Taking Attribution to the Next Level: Customer Lifetime Value

Series: How Smarter Attribution Leads to Smarter eCommerce Marketing

Our previous blog post about attribution explained how marketers can use their attribution knowledge to optimize their cost-per-order (CPO) in order to fine-tune online marketing investments. While sub-segmenting the CPO for vendors, partners or even keyword groups is a great way to increase precision for more granular optimization, this is not the end of the story yet. Read on to learn more about the Holy Grail of online marketing: optimizing to the Customer Lifetime Value (CLV).

Programmatic display is all about real-time data. Talking about milliseconds all the time might seduce marketers to focus only on short-term revenue, but when it comes to allocating marketing budgets, it is essential to step back for a moment and take a look at the long-term success (or not) of your efforts. Like the guys over at home improvement retailer Build.com, you might find that a short-term investment can bring long-term gain. This is why the CLV is one of the most important metrics in online marketing.

The CLV is a measure of a user’s potential value not only for the next transaction, but over the course of his or her lifetime as your customer. A successful CLV optimization therefore requires granular analytics and lots of testing, but those who’ve worked hard to crack the nut, such as Project A’s Florian Heinemann, say it’s well worth the effort. Marketers who plan their media spend using CLV are able to focus their investments on the channels, segments, and even individual users with the highest potential for revenue growth in the long-term.

Let’s get back to our previous example, the sports game. How cool would it be if a coach could predict a player’s value not only for the next game, but across his entire career? This kind of predictive knowledge can enable you to make the right investments the right players early on, and hold on to the players that will help keep your team in the lead. In the same way, the CLV enables marketers to better plan their investments for the long-game.

New VS Existing Customers

The CLV is especially important when it comes to acquiring new customers. In nearly every attribution model, sales from new customers will be attributed a higher value than those coming from existing customers. Why? Because it is more difficult to convince new customers to complete a purchase than existing customers. Some of our retail clients can predict with 90 percent accuracy the potential lifetime value of a customer after their very first purchase. This enables these marketers to make bigger investments in the new customers with the highest lifetime potential.

To calculate the CLV, you should define an evaluation period after which you will be able to calculate how many sales are generated through the average buyer within a given channel. Even better: calculate the margin per user by subtracting the products that were returned. For more aggressive online marketing, you then can increase the “lifetime” time frame and increase the share of the margin spent on marketing. But take heed: though new customers are often weighted higher than existing, marketers should always make sure to use some of the margin to re-activate existing customers, especially those with the highest CLV.

Display advertising via real-time bidding (RTB) is one of the few online marketing channels that allows advertisers to split sales attribution – and hence CPO targets – between new and existing customers, and even between different groups of existing customers based on their CLV. Stayed tuned for next week’s post, when we’ll explain the strategies you can use in the display advertising channel to make the most of your optimizations.

Screen Shot 2016-02-22 at 13.27.25Learn more about the different steps in refining attribution models in The Digital Marketer’s Attribution Handbook.