The Physics of Customer Lifetime Value (Part 1)

Customers are the lifeblood of any business. 

I don’t mean to diminish the importance of having a high-quality product, a culture of innovation or a strong brand. We at Umbel would like to believe that we represent those things as well. Still, while much has changed in the digital age (including the way brands acquire and communicate with customers) this one universal truth remains.

Without customers, you don’t have a business.

With this in mind, Umbel’s technology is customer-centric by design. Every data point that flows through our Customer Data Platform, unifying a multitude of data silos with a myriad of marketing channels, is tied to a known addressable customer. Organizing data this way allows Marketers to do some very powerful things with data science to increase the size and value of their customer base. However, before we break down the atomic structure of your customers, let me share a quick word on creative problem solving in the pursuit of science.

A Creative Approach to Problem Solving

A physics student at the University of Copenhagen was given the following exam question: “How would you measure the height of a skyscraper using a barometer?”

His answer: “Tie a long rope to the barometer, lower it to the ground from the roof, then add together the length of the rope and the length of the barometer.”

Simple addition doesn’t demonstrate any real understanding of physics, so the student didn’t receive credit. But like any pragmatic pupil, he appealed the ruling. Since his answer was “technically” correct, it was decided that he would be given another shot at the question. The student is called in and given 5 minutes to answer orally.

He spends the first few minutes in silence looking thoughtful. When reminded of the time limit, the student replies that he has a number of relevant answers but can’t decide which to use.

  1. “You could take the barometer up to the roof, drop it off the side, measure the time it takes to hit the ground, and calculate it that way.”

  2. “If the sun is out, you could stand the barometer on its side, measure the length of its shadow, measure the length of the building’s shadow, and then use the proportion solve for it.”

  3. “If you wanted to be boring, you could use the barometer to measure the differences in air pressure between the roof and the ground to find the height of the building.”

  4. “But the easiest thing to do would be to knock on the janitor’s door and offer him a shiny new barometer to tell you how tall the building is.”

That student was named Niehls Bohr and he won the Nobel Prize in Physics for his contributions to our understanding of the atom. When you think of an atom, you probably get a picture of Bohr’s Model in your head. The nucleus is at the center surrounded by circular orbitals where electrons zip about. We take that mental picture for granted, but it was quite revolutionary at the time. This funny little anecdote is a testament to how many different ways there are to solve a problem.

Ultimately, seeing a problem from all sides is the only way to solve it.

The Atomic Structure of Your Customer Data

Marketers are beginning to understand better than ever that the more connected they are to their audience, the more valuable their audience is. The caveat is that with more connections, comes more data. Putting all of that data to use is no small feat. There’s something of a science to it, and taking a page out of Niehls Bohr’s book, Umbel wants to see that problem from all sides and make customer data the most valuable asset you own. So we’ve developed an atomic model of our own.

Exhibit 1. The Atomic Model of an Audience

Registered Users

At the center of a brand’s atomic audience are Registered Users.

These are people you know a lot about. They have created an account, or joined a loyalty program or signed up for a mailing list. These are people that you can communicate with directly, most commonly using an Email Service Provider (ESP). Registered Users are the most immediately receptive to new content and special offers and the more personalized the better.

Contained within this group are people that you can tie transactional data to, and this is where the moneyball starts with modeling Customer Lifetime Value (LTV). Before Big Data, calculating LTV was a bit of a guessing game, but by unifying customer data, the picture of who your most valuable customers are begins to resolve in high definition.

A Customer Data Platform goes beyond identifying the highest LTV customers, it tells you who they are, so you can find more of them. Tying transaction histories together with customer attributes like demographic data, behavioral data, and social data, Marketers can be more precise with their marketing dollars and focus on the customers with an LTV worth capturing.

The true power of doing LTV the Umbel way comes with segmentation. If you know anything about our Digital Genome technology, you know that Umbel can create custom segments of your audience based on an infinite number of attributes in seconds. So while LTV is not a new idea, what is revolutionary is the ability to measure the LTV of any segment of your audience, no matter how specific.

Brand Audience

Taking a broader view, we’re now looking at a your total Audience. While your Audience includes Registered Users, the majority of these people are unknown users. These are people that you can’t communicate with directly, but they interact with your brand in some way. Maybe they’ve liked your Facebook page or hit your website. They might have some value to you, but you can’t really prove that they’ve bought anything, even if they have.

The only thing you really have on these people is cookie data, which is useful if you’re using a DMP. Tools like this can increase conversions, and through integrations, Umbel has demonstrated an ability to increase the effectiveness of DMPs by allowing marketers to further segment their audiences and get them to a 1:1 with their customers.

Remember, Registered Users are your most loyal customers and have the highest LTV. By focusing outreach to your Audience with a clear understanding of people that already buy from you, you can grow your customer base intelligently. You’re using data from your known users to pull in people from your audience at large, growing your sample size in the process, which gives even better intelligence to move forward with. Talk about growth hacking!

Potential Customers

At the broadest view are your Potential Customers, your total market. Outside of your Audience, these are people that have a need for your product, but either haven’t recognized that need, are currently looking for a solution, or fill that need with the help of a competitor.

In the digital world, Marketers’ best shot to reach these people is through ad networks. While useful, it’s something along the lines of a shot in the dark if you don’t know who is worth putting an ad in front of. Using Umbel Reach, Marketers can better target these completely unknown consumers through ad networks, and once again, this is only possible with a granular understanding of your existing customers, their digital genome.

So Now What?

If you found this article, it almost certainly means that you understand the potential of customer data to empower your marketing. If you’ve read this far, I hope that you have a better understanding of how different technologies play their own part in their own marketing channel. Umbel wants to help Marketers use the infrastructure they have to put their data to work.