“Will my existing customers keep on buying my brand in the future? How much will my best customers buy in the next 2 weeks? Which customers are at risk of churning? Who will be my top spender in the next six months?”
These are questions that many companies often ask themselves, to be able to forecast the future purchasing potential of their customers, understand the value they can generate, and plan marketing activities that will enhance the success of their business.
Not all customers bring the same value to a brand or react in the same way. To establish personalized relationships and communicate effectively with messages and activities that are shaped to customers’ real needs, it is vital that you know them well, and analyze their past, present and future relationships with your brand.
To do so, you can now count on an extremely valuable algorithm… The Customer Lifetime Value (CLV).
But just what is the Customer Lifetime Value (CLV)?
The CLV is an indicator of a customer’s purchasing potential, starting from actual spending levels.
Using the data and information about all the transactions carried out in a defined time period, together with the details of a customer’s actual purchases, it is possible to calculate the value of each shopper over time, and how it can change in the future.
Generally, the time period used is one year, although it can vary according to the actual market. For example, in markets with a high purchase frequency, such as FMCG, or other large–scale retail environments, it may be more meaningful to use the transactions from the last three months, then predict customer behavior for the next three. In those where the purchase frequency is lower, for example, luxury goods, a time period of two years may be more appropriate.
What happens, once the purchase potential has been calculated?
Every customer is assigned to a cluster, which are predetermined according to values defined by the company, with the results predicting:
- The churn probability.
- The expected spending amount.
- The future spending segment.
As a result, the algorithm enables you to:
- Understand buying behavior over time.
- Forecast what will happen in the future.
How is the CLV calculated?
For more about out how the CLV is calculated, see ‘Who will be your top spender next year? Find out with the CLV’
In the initial phase, the Contactlab data scientists are always available to define, along with you, the most appropriate parameters for the algorithm’s configuration page, in the Data module of the Contactlab Marketing Cloud.
Why calculate the CLV?
Keeping customer satisfaction consistently high and engaging with them in increasingly effective ways, is extremely important to brands, and the Contactlab Marketing Cloud platform delivers truly valuable support in doing so. The output of the algorithm provides you with vital information that helps plan and manage marketing activities, which can then be differentiated and tailored according to the CLV results.
A few examples
- Attract your customers and don’t let them escape.
You can, for example, identify the customers who currently belong to the gold cluster, the one which includes those with the highest purchasing potential, but are predicted to drop to the silver or bronze category in future. For these extremely important contacts, you need to organize marketing activities that maintain their high value, and not risk losing them.
- Customize your messages, don’t communicate in the same way with all your customers.
Different customers have different buying habits and behavior. It’s essential that brands keep these in focus and plan marketing activities, communication automations and differentiated journeys according to the customers’ type, together with their current and expected value. You should always take the needs and aspirations of each individual contact into account and personalize your messages accordingly. And thanks to the CLV, you can readily access data that relates to a customer’s purchasing history and send, for example, offers reflecting their interests.
- Re-engage past customers – even if they are inactive now, it doesn’t mean they are permanently lost.
Customers who frequently purchased a lot in the past, but have stopped buying over time, are not necessarily lost. Identify the contacts with a currently low CLV and, for example, plan re-engagement activities for those who were gold or silver customers in the past, to get them back on board and bring them closer to your brand once more.
The importance of tools that provide information about the actual and expected purchasing behavior of your customers, which also enable you to plan effective communications activities in support of your business objectives, cannot be overstated. But these valuable insights can also help you understand how the relationships with your contacts have evolved over time, as well as provide intelligence about establishing new or revitalized dialogs with customers.