By Adam Blair, Executive Editor
Today’s
marketers have lots of tools for measuring individuals’ Customer Lifetime Value
(CLV). Companies like Adobe and Salesforce, along with platforms like Facebook
and Google, offer data, analytics and technology to “make each customer visible
to us,” said Peter Fader, the Frances and Pei-Yuan Professor of Marketing at
The Wharton School, during the recent Sourcing Journal Summit.
“The
differences [between customers] are staring us in the face,” Fader added. “And
not only are customers vastly different from each other, but their lifetime
value varies by orders of magnitude.”
Fader
and Neil Hoyne, Head of Customer Analytics for Google, kicked off the Summit by
making a strong case for CLV. In addition to making marketing more effective, CLV
also can positively impact advertising, promotions, financials, R&D,
sourcing and product design.
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“If
you can come up with a lifetime value measurement, it’s like a number shining over each customer’s head,”
said Fader. CLV provides a different framework for running a retail or brand
business, he added: “Rather than focusing on product, you would want to figure
out what you could do for these really valuable customers. What products and
services should you offer to enhance the value of those customers, and to find
more customers like them?”
Using CLV
Analyses To Boost Customer Retention
Until
recently, CLV has stayed mostly within the walls of the marketing department. Much
of marketers’ interest in CLV stems from the frustrations they experience in
turning newly acquired customers into repeat customers. (This also will be a
key topic for the upcoming Customer
Acquisition and Retention Benchmark Survey Report from Retail TouchPoints, scheduled to publish in December.)
“Marketers
are spending all this money to acquire customers, and then they make one
purchase — it’s almost like they have to acquire them again,” said Google’s Hoyne.
“However, if the marketer can prove that the customers they are acquiring are
more valuable, they can go back to the company CFO and say ‘These are the value
these customers are driving.’”
Taking
a CLV-centric approach to customer measurement can cause a radical shift in how
retailers and brands value their companies’ assets. “A customer-based corporate
valuation means adding up the total value of each customer to determine the
value of the company,” said Fader. “It’s done all the time in the apparel space.
The truth is you’ll only get so far with innovation and efficiency; to succeed, you need to think of your
customers as individual entities.”
The Benefits
Of Catering To Top Customers
One
brand that has taken the CLV concept to heart is the video game company Electronic Arts. “They had
traditionally been a packaged goods company, with no visibility into their
customers, but they did the pivot to CLV during the last 10 years,” Fader
reported. “Now everything they look at is through the lens of lifetime value.
“They
look not only at the lifetime value of each customer, but which customers have
shown the greatest increase in lifetime value,” Fader added. “They find out
which games these people are playing,
and which scenes within the games they
are staying the longest on. Electronic Arts uses this information for
creative copy — they don’t have an ad agency — and they also share it with the
game developers, so that they can come up with cool games to appeal to these
people. They are always looking for ways to enhance these customers’ value, and
to find more customers like them.”
One
reason this CLV-centric focus is so effective for Electronic Arts is that the
gaming industry represents an extreme of the Pareto Rule, which states that 20% of a company’s customers typically account
for 80% of its business. “In gaming
and apps, it’s more like 98% of the
revenue comes from 0.2% of
customers,” said Hoyne.
Even
if the proportions are different, however, the principle is the same — and the
results can be impressive. “In retail, perhaps 2.5% to 3% of the people who come to a web site actually buy
something,” said Hoyne. “But for [retailers] using CLV, we’re seeing conversion
rates as high as 40%.”
CLV Also Can
Protect Margins
Using
CLV as a retail strategy means taking a truly customer-centric point of view,
and acting on it to create a real two-way conversation between the retailer and
the customer. For example, e-Commerce retailers can respond to multiple signals
from customers throughout the shopper journey, but too many continuously steer
customers to a certain product purchase, rather than responding to shifting
shopper preferences.
“As
the customer is giving more signals about their behavior, do you change the way
you market to them?” asked Hoyne. “Do you do anything differently, or do you
just keep pushing them to buy that product — including throwing coupons to them
and giving up your margin? And, do you follow them to see what they do
afterwards, so you don’t have to start the relationship all over again the next
time they come to your site?”
Hoyne
stresses: “The relationship doesn’t have to end with the purchase. You can
project it forward by multiple years. Then you can answer questions like, How do you find more of these people? How
do you develop the ones you have? And how much should you spend to retain them?”
Making
greater use of CLV also requires a level of discipline and accountability in
dealing with low-CLV customers. “Many companies are bending over too far to
keep customers,” said Fader. “If you can quantify the CLV, you can figure out
what kinds of discounts you should be offering — or, what kinds of value-enhancing
activities you should offer instead of discounts.”
Focusing
on CLV doesn’t mean ignoring the remaining 80% of customers, but it does mean paying
more attention to the high-value 20%. “Most people are content to buy once from
a retailer, and then never buy again,” said Fader, who likened these kinds of
interactions to a mutually pleasurable one-night stand. “That doesn’t mean
you’ve failed; it means they’re not looking for a relationship.”
