Strategic Insights from Calculating Lifetime Customer Value

Last week’s post looked at the calculations and mechanics of developing a Lifetime Customer Value (LCV) model. This post reviews some of the insights that can be determined from LCV calculations for better marketing, sales and business decisions.

Consider the following sample analysis using the same LCV model example from last week's post for reference.

Acquisition costs for a new customer are high and profitability in the first year is usually low or possibly negative. In the example, the ROI in the first year of acquiring a new customer is ~26% whereas the ROI for the next 4 years for those same existing customers is ~92%. More remarkable is the Sales & Marketing ROI in the acquisition year is ~42% and ~297% over the next 4 years. While this insight may be intuitively obvious in general, it is knowing exactly what your numbers are that will enable you make informed strategic decisions for improving performance.

“If you cannot measure it, you cannot improve it.” – Lord Kelvin (William Thomson)

Consider LCV per customer – in the example, total revenue over 5 years is $88,279 of which $12,000 (13.6%) is realized in the first year. LCV per customer in profit terms is $26,093 over 5 years of which $2,500 (9.6%) is realized in the first year. The point here is that many B2B companies invest a huge amount of resources, time and effort to acquire new customers, but rarely seem to show that same determination and enthusiasm for generating returns from existing customers in subsequent years. But the vast majority of the revenue potential and profitability is only realized in those subsequent years.

This raises some interesting questions:

1. Are your marketing and sales resources aligned with generating the maximum lifetime value from your customers relative to your specific LCV data?
2. Are these resources appropriate relative to the lifetime values? The type of marketing campaign and sales activity to acquire a new customer is quite different from marketing and selling to existing customers.
3. Knowing your LCV revenue and profit profiles, are you using the right marketing and sales channels?
4. In last week’s post I recommended calculating LCV by customer or market segment. You may also consider a separate dimension by product line if applicable. Having the market segment and/or product line slices of the LCV data provides more granular and specific insight for making even better and more relevant strategic decisions.
   

Customer retention is a significant factor in determining Lifetime Customer Value revenues and profitability – I’ll explore that in the next post.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

What do your C-Level Execs want from Marketing?

In my blog post last week I ended the customer buying cycle series discussing the need for separate marketing strategies to address new customer acquisition versus existing customer retention and unlocking the lifetime value of customers.

Two days after that post, eMarketer reviewed a research study conducted by Heidrick & Struggles on the focus of C-level executives in 2009. Interestingly the top 3 priorities for US senior executives are:

• Acquire new customers
• Increase customer retention
• Increase customer lifetime value

That puts Marketing squarely in the hot seat to enable and drive results for these top business priorities during these difficult economic times. Although not part of this research study, the disconnect for me is that other research shows that so many companies have cut marketing budgets over the past 6-9 months. So, while the top business priorities are clearly goals that marketing needs to drive, they have fewer resources and reduced budgets to accomplish it.

Although these 3 priorities have broad applicability, they may not be specifically what your C-level executives are thinking at your company. I would suggest that, if you haven’t recently done so already, marketing leadership do their own survey of C-level executives of business priorities for the next 12-18 months for your company, and then develop your strategic plan to deliver on those expectations.

“Marketing is too important to be left to the marketing department.”
– David Packard (co-founder Hewlett-Packard / HP)

Once you have your specific top priorities, you’ll need to show your C-level executives:

• Specific marketing strategies for each
• Current marketing campaigns and programs in each area
• How Sales is being enabled to bring in deals in each of these areas
• How other areas in the company are aligned in support of these plans
• Results from these campaigns and programs
• What’s working, what isn’t
• What needs C-level attention

The 4th highest priority in this survey is ‘Improve Marketing ROI’ – an interesting topic that has frustrated many C-level executives and marketers that I’ll explore further in my next post.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

Buying Cycle – You have a customer – now what?

This last post in the customer buying cycle series, explores opportunities for marketing and sales to engage with existing customers to drive more deals.

Even though the customer has bought and successfully implemented your product/service/solution, the buying cycle continues with the customer focused on achieving the benefits and value that initially drove them through the earlier steps of the buying cycle. While a customer may not specifically be in the market to buy something at this time, the outcome from this phase of their buying cycle will determine whether they buy more from you in future and what recommendations they make to anyone who asks.

During the achievement step, responsibility for customer success is primarily with support and professional/consulting services. An effective way for marketing to connect with the customer and monitor progress during this step is to ask for a case study. Since case studies are designed to highlight customer achievements, several responses from the customer are possible including:

• It’s too early, no documented achievements yet – this gives marketing the opportunity to follow-up on a regular basis to monitor the situation.
• It’s not going well / we’re having problems / no case studies until our problems are resolved – although negative, marketing can help bring attention to the situation to get it resolved, and continue to follow-up and monitor.
• Customer agrees to do the case study as requested – confirmation of achievement you can now put on record and publicize to attract more customers. Also opens the opportunity to develop a mutually beneficial long term business relationship with the customer.
  

The last step in the customer buying cycle is to have a loyal customer. If your business and product/service/solution creates value for your customer, a loyal customer will create value for your business:

• Lifetime customer value – the total revenue from loyal customers over the relationship lifetime can be many times the initial purchase
• Loyal customers are more willing to be positive references you can use to win other deals
• Loyal customers will promote your product/service/solution in their business dealings generating referrals

It takes significant time, effort and resources for most B2B companies to acquire net new customers. But that’s just for the initial sale – it takes more time, effort and resources to unlock the much larger lifetime value of a customer.

IMO, the key consideration for B2B marketers is that you have two very different audiences and therefore need two different marketing strategies that translate into specific campaigns and programs for each audience:

1. New customers – how to find and acquire net new customers – this is the lifeblood that feeds the long term viability of a business.
2. Existing customers – how to develop customer loyalty that unlocks the significant lifetime revenue stream – this is the major source of revenues and profits for the long term.
   

A key consideration from this series of posts is that the customer buying cycle begins long before your sales cycle and continues long after the sales cycle is done. How do your marketing strategy and sales cycle connect with your customer buying cycle?

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com

The Buying Cycle Disconnect

Talk to salespeople about their process to engage with prospective buyers and you’ll hear all about the sales methodology and sales life cycle they use. Marketing also has a life cycle for designing, developing, launching and executing campaigns plus another life cycle for managing, nurturing and distributing leads. These life cycles are all necessary and important.

However, these are all inside-out processes on how you want to engage with prospective buyers or how they should engage with you. That’s an unrealistic perspective.

Prospective buyers have their own buying life cycle that they will follow. Whether or not it’s a defined methodology, all B2B buyers will follow a similar process for acquiring whatever product/service/solution they need. Customers want to go through their buying life cycle processes and will buy when they are ready. You can achieve much better results by understanding and connecting with your prospective customer’s buying life cycle. I’m not suggesting you put the customer in the driver’s seat – sales still needs to manage and control the process, but to better align your marketing and sales processes with the buying cycle and the outside-in perspective.

Although buying cycles vary by industry, product, service, solution, etc. there are common processes that most buyers want to step through. The diagram to the right outlines the major steps in a generalized B2B customer buying process:

1. Sidelines – the vast majority of your prospective buyers are sitting on the sidelines, not actively looking to buy anything related to what you’re selling.
   
2. Awareness – prospective buyers are aware of the general category or type of product/service/solution you are selling, but have not identified a need for it yet.
3. Interest – the prospective buyer has identified a problem or opportunity that needs to be addressed and explores the issue in greater depth.
4. Research – the prospective buyer defines their requirements and actively researches a long list of possible solutions for the identified problem or opportunity.
5. Consideration – the prospective buyer finds suitable solution sources, gets more detailed information and does comparisons to compile a short list of possible solutions.
6. Decision – the short list solutions are evaluated in various ways including customer defined demonstrations, tests, in-depth analysis and other methods to find the most suitable solution. The buyer could also decide not to buy anything. Marketing is usually disengaged at this point.
7. Purchase – the purchase is made and everyone is happy for a fleeting moment. Sales usually disengage at this point.
8. Implementing – the implementation process to get the solution installed and working for the customer in the manner they expect. Vendor or third party professional services usually assist customers with this step.
9. Implemented – the solution is actively working for the customer. Vendor engagement with customers is primarily through support services from this point forward.
10. Achievement – the customer (hopefully) begins to realize the benefits they set out to achieve from the solution.
11. Loyal Customer – cultivating a satisfied and loyal customer has many benefits including additional purchases and referrals.
    

Although some of these steps in the buying cycle may seem beyond the interests of a marketing and sales discussion, I’ve specifically included them because they are frequently overlooked opportunities for marketing and/or sales to be engaged.

In the next several blog posts, I’ll delve into each step in more detail to explore how marketing and sales can engage more effectively and productively in the customer buying cycle to produce better results.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC. http://marketing.infocat.com