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Knowing the True Value of a Customer – Customer Lifetime Value

The previous entries on marketing intelligence have primarily focused on the advertiser’s activities. The articles looked at the contributions of each element of marketing activity and how they can be calculated in terms of their effectiveness and efficiency. In this context we found that the influences and interdependencies of traditional advertising and online marketing channels can be calculated with modelling, so that the advertising budget can be allocated optimally. Initially, advertisers try to keep the advertising costs in relation to the sales under the direct profits. This course of action may be understandable but it can also lead to a false conclusion.

A long-term observation is needed to calculate the true value of a client

A long-term observation is needed to calculate the true value of a client

This fallacy can be illustrated with an example: A banner campaign, costing £100 generates five orders from new customers in the online store. Under the premise that each order reached a net revenue of £20, we made a profit of £100. This would suggest that the evaluation of the banner campaign is positive. A short-term observation leads to a negative evaluation but in the long-term, the opinion will be different.

Although the banner campaign generated only five orders, at the same time five new customers could be acquired. We should not forget that in the digital world customer loyalty plays an ever more important role. This means, that after the first order, more orders might follow. And they will not cause a high advertising expenditure since the client has already been acquired. This shows that the focus should not be on the value of an order, but rather on the value of a customer and the value this customer relationship will bring to the company. The customer lifetime value (CLV) concept takes up this idea. In real terms, the CLV represents the gain or loss that a company generates through the entire duration of the relationship with the customer.

In the field of e-commerce it is also possible to reach existing customers via mailings and social media at practically no charge. Naturally the user should only be addressed with relevant content; otherwise the customer relationship will become strained or even end - by unsubscribing from the newsletter for instance. Moreover, existing customers can canvass new customers with recommendations. The customer value is thus described by many factors.

Overall, it is becoming clear that the biggest value of a customer often only takes shape after the first order. This should also be taken into consideration when evaluating the advertising activities, because a cost-per-conversion analysis is insufficient to evaluate a marketing channel as profitable or unprofitable. The CLV is therefore one of the most important target figures in marketing.

Since this figure results form the entire customer life cycle, the continuous documentation of customer activities represents a major challenge for companies. The more information that is available on the customer, the better he can be addressed in the future.

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