will give your company a clear competitive advantage over your competitors. Those companies which fail to measure and make decisions based on LTV, but whose competitors do, will fail to compete and lose. Nobody in ad tech is doing it right and we have much to learn, but some companies are further along in their journeys than others. At this point, I will also make a bold statement: those companies which fail to measure and make decisions based on LTV, but whose competitors do, will fail to compete and lose.

I’ve spent a few years wrapping my mind around this concept and learning from advertisers who are starting to move the needle. Trust me, this concept isn’t easy to understand, let alone master. I barely feel like I’ve reached a point of clarity, and neither have the world’s most brilliant analysts. But that’s okay—for now. As with many important milestones, we rely on our peers to forge the right path. That’s why I’ve written this piece; it will give you a brain dump of much that I have learned on the subject. So what do you need to do?

Step #1: Get Buy-In

Get Buy-InConvince your CEO, CFO, and CIO to commit to measuring and driving LTV for the long-term. This cross-functional senior alignment will help with resource allocation and organizational focus.

The digital advertising world is becoming increasingly complex. Actually, that’s an understatement. The online advertising landscape is painfully cutthroat. Take a concept as simple as cost-per-click (CPC), for instance. Advertisers are constantly looking for ways to outperform their competitors. If you’ve run a PPC campaign, then you probably already know this; your brand’s ability to compete will sometimes come down to half a penny. At scale, these CPCs amplify to become millions of dollars in marketing spend. If you can’t compete by half a penny, you start losing share.

Performance marketers are religious about monitoring spend relative to ROI. It’s their margins—not the advertising marketplace—that determine whether they’ll be game to ramp up their spends. The advertisers who are backing out their spends to an LTV measurement have significantly more wiggle room than the ones looking through a pure direct response lens. This competitive edge directly affects the advertising ecosystem by ramping up the costs of customer acquisition. Over time, as companies become more sophisticated in tracking LTV, the marketers who aren’t will be forced out of performance advertising markets.

Budget-strapped marketers will find themselves in a chokehold, pinching pennies in a way that inhibits them from fully pursuing valuable customer opportunities. Revenues will suffer. Meanwhile, the companies that are measuring LTV will have the flexible ad budgets to acquire users, and sustain profits, for the long term. You see where this is going, and this logic should help you to gain buy-in.

Step #2: Build the Data Infrastructure

Build the Data InfrastructureStart with inventorying your customer data. Determine, 1) what you can use now and, 2) what you need to improve upon. Key questions include:


  1. What customer email addresses do we have now? Are they “live” or lapsed?
  2. Do we have permission to send emails to them?
  3. What do we know about their demographics? If nothing, you can work with third party data companies (such as Experian) to learn more about them (age, sex, household income, marital status, etc.)
  4. Can we link those email addresses to their past purchases? This enables a level of segmentation that, for instance, allows sending a different message to lapsed customers versus high-spending ones.
  5. Do we have other customer data, like mobile app logins or Facebook fan data?

Take note – Email is still the 800-pound gorilla

E-mail has a history of being one of the highest ROI channels for advertising.  Let’s go back ten years. While Adknowledge had a database that allowed for fairly granular consumer targeting, most brands were unable to zero-in on their prospective customers. Five years ago, some e-mail marketers started catching up and could experiment with basic interest targeting.

But over time, email lost its appeal. The channel became synonymous with spray-and-pray spam. Consumers put on their filters, complained, and pushed unsubscribes to a collective record high.

At Adknowledge, we have always taken a different, more responsible path. When targeted and correctly managed, we believe email is not only relevant, but is a magic marketing pill. Here’s why:


Unified View of the Customer

The email address is the primary way to identify a consumer, to be used as the core of a “unique identity” to which all other customer data points can be added and/or derived. For example, if a consumer logs into your mobile app with his email address, you can combine your mobile data about that consumer with your existing data.

Persistence

Unlike other forms of user identification (e.g. cookies) which deteriorate pretty quickly, email addresses remain valid until a consumer stops checking it, which is typically years. This means that an email database will retain its size and freshness for much longer

Integrated Messaging

We can also take our email databases to deliver highly personalized, high-touch, cross-platform experiences. We can segment our users based on historical behavior, which means that we can reach them with the right message, at the right time, on the right platform. You can also target them beyond a mere email; for example, Facebook’s “Custom Audiences” allows targeting of ads to consumers based on their email address.

Integrated Measurement

Although not perfect yet, once you have a more unified view of each consumer (centered around an email address) you can start to track how much you spent marketing to them, and how much you engaged them and persuaded them to spend money with you.


Experiment, experiment, experiment

Now is the point where you can put your data plan into action. For example, you can:


  1. Segment your data into different groups, based on their current relationship with your company and your marketing goals for that group (acquire/upsell/retain, etc.)
  2. Send emails to potential, existing and lapsed customers

Now take your strategy a step further; extend your data to new platforms:

With Facebook Custom Audiences, for instance, we can target users based on their e-mail addresses. You can then take this technique a step further to create “lookalike” audiences that amplify the profiles of your most engaged—and profitable—consumer segments.

This level of cross-platform targeting gives us the data we need to track LTV with precision. Yes, we’re still trying to figure out how to connect the dots, but the pieces are there.

In online advertising, there are enablers and then there are methods. E-mail is one of the biggest enablers of lifetime value.

Acquire More Data

Prioritize growth as part of your company’s advertising engine. Start to systematically get your customers to provide you with their email addresses with techniques such as:


  1. Offering great deals/ coupons/ content (or something else attractive) in order to encourage email submission/signup
  2. Making some functionality on your website or mobile app only accessible for logged-in customers (requiring email submission)
  3. Capturing email address as part of the checkout process on your website (if it doesn’t negatively impact conversion rates too much)
  4. Talking with third party data suppliers to find out what else is available/possible

Once you know what data you have (and what you need), you can join forces with your IT and analytics teams to manage and optimize your database more efficiently. Don’t wait for an 18-month plan or multi-million dollar budget. Get started now. Establish a plan to constantly increase the scale and quality of your database. Never stop testing, evolving, and growing. Be relentless in balancing quality with quantity.

Step #3: Start Increasing Lifetime Value Now

Plan, Act, Measure, and IterateNobody has LTV figured out perfectly, but some advertisers are pulling ahead of others. This approach to analytics is far from black and white. Imagine that you’re throwing a dart towards a bull’s-eye. You’re looking through the haze. Some marketers have a clearer view than others, but we’re all struggling to develop a sense of laser focus.

Often times, the biggest barrier to getting started with a major R&D effort is the feeling that you’re already behind—past the point of catching up.

That’s not true, simply for the reason that LTV means something different to every brand. “Lifetimes” are in the eyes of the beholder. Start by asking the question, “At what point do my customers churn?” After one month? Five months? Five years? Never? Remember to avoid using the average for all your calculations! Certain segments will leave you at different times based on who they are and what they want out of your product or service.

Approach ad networks as more than just platforms for running campaigns. Your (3rd party) account managers work with brands that are similar to yours and can be your extra sets of eyes to survey the marketing landscape. Ask questions. Ask for your partners’ help in seeking out answers. I guarantee that your company will be one of the few advertisers taking this extra step.

So long as you’re a part of the marketing ecosystem, you will never, ever be left to navigate your blind spots alone. Adapt the following framework to your company’s needs:


  1. Plan. Create quarterly goals for all the right people–in marketing and elsewhere–to get started.
  2. Act. Do what you can with the data you have  now, regarding:
    1. Acquisition. User acquisition (in which the user acquisition cost is lower than the predicted LTV)
    2. Upsell. Increasing the LTV of existing customers, through cross/upsell (in which the increased LTV is higher than the marketing spend)
    3. Retention. Reducing customer churn (in which the LTV retained is more than the marketing spend)
  3. Measure. Measure what worked and what didn’t. Also, work out what you couldn’t measure, and make a plan to fix those areas.
  4. Iterate. Fine-tune the three work streams, improve your database, and try again. Fast.

Step #4: Your “Solution” Is Already on Your Team

You’re ready to start tracking LTV. Where do you start? Reach out to an enterprise analytics consultant, and you’ll receive a quote totaling seven-figures and multiple years. This plan should scare you. It’s not the financial investment that’s scary, however. It’s the opportunity cost of waiting years to start tracking your ROI.

It’s okay to hire consultants, but don’t overlook the solution that’s right in front of you: your company’s smartest engineers, marketers, and quantitative analysts. Put your heads together, and make an educated guess of where to get started.

The process won’t be easy, nor will it be harmonious. Your “best-practices” will conflict, and there will be moments when you are absolutely frustrated with the varying points of view.

That’s a good thing. The path to calculating LTV shouldn’t be easy. Be prepared to tear your hair out and be in perpetual experiment mode. You’ll come up with a framework, test it, and then refine it to become a better one. Over and over. This process won’t happen overnight, but it will set you in the right direction.

You’ll need your cross-functional left- and right-brained powers. Look no further than the smartest people on your existing teams.

Step #5: Stop Thinking About Marketing as Marketing


Your "Solution" is already on your TeamCoca-Cola’s Freestyle machines exemplify this concept.
The company recently launched a free app on iOS and Android devices to let fans explore more than 100 available drink options. Fans can create, save, and share their favorite mixes via Facebook. The app also comes with a location finder to help users take advantage of special offers at local Freestyle outlets. This strategy takes “create your own drink” to the next level—create it on your device, save it, share it, find it in real life, and then try it out.

What I love about this marketing campaign is that it’s more than a marketing campaign. It’s a solid growth strategy that is built into Freestyle’s core user experience. This device-agnostic strategy helps to create an engaging user experience across devices.

The connection to LTV?

User behavior on Freestyle machines is traceable, but only at the anonymous and aggregate levels. Coca-Cola’s mobile app helps create individualized user-level portraits. The consequences are two-fold:


  1. Coca-Cola can now track this valuable consumer segment.
  2. Coke can now re-engage this valuable consumer segment, and as a result, increase lifetime value.

The end result is more—much more—than a Coke with a splash of vanilla or orange. It’s a customer who will be engaged for life.

Brick-and-mortar is the darkest area with the least amount of data and insight. Mobile will be the bridge between brick-and-mortar and online analytics.


Final Thoughts:

Let’s jump back to the topic of mobile. In Step 5 (yes, one sentence ago), I said that it will be the bridge between brick-and-mortar and online analytics. The concept sounds simple and elegant; you should be able to monitor and connect disparate touch points.

But if this process is so easy, why has nobody figured it out?

Because it’s not easy. Nobody has fully solved the challenge of cross-platform attribution, which is so fully integrated with the concept of LTV. It may be years until we get to this point. The more involved we are in the process of determining LTV, the further away success will feel. Our natural perfectionism and relentless ambition will inspire us to strive to achieve more.

But along the way, you will learn a ton about your customers and out compete your competitors in the process.

If that isn’t worth the effort, I am not sure what is…