Combining Customer Lifetime Value (CLV) with Actionable Segmentation

In the last blog, we discussed the methodology to calculate CLV of a B2C company. Many companies do the mistake of creating CLV for all customers (generic CLV) and use it for formulating customer acquisition strategy, including how much money they should spend on new customer acquisitions.

This is a sub-optimal strategy because all customers are not created equal.  The famed Pareto Principle applies here – 80% of your company profit will likely come from 20% of customers. The challenge and the opportunity here is to formulate actionable segmentation plan where high CLV customers can be identified (i.e. the 20% customers) and more such new customers can be acquired. Then you can create better marketing strategy and acquire more high value customers. This can create a dramatic improvement in your business top and bottom lines.

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The segmentation methodology using data science is to use a clustering technique on a cohort of new customers. Use this to create a segmentation plan that you can incorporate in your marketing strategies. Below are some of the dimensions this segmentation plan can include:

  • Gender
  • Age
  • Source of acquisition
  • Geography

Then use the CLV methodology explained earlier to estimate CLV for each segment. The goal is to have clear differentiation between CLV’s of different segments. Then you can determine acquisition dollars for typical customers in each segment.

If you cannot do sophisticated analysis with clustering, we have found that two key dimensions – gender and age – can provide differentiable results.  One such segmentation plan is provided below:

  Age <35 Age > 35
Women Group 1 Group 2
Men Group 3 Group 4

 

You can see the above segment plans are very actionable – meaning you can create marketing strategies to acquire new customers falling into different segments above. Examples include advertising by targeting different demographics (available in Google and Facebook) and using high affinity websites – like those focusing on Beauty, Outdoor activities, and so on.

The focus on each segment will depend on their CLV. The CLV’s in the above grid will vary based on your business. For example, if it is a beauty products site, Group 1 may be the highest value segment. If it is an outdoor products site, Group 4 may be the highest value segment. Use the CLV’s as the reference for generating marketing strategies and budget allocations.

It is also important to note that some segmentation plans can get controversial.  There was a case few years back where a travel website discovered that customers who use Mac to shop at the site tend to spend as much as 30% more on hotel rooms than those who use PC. Noticing this, the travel company showed costlier options to Mac users in the search results. This created major PR and legal problems for the company.

In addition to creating marketing strategies, another use of LTV is formulating priority treatment of customers – for example, you can design customer support strategy so that higher CLV customer get priority lines with less wait times.  Ability to identify high CLV customers are crucial for such innovations.

Finally, looking at the broader picture, CLV is very dependent on the ability to retain customers and earning their repeat purchases. Net Promoter Score (NPS) framework is a major tool to monitor and elevate customer loyalty. We will explore it in a different blog.

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Posted by HireJar Staff

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