It’s Time to Rethink Customer Lifetime Value

Back in 2003 or so, Orbitel, a telecommunications company in Colombia, tried something really interesting. It did some research and found the business decision makers who would influence the procurement of phone services at their companies. Regardless of the level of residential service these decision makers currently had, Orbitel treated them as high-value customers. Even if they spent the equivalent of just $30 per month, it didn't matter. They were high value.

The concept was simple. Treat them well and that will translate to business decisions on phone service that could benefit Orbitel.

To be honest, I don't remember the exact results, only that Orbitel made the right move and the results for businesses choosing them were noticeably better.

What makes this a good story is that Orbitel wasn't equating high value only with high customer lifetime value, but was focused on the anticipated behavior of the customer in a different context. It wasn't just a left-brained decision but a right-brained one, not just transactions, but interactions.

We've reached the point with the ascension of the digital customer where how we measure the value of a customer has to change. The two metrics for customer value that tend to have credence now are customer lifetime value (CLV) and Net Promoter Score (NPS). Let's take an abbreviated look at each of them and then start positing the replacement—which is actually easier than you might think.

CUSTOMER LIFETIME VALUE

Historically, CLV has been the financial value, typically the net profit, that an individual and/or his immediate household has over the life of the anticipated relationship to a company. I won't go through the permutations of CLV's formula, for they vary quite a bit. Just hold on to this.

NET PROMOTER SCORE

NPS is ostensibly a measure of advocacy developed by Fred Reichheld, Bain and Company, and Satmetrix. It is based on a single question asked of the customers of a company: "Would you recommend this company to someone you know?" On a scale of 1 to 10, a 9 or 10 is a promoter; 0 to 6 is a detractor; and everything in between is pretty much blah or, as Reichheld et al. put it, "passives." The NPS is the score of promoters minus detractors—with a scale that ranges from minus 100 to plus 100. Theoretically, it tells you the level of enthusiasm for and commitment to your company.

Both CLV and NPS were important in their day, but that day has passed in both cases. We are now dealing with digital customers who have a much wider capability to communicate with a company and with their peers about brands. In addition, as the Edelman Trust Barometer revealed in 2006, peers (or "a person like me") were seen as credible spokespersons—signaling the rise of peer influencers. This has had a big impact on how we have to think of customer value. It is no longer as simple as the financial value of the household or the loyalty of the promoter. The measurements have to supersede both of them.

WHO'S RESPONSIBLE?

I'd love to say that I've come up with the new measurements for customer value, but I haven't. However, do not mock me. V. Kumar, Ph.D., a longtime rock star customer-value expert, has. Kumar runs the Georgia State University Center for Excellence in Brand & Customer Management and has awards and titles that are too numerous to list here. He's written a book, Profitable Customer Management: Concepts, Metrics and Strategies, that, as far as I'm concerned, starts the discussion on the metrics necessary to identify customer value in this era of engagement. Inadvertently, since I'm sure it wasn't his intent, he makes CLV and NPS obsolete in the process.