Report Lab

Using customer lifetime value to overcome a growth plateau

Home Insights Using customer lifetime value to overcome a growth plateau

David Howlett

Head of Data Science

June 9th 2022

Analytics and Data Science

As businesses continue to optimise toward transaction revenue, eventually they reach a performance plateau. Targets become stagnant and it becomes difficult to justify increasing media spend to drive business growth. Plateaus are often the result of a digital marketing strategy not being aligned to fundamental growth drivers of the business – profit, new customer acquisition, and customer retention.

Lifetime value (LTV) is key to solve this performance plateau. LTV enables businesses to pivot their digital strategy to invest in new, the most valuable and the most profitable customers to drive long-term business growth. This heightened, longer-term perspective is not visible when optimising towards transaction revenue alone.

Once LTV has been implemented, you’re no longer restricted to investing based on a singular purchase. You may find certain products are best suited to loss leaders or have unseen profitable growth value. Moving away from transaction revenue highlights the importance of looking at individual product metrics. Every product has a very different value to the business that cannot be illustrated simply via transaction revenue. It can easily become exploited when you implement it into your wider strategy.

The lifetime value solution

LTV calculations enable businesses to calculate expected value of new customers over six, 12 or 18 months, or whatever period is right for your business. Many companies often calculate what an average new customer is worth, but struggle to inject this into their marketing strategy. This forms a disconnection between business growth objectives and effectively optimising their digital strategy.

Fundamentally, your digital marketing team can’t effectively optimise towards a LTV if there is no way to calculate it in their platform. For example, tracking in Google Analytics (GA) if a sale is via a new or returning customer or dynamically calculating LTV at the point of sale, and pushing that value back through into GA.

While nurturing a greater understanding of your audience, we recommend starting simple so you can work towards more complex and robust modelling solutions. Calculating average new customer value and what percentage of sales are new customers allows you to instantly input LTV into your digital marketing strategy. You’re then able to sense check if there is room to invest more if you were to use LTV.

The next crucial step is to determine key factors that impact LTV and exploit them. Generally, we want to avoid sweeping averages because it removes the ability to find opportunities.

Getting the most out of Lifetime Value

KPIs are only valuable when they let you find opportunities and segment data. Revenue enables investment into lower-funnel activity but becomes less effective as a KPI as you move up the funnel. The real power of LTV comes when you segment by product and specifically basket composition.

For example, the average 12-month LTV of a customer may be £80, but for customers who bought expensive shirts, it is in fact £140. That same LTV calculation will likely change again if you consider combinations of products bought together. Customers whose average basket value is high may ultimately have a higher LTV.

Your customers give you all the data you need to effectively score them and estimate their future value by:

Analysing what products they look at
What they purchase
The value of their basket
How frequently they purchase.

Determining LTV based on product and basket composition enables your digital marketing strategy to target new customer growth by product and enables targeted investment to your most valuable customers.

Ultimately, it is possible to calculate the LTV of every individual customer based on their individual user journey through the application of machine learning. This enables you to value your existing customer pipeline and future customers who have shown interest but are yet to purchase. We build these solutions for our most cutting-edge customers and believe this is the future of marketing to stay ahead of your competition.