Sales & Marketing is dead, Long live Sales & Marketing (Data driven that is): Customer Lifetime Value
Anytime someone says that they work in a creative field hence they cannot measure the creative output of their work is a concerning statement. I would argue creativity stems because you are trying to drive an outcome. So how do you know that your creative juices actually resulted in the outcome that you wanted?
We don’t have to look far, remember the dot com bubble or the housing bubble? The reason why bubbles happen is because you work under the premise that everything will be rosy and hence you become creative to drive that outcome. You may realize it but the premise of everything being rosy is a constraint, which provides you the basis to operate.
Unfortunately we don’t think about measuring right out of the gate. This is what usually happens, we start down a path to do something, and then stuff happens and suddenly we have the epiphany that we need to track it and measure our progress. By the time you get to the last part you are overwhelmed because the infrastructure to measure your progress becomes an excel spreadsheet and tracking progress becomes a manual and tedious task because results from the various elements of your value chain are stored in different repository and you are out of luck….. Does this sound familiar?
One of my favorite metric in any sales and marketing effort is something known as Customer Lifetime Value (CLV). CLV is a very simple premise what is the value of a customer to your business starting from the time of acquisition to a set amount of years. Now I know that the term lifetime word sounds intimidating because you really don’t know. Which is fine, but in most case using a time horizon of 3 to 5 years usually works.
So the obvious question is how do you calculate customer lifetime value? The elements that make up the calculation of customer lifetime value are as follows:
Acquisition Cost (AC): This basically means what does it take to acquire a set of customers based on various segments etc. The initial cost of acquisition is usually captured in the investment you make in your sales force, advertising, marketing, PPC, etc. initially, to get potential clients in to the funnel. If it takes a lot to get you noticed the first time, you are not alone.
Marginal Profit per Customer (M): If you have dealt with microeconomics you know what this is. If you have not gone through an economics 101, that is fine too. What this is the measure of profit that you continue to add to your user base. This is not just the initial booking, but also the subsequent renewals that you get. You need to know this for the various time slices in your overall time horizon
Probability that the customer will stay (p): Like the measure says this is the probability on whether the customer will stay with you after they have tried your products (switching costs may also be a factor here). In order to derive this number you have to have the something called the churn rate. Churn rate is basically a measure of how many customers are leaving you vs. staying with you. The probability measure is basically (1- the Churn rate).
Discount rate ( r ): This is the rate that you will use to discount future value in terms of current value. In most cases if you are familiar with NPV, you can use the weighted average cost of capital (wacc) as the discount rate
Formula for Customer Lifetime value
CLV = -AC + (M1 + C1) p/ (1+r) + (M2 + C2)p2/(1+r)2 + (Mn+Cn)pn/(1+r)n
Now there are other factors that I have not included in this blog such as the capability of the product or service in question. For that matter the ability to deliver capabilities quicker and incorporate feedback into product and service quickly etc. These are all elements that can help increase the customer life time value of your product or service. The net is with the arrival of Cloud and Big Data technologies is naïve to think that traditional sales and marketing can survive, data driven sales marketing is the future and it is here to stay now matter how creative you claim to be. Bottom line any creative idea has to be something that is
Otherwise you are just making stuff up to make yourself feel important. Which might help you in the short term but long term you need to know what is going on to consistently reward yourself and react to changes in the market place. You can contact me @ kkanakas on twitter with your comments