Customer lifetime value (1)

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Customer Lifetime ValueAkceleračné školenie I., 23. 2. 2016 BratislavaPavel Jašek (@paveljasek)

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Main topics for this session1. Choosing the right metric to focus on

CPC? CPA? PNO? ROAS? ROI? Profit? CLV?

(Goal: Understand differences between various KPIs)

2. CLV: The Holy Grail of Customer Centricity(Goal: Provide overview of customer strategies and relevant analytics)

3. Actionability (Goal: Put chosen KPI into practice)

4. Marketing experiments(Goal: Quick introduction to marketing experiments)

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When a telco company acquires a customer, cash flow for next 2 years is easily predictable

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When an e-commerce acquires a customer, what can you predict about her/his behaviour?

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How easily can you predict customer behavior?History Present Future

Customer 1

Customer 2

Customer 3

Average number of transactions in a learning period

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Your 11 projects work under specific conditions11/11 Focused on end customers (B2C)

11/11 Non-contractual settings

11/11 Non-membership status

11/11 Always-a-share (vs. lost-for-good)

11/11 Continuous buying

11/11 Variable-spending environment

11/11 Partial identification possibilities

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What are your performance marketing goals?

How many of you are oriented on profit? Revenue? New customers? What else?

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Part 1: The right metric to focus on your performance marketing

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CPA5 €

10 €

A

B

Which campaign is performing better?

Cost per Action= Cost / Conversions

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A

B

5 %

10 %

PNO

Which campaign is performing better?

Podíl nákladů na obratu (Cost to Revenue Ratio, Effective Revenue Share)= Cost / Revenue

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20:1

10:1

ROASA

B

Which campaign is performing better?

Return on Advertising Spend= Revenue / Cost

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20:1

10:1

ROASCPA5 €

10 €

A

B

5 %

10 %

PNO

Which campaign is performing better?

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CPA ConversionsAverage

order valueTotal

revenueMedia costs PNO ROAS

Total Profit

(simplified without product

costs)

$50 10 100 € 1 000 € 50 € 5 % 20 : 1 950 €

10 € 30 100 € 3 000 € 300 € 10 % 10:1 $27,000

5 €A

B

20:1

2 700 €

Key idea: Total profit balances the trade-off between unit costs and volume

5 %

… well, it depends

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Focus of performance marketing

CPA

ROAS

Profit

RevenueValue Optimized

ROI and Total Profit Optimized

Conversions Cost OptimizedCPC

ClicksCost Optimized

PNO (CtRR, ERS)

Conversions Cost Optimized

Long term Profit

Customer Equity Customer Lifetime Value Optimized

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PNO

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The wrong CPA can limit your Profit

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Finding elasticity using Bid SimulatorUse Google’s Bid Simulator for estimation of elasticity on specific campaigns.

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What simplifications do you cover?Seeing all touchpoints

Attribution of conversions and costs

Word of mouth and referrals

Cross-environment behavior (cross-device, omnichannel)

Data in the right moment

Individual campaigns vs. portfolio approach

Future incremental purchases

Past behaviour of a customer (new customer?)

Variable spending

Volume of sales

External and indirect effects

Averages vs customer heterogeneity

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Easy way to estimate some of these simplifications

https://life-time-value.appspot.com/

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Can you choose your KPI?

CPA

ROAS

Profit

RevenueValue Optimized

ROI and Total Profit Optimized

Conversions Cost OptimizedCPC

ClicksCost Optimized

PNO (CtRR, ERS)

Conversions Cost Optimized

Long term Profit

Customer Equity Customer Lifetime Value Optimized (CLV)

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Recap of Part 1

CPA

Cost optimization

ROAS, ROI, PNO

Revenue optimization

Profit, CLV, CE

Profit Optimization

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Part 2: Customer Centricity

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“ Customer centricity is a strategy that aligns a company’s development and delivery of its products and services with the current and future of a select group of customers in order to maximize their long-term financial value to the firm”

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“ Customer Lifetime Value (CLV) is the present value of the future (net) cash flows associated with a particular customer “

“ Customer Equity is the sum of customer lifetime values across a firm’s entire customer base“

http://noca.cz/clvbook

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Focusing on profitable customers

% of Total Customers (sorted by profit)

% o

f Tot

al P

rofit

ID 123

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Pareto analysisHow many customers is the company currently dependent on?

Are there customers who causes losses?

Visualizations via decisivedata.net/blog/pareto-charts-in-tableau/

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Google Analytics helps you focus on top purchases and their traffic sources

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Important questions on profitability

Who are our most profitable customers now? And next year?

How do the most profitable customers differ from one-time buyers?

Who has the most discounted purchases?

Who makes the most returns?

How much can you invest in a customer and still be profitable?

How long do you need to wait for ROI?

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Firmy.cz

Cost per click 9 Kč

Cost per action 135 Kč

First purchase value 1 842 Kč

More B2B office customers

Incremental purchases within the first year

Example of TisknuLevne.cz (2010)Zboží.cz

Cost per click 1 Kč

Cost per action 64 Kč

First purchase value 1 749 Kč

More B2C home customers

Low ratio of returning customers

http://old.webtop100.cz/files/2010/martin-penicka.pdf

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Kevin Hillstrom

There is a direct correlation between annual repurchase rates and the length of time you are willing to wait for payback.

http://blog.minethatdata.com/2015/10/lifetime-value.html

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How does CLV look like in reality?

For each customer you typically estimate lifetime profit (discounted in following years).

I’ve found out that for better actionability it is useful to estimate profit for some shorter term: ¼ to 3 years. This should be selected depending on the nature of business when your customer have high probability of repurchasing.

Also, you typically calculate CLV each month/week/day in order to see how your predictions evolve.

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How does CLV look like in reality?

Your monthly calculations for each customer. Naturally, CLV models change when customer purchases and “fade out” the value when the customer is inactive.

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Main areas where online marketers can benefit from CLV

Theoretically:

➔ Customer Acquisition - Expansion - Support - Retention➔ Direct Campaigns➔ Customer Intelligence (CRM, managerial reporting)

Ideas of use cases like those mentioned on The Wise Marketer, on Econsultancy and Custora are nice, but lack details.

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1) Customer AcquisitionHow much can we afford to pay for a new customer? What is the true value per acquisition? Should that differ from CPA / ROAS targeting?

What products drive higher CLV?

How fast can we estimate CLV for a fresh user/customer?

When can we compare CAC and Historical Profit + CLV?

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2) Customer ExpansionFor what segments of customers should we increase/decrease marketing activities (/costs)? When?

When can we push marketing efforts on fresh customers?

What is the impact of (up|x)-selling on CLV?

What less profitable customers should we remove from mailing?

What if CLV estimation rises?

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3) Customer SupportWho can (not) be given a discount?

Who should wait in a queue for a support?

Should we give a customer a gift or an exclusive deal?

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4) Customer RetentionHow much can we afford to pay to retain a customer and still being profitable?

What to do when CLV estimation drops?

How to treat customers with low or negative CLV?

Should we give incentives when CLV rises?

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5) Direct Campaign EvaluationDecide which customers by CLV to select for a campaign.

Can we get top 10% customers by CLV?

Use ratio of CLV as max costs per campaign.

Evaluate campaign by change in CLV.

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6) Customer Intelligence and managerial reporting of your customer base

How does CLV/Customer Equity evolve? For various companies, markets, customer types, segments of customers.

How well can we forecast sales?

What activities can you do to support the growth?

Where will high profits come from? What are profit drivers?

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Recap of Part 2

Customer Centricity Customer Lifetime Value Customer Equity

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Part 3: Actionability and Marketing experiments

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Actionability concernsReporting and optimization for the chosen KPI

Using the data: support of bidding mechanisms

Having the right technology platform for all of it

Opportunity to increase investments for incremental conversions?

Managing KPIs across several campaigns = optimizing account-level KPI by weighting individual campaign’s contribution.

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Advertising Platforms, with Measurement enabled

Measurement Platforms, with Ad Tracking enabled

Measures Google Media

MeasuresAll Media

Online/app measurement

Online/offline marketing mix

Google’s Measurement Solutions

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Reporting support in AdWordsNative support for CPC, CPA, ROAS, ROI. Calculated column for PNO

Possibility to import profit

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Reporting support in AnalyticsRevenue via e-commerce. Calculated column for PNO. Custom metrics for profit.

Cost Import for non-Google ad costs.

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Support of bidding mechanisms in AdWordsReporting and optimizing on Conversions.

Conversion Optimizer, eCPC, Target CPA.

Targeting on ROAS usually requires more conversion data.

Experimenting with multiple bidding strategies (AdWords Drafts and Experiments)

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Recap of Part 3

Reporting

Choosing the right measurement platform

Optimization

Ability to use data for manual or automatic

campaign optimization

Data Integration

Using the right platform

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Part 4: Short introduction to Marketing experiments

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Fresh Lemons Imported to USA from Mexico (Metric Tons)

Any clue on what really happened here?

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Experimentation BasicsKey Terms

All definitions from Wikipedia.

Experiment CorrelationControlledExperiment

Causality Uplift

Orderly procedure carried out with the goal of verifying, refuting or establishing a hypothesis

Experiments that provide insight into cause-and effect by demonstrating what outcome occurs when a particular factor is manipulated

Refers to any of a broad class of statistical relationships involving dependence, which is any statistical relationship between two random variables or two sets of data

The relation between an event (the cause) and a second event (the effect), where the second event is understood as a consequence of the first

Usually defined as the difference in response rate between a treated group and a randomized control group, allowing marketers to isolate the effect of a marketing action and measure the effectiveness or otherwise of that action

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Experimentation BasicsQuestions to get started

Do you know how experimentation can prove the value of your marketing efforts?

Are you relying on correlations, or can you base decisions on measured causal impact?

Do you know the incremental value of each of your media investments?

Do you have a plan to evaluate the effectiveness of new marketing channels?

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Experimentation solutions can help you measure the value of your marketing efforts

Time Series Experiments

User-level Experimentation

CampaignExperiments

Marketing Geo Experiments

thinkwithgoogle.com/articles/proving-marketing-impact.html

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Recap of this session1. Choosing the right metric to focus on

CPC? CPA? PNO? ROAS? ROI? Profit? CLV?

2. CLV: The Holy Grail of Customer Centricity(Managing CLV and Customer Equity)

3. Actionability(Putting chosen KPI into practice with your campaigns)

4. Marketing experiments(Controlled experiments to understand causality)

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THANK YOU! jasek@google.com@paveljasek