Customer Lifetime Value: One Size Doesn’t Fit All

One size doesn’t fit all

Have you ever tried one-size-fits-all jeans? T-shirts? Underwear? Even socks? They don’t fit, do they? Because if I know one thing, it’s that the law of averages doesn’t actually work.

So why would you apply the same theory to your customer recruitment spend?

Most businesses understand lifetime value and how much their customers are worth to the business over certain periods of time. This determines how much the business can spend to recruit new customers.

So far, so good, right?

Wrong.

We know that individual customers spend different amounts and in different ways – so why would we treat them all the same?

In other words, why would we use averages to determine how much we spend on recruiting a new customer?

The three biggest factors that influence a customer’s lifetime value are:

1. The channel you recruit them through
2. The product category they buy
3. The month/season of their first purchase

Lifetime value can vary dramatically depending on the month a customer is recruited.

Sale periods are particularly interesting as they bring large numbers of new customers into the brand but we have to be able to demonstrate that those new customers are worth spending our precious marketing budget on.

Naturally, there’s no one right answer. However, I’ve looked at the sales results from a few of our retail clients and I’ve picked out three big recent trends:

Low First-Order Value

Sale recruits have a lower AOV than non-sale recruits. This means that a sale recruit is worth less to the business on first order – after all, you’ve probably given them a healthy discount.

Normal Repeat Rate

They may have a lower AOV but sale recruits’ repeat rate (i.e. the % who buy again) is similar to that of a ‘normal shopper’.

Lower Lifetime Value

Although sale recruits do come back and buy again, they’re more likely to do so during sale periods. This means that their overall lifetime value is lower than normal.

Bearing these trends in mind, it’s really important to work through your numbers and identify your allowable recruitment cost during sales periods. This needs to take into account:

1. Upfront discount and what this does to your margin per recruit
2. Predicted future behaviour
3. What percentage of those you recruit will only ever buy during sale

Once you know this, you can identify who’s worth recruiting during the sales and who to avoid.

In an ideal world, you wouldn’t have to recruit any customers during sales periods (if only!) but until that happens, do the maths and figure out where to splash the cash!