3 Reasons Why Segmentation is Necessary to Understand Customer Lifetime Value

Maria Breaux
June 19, 2014

Marketing metrics like CPC or CPA only capture the cost part of the profit equation. This seems a bit odd when you think about how often successful marketing campaigns are judged on the revenue portion of the equation. It’s also detrimental over the long-term because it treats your marketing efforts as a cost-center vs. a revenue center.

Incorporating customer lifetime value (CLV) is important because it takes both revenue and costs into account. Our recent white paper provided an introduction on how to introduce customer lifetime value into your online marketing campaigns. This post is the first of a 4-part series that will provide pragmatic recommendations for building lifetime value models.

Prelude - Get your data ready

A lifetime value model is only as good as the quality of the data you keep. To develop a good CLV model, you’ll need to ensure you’re accurately measuring things like revenue per customer, margin per sale, and retention/churn or repeat purchase rates.

Once you have your data, there are three good reasons why you need to segment your customers to get an accurate understanding of your customer lifetime value.

Reason 1: Average Revenue Per User (ARPU) is incomplete

A simple example can illustrate. Let's say a business has two customers:

Customer Lifetime Value example

Customer #1 is an unmarried, 25+ y/o librarian, $35K HHI, and buys a hatchback for $15K. Customer #2 is a married, 55 y/o executive with 3 kids, $250K HHI, and bought a sports car for $160K.

Based on this data, the average customer for this business buys $80K cars. Except in reality that $80K car is far outside the price range of Customer #1, and it might not be upscale enough for Customer #2. Furthermore, the average customer’s demographic info based on the details above is basically worthless.

This is why segmentation matters. ARPU tells you that you have paying customers, segmentation can tell you who’s actually driving your business.

Reason 2: Focus your effort on the segments matter most

Go back to the two customers above. Which segment appears to be more valuable to you? Which is the one you want to focus your marketing on?

That’s a trick question. The answer is it depends. If you can convert the hatchback buyer and she buys several cars from you over her lifetime, then she could be worth more than the sportscar buyer. But if you were focusing on a window of 3-5 years, then you’d probably want to focus your marketing efforts on other sportscar buyers.

Either way, you can’t make this decision until you know how different your customers are.

Reason 3: Make better decisions

You might choose to target both customers. And that’s where segmenting for CLVcan be most helpful. Once you can divulge a segment’s CLV, opportunities for acquisition, upsell, and cross-promotion may become more visible. For example, you might leverage retargeting campaigns to upsell to segments with high CLV. Alternatively, you may find that there are cross-promotion opportunities with a segment with lower CLV but potential for growth. Finally, you might decide to cut marketing in channels that consistently acquire customers with low CLV.

Ultimately, understanding your customers' CLV enable you to be a better marketer. This is a 4-part blog series, so stay tuned for more best practices to follow! [Part 2: Gathering Customer Lifetime Value Data – Start Small and Build]

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