For the rest of the August 2009 issue of CRM magazine, please click here.
Think of one of your low- or mid-value customers—not very wealthy, with a customer lifetime value (CLV) that doesn’t add much to your corporate customer equity. But this customer is socially engaged—an ardent advocate for your products, she has sway in her immediate circles and is somewhat influential on the social Web thanks to her reviews on sites such as Yelp.com. Think you understand this customer’s actual value to you? Well, you can’t hope to understand that value unless you’re able to measure it.
Luckily, greater minds than mine are developing benchmarks, metrics, and equations to help on that front. (Otherwise, this would’ve been a very short article.)
Customer Lifetime Value: Defined as the net present value of future profit derived from the customer, CLV identifies the direct contribution a customer makes over a period of time toward a company’s profitability. A progressive metric—based on expense incurred, revenue derived, profit derived, and customer behavior—it’s key to resource allocation. CLV can drive strategies that increase customer equity, and guide efforts to optimize the individual customer experience—all based on an expected return.
But is that enough? Nope, and here’s why: Those customers also provide your company with indirect value.
In Managing Customers for Profit (2008), Georgia State University professor Dr. V. Kumar introduced new measurements beyond CLV: customer brand value (CBV) and customer referral value (CRV). Together they provide a rounded forecast of future customer behaviors and a way to quantify the real value of social customers, instead of merely the potential profit they represent. Remember that low-to-mid-value customer who has some influence? CRV shows the real value she represents to you. (Sorry, CBV: Next time.)
Customer Referral Value: Over a fixed period, the value of the social customer can transcend historic CLV, Kumar says, thanks to each customer’s “ability to generate indirect profit”—profit that materializes when a new-customer referral reduces customer-acquisition costs to nearly zero.
The referral, in fact, is at the core of the Net Promoter Score (NPS), which correlates customers’ willingness to refer a company with the growth of that company’s profit. NPS has become a popular metric, but willingness to refer isn’t the same as an actual referral. (We all know what the road to hell is paved with.) And NPS doesn’t reflect the social customer’s true value. As community-centric retailers such as Karmaloop can attest, referrals not only increase the number of new customers—but the number and value of purchases made by those new customers.
To gauge how often the willingness to refer becomes an actual referral, Kumar developed questions that far exceed the one asked for NPS. (See “The 4 Questions,” below.)
SIDEBAR: The 4 Questions: Customer Referral Value Goes Beyond Net Promoter Score
|Question Asked||Financial Services Industry (6,700 respondents)||Telecommunications Industry |
|Do you intend to recommend this product or company to someone you know?||68 percent||81 percent|
|Did you actually refer this product or company?||33 percent||30 percent|
|Of those you referred, what percent became customers?||14 percent||12 percent|
|Of those new customers, |
how many were profitable customers?
|11 percent||8 percent|
Source: Managing Customers for Profit, V. Kumar, 2008
The result? Intent to refer and ultimate profitability are not strongly correlated. In one vertical, 81 percent intended to recommend—but only 30 percent actually did. Worse, only progressively smaller subsets of those referrals became customers and customers who contributed profit.
Compared to NPS, CRV’s inclusion of indirect contributions represents a more-accurate look at the social customer’s true value. And yet the disparities between CLV and CRV complicate any investments in your customer. For example, do you invest resources in a customer who has a low traditional CLV but a high CRV? If you do, how do you keep that individual engaged enough to continue to refer ultimately profitable customers? It’s a game of nuance, but at least these measures provide a fuller knowledge of the real value of your customer—not just her future purchasing behavior.
OK—scoot. Go tell someone about this article—it’ll improve the CRV you represent for me and for CRM.
Paul Greenberg is president of consultancy The 56 Group (the56group.typepad.com); cofounder of training company BPT Partners; and chair of CRM Evolution (www.destinationCRM.com/evolution), CRM magazine’s conference (Aug. 24–26 in New York). The fourth edition of his best-selling book, CRM at the Speed of Light (McGraw-Hill)—from which this article is adapted—will be out later this year.
You may leave a public comment regarding this article by clicking on "Comments" at the top.
To contact the editors, please email editor@destinationCRM.com.
Every month, CRM magazine covers the customer relationship management industry and beyond. To subscribe, please visit http://www.destinationCRM.com/subscribe/.