Why the Future of Marketing Lies in Customer Valuation (Not Attribution)
Marketing attribution has been a hot topic for several years now, especially with the increasing availability of technology and metrics that can show marketers almost every step in a customer’s journey. Greater and deeper visibility into these touchpoints has led to the proliferation of attribution — last touch, first touch, multi-touch. Despite the effort to quantify every activity, the picture is still incomplete.
Current multi-touch attribution schemes only credit each channel or activity with a fraction of a transaction or acquisition. They don’t consider whether those events would have happened without any intervention whatsoever. And they don’t show whether the touchpoint had a positive impact, negative impact, or none at all. The future of marketing lies in customer valuation — understanding how much incremental value marketers create at each step in the customer’s lifecycle.
Before you can measure changes in value you have to have a baseline. So, the first step in customer valuation is understanding and correctly measuring Customer Lifetime Value (CLV). CLV is the present value of all spend, from the first transaction until the customer churns from the brand, including transactions predicted to happen in the future. The goal of customer valuation should be to maximize CLV with each and every marketing activity.
Three Stages of Value Creation
We talk about customer valuation using three generalized stages in the customer lifecycle: acquisition, development, and retention. A company needs to understand where its marketing is creating the most value among these three stages, so it knows how to allocate budget.
1. Acquisition
To begin using customer valuation data, you first need to come up with a baseline CLV for the customer — how much they are likely to be worth if you simply acquire them and then do absolutely nothing to extract further value. This doesn’t mean only valuing their first transaction; a customer may make multiple purchases even if you never retarget them, email them, nor market to them again. You’ll also need to factor in how much you spent to acquire the customer and whether the value they represent to your business makes that acquisition channel profitable — adding real meaning to familiar measurements of efficiency like cost per click and cost per acquisition. Quantity without quality leads to real problems down the line.
As an example of a business that derives most of its customer value from acquisition, think of a company like SmileDirectClub, which sells clear braces online. A customer is very likely to be a one-time buyer (unless the product doesn’t actually work!), since most people only straighten their teeth once.
2. Development
In most businesses that expect repeat transactions, marketers try to get customers to spend again with tactics like promotional emails, retargeting ads, and a loyalty program. They’ll also launch new product offerings in hopes of increasing customer lifetime value with additional purchases.
While all of these tactics sound great, what if a loyal existing customer was going to transact anyway? Marketing budget has been used to retarget them, possibly offering a coupon and giving away margin dollars. A multi-touch attribution model would give credit to the various touchpoints for the transaction. However, this was NOT an incremental transaction. Not only was value not created — it was actually destroyed by discounting an otherwise full-value purchase.
With customer valuation, you’ll be looking at what type of incremental value these activities drive for your business. Would Customer X have had the same lifetime value if you never launched a deluxe version of Product A or assigned them a Strategic Account Manager? If the answer is “yes,” you’ve merely created more SKU’s to manage or hired unnecessary employees, hurting the underlying economics of the business. On the other hand, if you see that the CLV of a customer increases relative to the acquisition-only CLV, then you know these activities are creating value for your company.
3. Retention
Typical retention techniques like discounts and coupons must be looked at very closely through the customer valuation lens. Why send a coupon to a customer that would likely return anyway to buy an item at full price? And for a customer who has been marked as likely to churn, would the tactics used to keep them with your brand cost more than the remaining value they represent? If the answer is yes, you can decide to reallocate your budget to acquiring or retaining a higher value customer.
Where Should the Budget Go?
Depending on the business, you should choose how much marketing budget to allocate towards acquisition, development, or retention. You may think that one of those is driving a lot of value, but it might not be incremental, so you could be misallocating resources. If you are the type of business that creates all the value up front, you should focus on acquisition and experiment with the others to figure out what creates value. If the first transaction is hugely unprofitable, then you need to make sure you’re acquiring customers that become profitable down the line and can be retained effectively at high ROI. If not, you have a situation like Blue Apron, where 62% of their customers churn within six months after taking advantage of a massive discount to try to the service initially.
Transforming Your Marketing Activities with Customer Valuation Insights
With insights into customer valuation, you can take concrete steps to improve your marketing strategy and budgeting immediately. Below are just a few tactical examples:
Discounts
It’s easy to sell a dollar for 80 cents, but you need to understand whether that discount is creating incremental value or if the transaction would have happened at full price anyway. Did you actually capture more share with that customer or just make them more price-sensitive?
Personalization and Messaging
Once you have individual information on customer value, personalization can become more meaningful and effective. For some customers, premium offerings will work best, while others will respond to deals.
Loyalty
Loyalty program tiers are most often based on historical purchase behavior, which may or may not continue into the future. Having forward-looking customer valuation insight can help you build loyalty tiers that extract value more effectively.
Seller Incentives
You might find that you’re incentivizing your sales force to acquire low-value customers, or to use tactics that detract value. Customer valuation can ensure that you’re making it most attractive for your sales team to close the highest value deals.
Once you have access to customer valuation data, there is no one-size fits all approach to acting on it. Some customers yield all their value up front, while others become more valuable with development. And the types of development activities they will respond to will vary as well, so you have to test and see what works for your business.
How to Get Started with Customer Valuation
Most companies will use a vendor to help with customer valuation. Many Martech products today have messaging around increasing CLV, but they’re still using metrics like conversion rate to assess acquisition channels and repurchase rates for retention rather than actual customer value, which can only be procured using probabilistic prediction methods.
At Zodiac, we focus on valuing each customer at every single point in their lifecycle. We can measure customer value at acquisition and then again at different points to see which marketing or business levers added or detracted from that initial valuation.
Our overarching goal is to stop organizations from misallocating their dollars. Our experience with billions of customer data points has shown us that there are diminishing returns on overall acquisition and retention activities. As I wrote in this post, most businesses acquire their highest value customers early on, and then go outside their core group as their business matures. Their acquisition costs increase over time, but CLV doesn’t (in fact, it usually decreases), so their budget would be better spent on other activities that drive incremental value for the organization.
The future of marketing lies in understanding how your activities are creating value (or not) with each customer. The CMO’s who will be most successful will seek to understand where to put budget in order to drive long-term value rather than counting touch-points for short-term growth.
