17th May 2010
As more companies adopt customer lifetime value strategies, do firms need to apply a new measurement approach to avoid losing influential customers?
The idea that companies should consider the lifetime value of their customers has become one of the core premises of sophisticated marketing over the past decade. By taking the longer-term view, companies can optimise their customer relationship strategies. The customer lifetime value can be used to drive decisions such as which customers to target, how much to spend on acquiring them, and how best to serve them to ensure that they remain loyal for years to come.
Airlines, for examples, have long been known to reward their most frequent flyers and those that spend more on high-cost fares. Casinos are also known to treat their high rollers to various indulgences such as free drinks, meals, and accommodation. However, applications of the lifetime value concept can be found across industries and products.
- Telephone and cable operators have devised extensive promotional plans that entice consumers with lower rates for the six months or even as long as a year, hoping to generate greater profits for many years after the promotional rate expires.
- Banks, which traditionally have had a hard time relating to customers across product lines, are increasingly developing a holistic view of their customers. It is not uncommon for a bank to offer customers lower rates on loans, for example, provided they also open a checking account with direct deposit of their salary.
- Some of the lifetime value applications are more difficult to detect. For example, a high lifetime value customer calling the company’s support line may be routed to a special queue with shorter wait times and higher-level experts on the other side of line.
But how is customer lifetime value measured? As more companies adopt customer lifetime value strategies, the question becomes more critical.
A tale of two customers
Consider George, a hypothetical yet highly realistic coffee consumer. George practically runs on coffee. He stops at the High Coffee chain store by the office on his way to work. He goes down for a mid-morning refill, then for an after-lunch espresso on his lunch break. And he stops after work for another cup for the drive home. Being a guy that exercises a lot and can easily afford the extra calories, he usually cannot stand the temptation of a sweet to go along with his caffeine intake. Once a week he also buys a bag of beans to use at home, although now that there is a High Coffee store right in his town he sometimes sneaks there on the weekends.
Based on his purchase volume, George’s lifetime value for High Coffee is extremely high. As a High Coffee cardholder, he has earned a platinum status, which rewards him with occasional free drinks and extras. To Rita, the head of the loyalty program at High Coffee, this makes a lot of business sense. The competition is also interested in heavy coffee drinkers like George. The Coffee for Less recent ad campaign literally shows a George-look-alike bragging about their new coffee that not only costs less but presumably tastes better. Keeping George happy means that his heavy spending goes to Rita’s chain and not to the competition.
But earlier this year, George actually switched to the competition. It was Kevin, the guy from accounting, that dragged George to try out something different. Kevin himself is not a big spender like George. He actually wasn’t much of a coffee drinker until a few years ago. After spending some time in Italy, he has developed an appreciation for a good espresso shot, which he is always happy to tell you about. When Kevin and a group of coworkers go out to lunch, he always manages to drag them to the coffee place to join him for his fix.
Kevin and George often lunch together, and then go together to get their espresso shot. When Kevin switched to a Coffee for Less store that just opened near the office, George followed suit.
Kevin was also a cardholder of High Coffee. With the little spending he did, he was only at the bronze level, and got little to no attention from Rita’s loyalty program. Clearly, George’s move to the competition was a big loss for High Coffee. But it was actually Kevin’s move that was even a bigger loss.
Kevin is one of those individuals who have the power to cause George and others to move to the competition. Problem is, Rita and her group at High Coffee didn’t know it. If they could have figured it out, they would have attempted to keep Kevin happy with their chain at least as much as they tried to keep George happy (they would have had to do different things to keep Kevin happy, but that’s a topic for a different article).
The new customer lifetime value measurement
To avoid losing influential customers like Kevin, the chain needs to adopt a new measurement of customer value.
The new measurement of customer lifetime value should incorporate not only individual purchases but also those influenced by each customer.
The following chart illustrates a typical distribution of a company’s customer base:
For many companies, the rule of thumb says that 80% of the customers generate 20% of the revenue. Most customers fall into the 'Quiet Majority'. They neither spend much nor influence others to spend. The “Wealthy Snobs” are the ones that spend a lot, but have little influence on others (George would be one). They are still important, but most companies already recognize them and treat them according to the value they generate. The “High Spend Influencers” are the “super customers”, those that spend a lot and also influence others. Even if they already get preferential treatment due to their high spending level, they should be treated as gold.
The customers mostly missed by companies that apply traditional customer lifetime value strategies are the 'Everyday Influencers'. Like Kevin, while they don’t spend much themselves, they highly influence others in their decisions where to shop, what to buy, and what services to use.
Companies that want to take the most advantage out of the customer lifetime value approach need to change the way they measure customer value. Rather than basing the value solely on the individual’s purchases, they should now include the value of purchases influenced by each customer.
Ran Shaul is co-founder and EVP Solutions at Pursway
To learn more about Customer Influence Value™ and how it can be used to optimize customer relationship strategies, download the eBook The Influencer Marketing Revolution.