Level Up! Level 5: Optimizing Digital Campaigns to Customer Lifetime Value (LTV/CAC)

A DTC Performance Marketing Framework for 2020 and The New Decade

Wow! Here we are. The final and topmost level of your DTC Performance Marketing Framework for 2020 and the New Decade. Level 5!

If you’re headed to Etail West 2020 tomorrow in Palm Springs, stop by booth S50 and meet the SoundCommerce team to learn more about this game-changing approach to retail marketing optimization.

This is the framework for retail digital marketers to definitively prove ad spend ROI, quantify the ideal budget to balance profit and growth, and profoundly improve campaign performance. 

We’re talking about true contribution margin- and customer lifetime value (CLV)-based marketing optimization, reconciled by source, medium, and campaign all the way down to specific order ID and named customer.

I want to shout out to Dan McCarthy and Peter Fader of Theta Equity for their important academic and strategic advisory work promoting the value of customer lifetime value, customer equity, and customer-based corporate valuations in retail and beyond — valuable educational input to our platform vision and engineering work at @SoundCommerce.

Leveling Up to Customer Lifetime Value (CLV)-Based Optimization

Here’s the deal. Airlines have done it for years. Your bank and credit card know you better than anyone. Brands — and shoppers — win when business decisions reflect customer lifetime value. 

What happens when you measure digital marketing spend to true customer lifetime value return goals? You unlock more ad spend! You can prove to your peers, executives, and shareholders (with some caveats) that your ROAS is much higher than previously reported.

What happens when you measure digital marketing spend to true customer lifetime value return goals? You unlock more ad spend!

However, have you noticed that all (I mean ALL) industry content regarding LTV and CLV calculate results based on lookback averages — rather than in real time on unique individual orders and customers? This is because the technology and data capability required to calculate these metrics in real time has only just emerged with the rise of cloud computing.

With the fall of third-party cookies and data management platforms (DMPs) due to poor efficacy and consumer security/privacy concerns, and the rise of customer data platforms (CDPs) and more comprehensive data platforms like SoundCommerce — it’s time to revisit these concepts through the lens of specific transaction IDs (order IDs) and named customer profiles.

A CLV vs LTV Primer: Whatever You Call It, Make Sure It Reflects Contribution Profit

Whether customer lifetime value (CLV) or lifetime value (LTV), these terms are intended to reflect lifetime contribution margin of a customer, not just cumulative revenue or gross margin.

Consider the following defined terms:

Gross Margin = Revenue minus order item Cost of Goods Sold (COGS)
We discussed this metric in Level Up! Level 2, Gross Margin-Based Campaign Optimization. Revenue-based ROAS is good. Gross margin is better. But contribution margin is really the only way to get to meaningful ROI analysis.

Contribution Margin = Gross Margin minus Variable Operating Costs
We discussed this metric in Level Up! Level 3, Contribution Margin-Based Campaign Optimization. Order-specific gross margin-based ROAS is good. Contribution margin is better. Knowing contribution margin net of COGS, marketing expense, and operating expense is key to a viable business. And contribution margin per customer (rather than per order) is really the only way to get to meaningful digital marketing ROI analysis. See Customer Lifetime Value (CLV) below.

CAC (Cost-to-Acquire-a-Customer) = total sales and marketing costs to acquire a new customer for the first purchase transaction. We discussed the importance of discerning new and repeat customers in Level Up! Level 4, Drive New and Repeat Shopper Engagement through Paid Campaigns.

CRC (Cost-to-Reengage-the-Customer) = total sales and marketing costs incurred with each repeat purchase over the customer lifetime to bring them back and engage on transactions n+1. This is often ignored or blended into overall spend and ROAS calculations because the complexity to track the actual performance of retention campaigns has proven too great in the past.

Lifetime = total retention time period in which orders are placed

Lifetime Value (LTV) = Average or actual order value (AOV) x order count x Lifetime
If you have to average, it’s better than not calculating LTV at all. But unique customer LTV based on unique transaction IDs allows for segmentation and action driven by actual revenue and expense.

Customer Lifetime Value (CLV) = LTV x contribution margin
This is it! This is the holy grail in terms of digital marketing ROI measurement and optimization. Knowing the (past, present and future) profit generated by a customer, net of their acquisition and retention marketing expense, COGS, and variable operating costs (like fulfillment, delivery, and returns) means you can predict the (profit and cash flow) future of your brand!

Go forth and optimize to CLV-ROAS! But make sure you avoid…

The Common Pitfalls to CLV-Based Marketing Optimization

Given the (data) effort involved to get to individual-level impact of marketing and operations on customer behavior and profit, there are many common failure points when it comes to measuring and optimizing campaigns and spend to customer lifetime value (CLV):

Relying on averages. We discussed this issue in Level Up! Level 3. “Even in the era of big data, most expense tracking and reporting happens in the general ledger, with “peanut butter” averages applied by dividing total monthly expense by total monthly order volume. What’s lost in translation is the wild cost differences between a Facebook and TikTok acquisition, the huge variation between east and west coast deliveries, and the differences in unit economics between a ten-item and a single-item package. Most modern finance organizations still struggle to discern the impact of a sale discount or seasonal mark-down on specific order profitability.”

Ignoring variable operating costs. The hardest part of calculating contribution margin-based CLV is tracking the unique costs of promotional offers, fulfillment, shipping, cancellations and returns, and customer experience at the individual and customer level. Most brands give up and limit their analysis to marketing expense and costs of goods. But this is folly in an industry where the biggest variable expenses are incurred during and after order processing.

Ignoring bad actors. Some shoppers return things. Some shoppers return a lot of things. And some shoppers return everything they’ve ever purchased on a BOGO promo with free shipping promotions. These are not the shoppers you’re looking for. 

Calculating CLV on revenue or gross profit. Per the defined terms above, customer lifetime value should be a contribution profit margin metric reflecting COGS, marketing and operating expense — not lifetime revenue. 

Ignoring post-conversion customer experience. If you’re a hammer (a CDP), everything looks like a nail (a segmented marketing campaign). But brands aren’t built on marketing alone. This is the vision and experience that led us to start SoundCommerce in the first place.

Check out these…

Best Practices for CLV-Based Campaign Optimization

Test This Best Practice: Segment out bad actors and the campaigns that engage them.
Identify customers that can’t realize a profit, and eliminate them from your promotional campaigns. Kill the marketing channels and campaigns that drive the greatest engagement and participation from these loss-inducing customers. Up your spend on source, medium, and campaign where true CLV is greatest.

Test This Best Practice: Calculate CLV from the bottom up for each customer.
Getting to true CLV and avoiding averages means tracking order item COGS, variable acquisition and retention marketing spend, and the variable operating costs to serve the customer — including promotional discounts, fulfillment, shipping, returns, and customer service.

The gold standard for CLV is a P&L profitability waterfall for every customer reflecting actual (not average) revenue and costs over the lifetime of each unique individual shopper.

Test This Best Practice: Invest in customer experience first, marketing last
Post-conversion customer experience is where long term customer relationships are built — ensuring that your assortment, promotions, inventory levels and locations, order routing and customer service experience investment match the CLV potential of each customer served.

Turnkey Marketing Insights and Action with SoundCommerce

SoundCommerce helps consumer brands act and think like Amazon, and that means starting with the fundamental data at the core of the retail model. 

Our focus includes digital marketing as a key success driver, but not at the expense of operational conversion readiness (merchandising planning and supply chain concerns) and post-conversion shopper experience (doorstep fulfillment and customer service capabilities).

As we’ve extended the scope and reach of our data platform, our case studies show that consumer brands and retailers are still in the dark regarding where and how to best apply digital advertising dollars for maximum ROI.

SoundCommerce brings together real-time data at the unique source, medium, campaign, order and customer level to show you exactly where, how, and how much to spend to maximize profitable growth.

Contact SoundCommerce today to take charge of your data and accelerate your profitable growth!