The Importance of ‘Customer Lifetime Value’ in B2B Online Advertising

As advertising options online proliferate, B2B marketing continues to evolve into a significantly more sophisticated and complex endeavor.  What’s the value of an impression?  An audience?  A click?  A lead?

If you – like me – run a website or work with advertisers, you know that calculating ROI is becoming increasingly important in the eyes of many advertisers, yet tracking and demonstrating that ROI is challenging at best.  Although the Internet offers much more robust tracking and an immediacy of results than traditional media, it’s no holy grail when it comes to reliably providing identifiable ROI.

On the flip side, as a company advertising online, you are looking for immediate results and validation of your marketing spend.  Who can blame you?  The economy is struggling and advertising dollars are being scrutinized at the highest level.  From Google and Yahoo CPC ads to social media to industry portals, how do you best measure the success of online as a channel in acquiring long-term customers?

Publishers, whether online or print, provide an audience and offer the opportunity for customer acquisition.  They give companies the opportunity to seed and then grow a long-term relationship with key decision makers in their industry.  Yet connecting impressions and clicks with tangible results for advertisers is difficult due to the use of multiple tools and elements in ad campaigns, from video to custom content to social media, along with less-than-precise tracking software, long sales cycles and company websites that may not be ideally optimized to maximize conversions.

Missing from the Discussion

There are multiple facets to the ROI discussion, but one critical element that is often left out is the concept of  Customer Lifetime Value (CLV).  As an online publisher, CLV is an important concept in differentiating between buying a click and creating a customer relationship.  For instance, in our market – public safety (comprised of law enforcement, fire, EMS and corrections) – customers are highly brand loyal.  If you attract them, create a relationship, provide them with value and attentively service their account, they are yours for years.  As an advertiser, CLV is an important tool in maximizing custom acquisition and evaluating marketing spend.

In layman’s terms, Customer Lifetime Value is very simply a way to understand how much you should be willing to invest in a new customer taking into consideration how much that customer will spend on average over the term of their ‘customer life cycle’.  Depending on your product, lifetime value could reflect months or years of business and includes renewals, replacement purchases, repeat purchases and other fees or revenue streams a company might collect from a customer.

Formal definition:  In marketing, customer lifetime value (CLV), lifetime customer value (LCV), or lifetime value (LTV) is the net present value of the cash flows attributed to the relationship with a customer. The use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.

For example, I have an exceptional customer relationship with Amazon and as a single guy, it’s lasted far longer then any of my dating relationships.  My first Amazon purchase was through a promotion 8 years ago.  Amazon probably paid $20-30 in marketing cost to “acquire” me through an online marketing campaign associated with my American Express card.  Since then, I have spent $50-200 per QUARTER from Amazon.  That’s $6,400 in value from that one acquisition, which is quite a return.

Within our industry, one of the companies we work closely with is in the firearms segment of law enforcement.  One of their recent campaigns generated several thousand dollars of immediate sales and a couple dozen new customers.  As we analyzed the results, we realized that most of our clients who sell direct tend to measure results only on the immediate return from those initial sales.  However, for this company, we highlighted that each sale would generate several different purchases or revenue streams from activation fees to new cartridges to replacement parts and accessories over the course of the customer’s lifetime.  When taking those calculations into consideration the campaign went from “successful” to “highly successful”.

Tracking Customer Lifetime Value

Although relevant for any marketer, CLV is particularly relevant for companies who sell direct to consumers or who are distributors.  If you measure online advertising through direct sales post advertising, make sure that you are considering the long term value a customer provides.

While companies can calculate CLV by doing customer surveys and keeping track of the average customer’s spend over time, that can be difficult and time consuming and most companies don’t do it – particularly those in our market.  If you are an online publisher, make sure to always ask advertisers how they value a customer over the long term – it will make your job that much easier in establishing ROI.  Even if they have not calculated CLV, making sure they understand the concept is a good first step.

If you are an advertiser, it’s not difficult to generate and test hypotheses of how much customers will spend over time.  Oftentimes, much of this data can be extracted from your CRM software.  I recommend advertisers at minimum account for potential lifetime spend in assessing their marketing campaigns even if it is with only a general sense of what that spend might look like over time.  A full calculation can be complex and time consuming, but here are 5 steps to quickly eyeball your CLV and tie it back to your marketing strategy:

1.  Estimate the total amount of money that your average customer will spend on your products per year.

2.  Estimate the average lifespan of a customer, meaning how long the average customer continues to purchase products from your company.

3.  Multiply the two numbers in #1 and #2 above to get the average total value of each customer over time.

4.  Apply a discount rate to that value to account for the present value of that future stream of income. I recommend using a discount rate of 5 to 10% and a net present value calculator to determine how much that future stream of revenue is worth to you today.

5.  Figure out how much you’d spend in marketing dollars to acquire a customer based on that calculation, taking into account the gross margin of the products that customer is purchasing and any other strategic factors applicable.

If you’d like to do a more thorough calculation of CLV, here are two useful online tools that guide you through the process:

How to calculate CLV:  http://www.dbmarketing.com/articles/Art251a.htm

HBS CLV Tool:  http://hbsp.harvard.edu/multimedia/flashtools/cltv/

About alexford

Alex Ford is an accomplished entrepreneur, angel investor and executive. He has led Praetorian Digital, the leading online media company in the public safety and security market, as CEO and President since 2001. Under his direction, Praetorian has launched more than 30 websites, including PoliceOne.com, FireRescue1.com, EMS1.com and CorrectionsOne.com – all the #1 digital media properties in their respective markets – and brought together more than one million first responders to create the world’s largest network for public safety.
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