What if you discovered there was a piece of information about your grocery business that could provide the key to growth and success for years to come? Sounds like something you’d want to get hold of, right?
Well, there is.
It’s called customer lifetime value, or CLTV (also referred to as CLV or simply LV), and it’s one of the most important metrics your retail grocery business can measure.
In this post, I’m going to discuss how to measure CLTV, and how you can use this important metric to shape strategies and tactics that will improve your bottom line. I’ll also look at how you can protect this valuable metric from decline.
Why CLTV matters
- CLTV measures customer spend over the long-term, providing a picture of the health of your business both today and tomorrow.
CLTV measures the total value a customer brings to a company over the lifetime of the relationship. The higher the CLTV, the better the long-term health of your business.
Like other key performance indicators (KPIs), CLTV can help you understand how well your company is doing by taking a baseline measurement and continually remeasuring it to identify change and adjust strategies and tactics to meet business needs.
It’s a concept that’s gaining traction among retailers, who say that monitoring CLTV is increasing retention, gaining more sales, encouraging brand loyalty and improving personalization1. Leaders of some of the world’s most successful businesses understand the importance of focusing on customer value as an asset. Research shows that loyalty leaders grow revenues about 2.5 times faster than their industry peers.2
CLTV is clearly a crucial metric for all retail businesses, including grocery, because it provides a picture of how well you’re doing today — and how well you’re likely to do in the years ahead, based on the strength of the one asset every business has in common: customers.
Unfortunately, CLTV is a metric that is rarely talked about in grocery retail, at least outside the small circle of a handful executives who understand the criticality of shopper retention over time. Those grocers who do measure and use it will have a significant competitive advantage.
What CLTV is and how it compares to other metrics
There are many ways that CLTV can be calculated, with varying degrees of complexity. In its simplest form, CLTV is measured as:
Average transaction x Annual purchase frequency x Expected years of relationship3
You may be wondering how it ties in with other metrics you’re already using, and what it offers that they don’t. CLTV is similar to loyalty because both measurements consider the length of the relationship. But loyalty is less indicative of financial health because it doesn’t factor in how much a customer buys.
CLTV is similar to return on investment (ROI), in that both measure customer actions. But CLTV differs in that it considers spending habits and behaviour over a longer time horizon. ROI is a short-term measurement that looks at how a specific marketing tactic influences sales.
How grocers benefit from measuring CLTV
- CLTV can be used to segment customers and develop strategies that promote higher spending by loyal customers for years or decades.
In addition to using the lifetime value metric to measure business success, you can use it to more effectively structure your marketing and other business activities. Here are just a few examples.
- You can use this information to determine how much it’s worth spending to acquire a new customer.
- You can target the types of customers that are most likely to have a high lifetime value.
Acquisition, however, is widely regarded as the most expensive marketing activity. A more effective way to use CLTV is to segment and prioritize existing customers, to help ensure your budget is spent on getting the best returns.
- Consider categorizing customers based on demographics, acquisition method or purchase behaviour.
- Based on that information, you might prioritize marketing or customer service activities specially tailored to ensure you retain your most profitable 20%.
- Look for ways to nudge other customers to spend more or buy more often.
Perhaps one of the most important benefits of keeping tabs on your grocery CLTV is that it encourages long-term strategic thinking, which is so essential to capitalize on the strengths of the grocery sector — high market penetration and high frequency of household transactions.
- Instead of a relentless (and expensive) quest to simply increase next month’s sales, you can use CLTV to shift the focus to getting repeat customers spending more every month — for life.
Few businesses are as long-term as grocery retail, which is what makes CLTV so important for this sector. By activating strategies that encourage customers to increase spend, buy more frequently and stay loyal for longer, you’ll realize the true customer lifetime value of your shoppers and improve your bottom line over time.
Imagine, for example, that your online store signs up one new loyal customer after he graduates. Looking at him through the CLTV lens, you focus your efforts on cultivating and retaining that client. In a few years, that account holder gets married (increasing sales to a two-person household), and then starts a growing family (multiplying sales further). Instead of experiencing constant churn and incurring high acquisition costs, you’ve developed a profitable 20, 30 or 40–year relationship with a multi-person household (and possibly also the households of the adult children who continue to shop where their family has always shopped) — and a high CLTV.
Do you own your CLTV?
- CLTV can decline with poorly executed tactics and outsourcing eCommerce to third party marketplaces.
CLTV is expressed as an exact dollar amount, but like all KPIs, it is always in flux. If the length of the relationship or the value of purchases (amount or frequency) increase, then CLTV will also rise.
Important tactics that will affect customer loyalty, sales volume and CLTV include:
- quality of goods and services,
- customer service interactions,
- convenience shopping services like pickup and delivery, and
- a retailer controlled and branded online shopping experience.
CLTV can plunge downward, to the detriment of the company, when decisions prioritize short-term profits at the expense of long-term customers. Your CLTV can also be drained when you outsource your eCommerce to a third-party marketplace instead of building a proprietary online grocery shopping experience. Strategic retailers don’t let third-parties come between them and their customers. Long-term, high-value shoppers can easily be lured away to another grocer listed on the delivery provider's marketplace, and the fees and markups result in lost profits from high-spending customers.4 Listen to our podcast on how this happens in our interview with Karen Short from Barclays Investment Bank.
As a predictor of your financial health, customer lifetime value is something to both nurture and protect to ensure you retain control of the long-term health of your business.
At Mercatus, we provide digital eCommerce solutions that put grocers back in charge of all aspects of their business — including CLTV. Intrigued? Learn more at mercatus.com/backincharge.
To learn more about CLTV, tune into the Digital Grocer Podcast, where we discuss this incredibly important metric and how retailers can benefit from measuring it: https://www.mercatus.com/blog/resources/podcasts/why-grocers-need-to-measure-customer-lifetime-value/.