It’s Time to Rethink Customer Lifetime Value
BEYOND CLV AND NPS
So how do you define and find customer value when digital customers are becoming the norm? These are customers who not only buy stuff; they talk about brands to their peers on social networks, and they feel empowered to ask for—or even, at times, feel entitled to—a highly personalized experience from the companies they're investing their time, effort, and money in. They are customers who expect rewards for their brand commitments.
Kumar starts from the premise, as do I, that value is no longer derived from just the financial commitments that a customer makes, but from much more. CLV is just a part of the actual customer engagement value that encompasses so much more. In Kumar's value matrix, there are six components (in no particular order):
1. Customer Lifetime Value—See above.
2. Customer Brand Value—The total value a customer attaches to a brand through her experiences with that brand over time. This would be something like building brand loyalty or positive awareness of the brand, which then drives the customer's brand behavior—e.g., consistent transactions, top-of-mind purchasing, etc.
3. Customer Referral Value—This would be customers influencing other customers to buy or engage the brand via incentive-based referral programs. "You get ten points if you get a friend to sign up for the community." Or, as Karmaloops does, if your friend inputs your specific ID number when he purchases something, you get X in return. CRV has to do with formal referral programs. You'll see why that's meaningful in a bit.
4. Business Reference Value—This is for a B2B setting, where the references have an impact on the buying decision. This could mean an influencer inside a company who knows the buying decision maker, or a reference offered by the vendor to influence a positive purchase decision.
5. Customer Influence Value—This, unlike customer referral value, is more what we now see as social brand influence (for example). This is where word of mouth affects buying decisions. We've seen the stats. Peers, according to Edelman's Trust Barometer in 2014, are one of the trusted sources of choice for 82 percent of the respondents. We've also all seen the numbers that reflect the polar opposite—the lack of brand trust via advertising ranges from 72 percent to 94 percent of the respondents, depending on who you're reading. So the fact that a friend of mine, or someone who I perceive has similar interests to me, might influence me to buy your product or service due to his glowing recommendation on Twitter or Facebook is a real measure of value too—the indirect impact on revenue.
6. Customer Knowledge Value—This is the value of feedback from customers, information a company can then use in creating products customers want. Given that the product failure rate is between 40 percent and 70 percent, according to Kumar, this is a significant part of the value proposition. The customer getting her needs fulfilled is likely to reduce the failure rate of the new products. A huge part of value.
You can see the complexity here. The new breed of customer, who is more engaged with the company than ever in either a passionate or a utilitarian way, or anything in between, is the source of a lot of different streams of value to the company. The old model, where the customer is a loyal customer or isn't, is over. The days in which the customer's investment, past and anticipated, in the company was the measure of his value are over. We now have many ways that a customer can be engaged to provide value, and both the company and the customer benefit, as long as the company is smart enough to recognize the multiple possibilities for the provision of value—and provides the attention to the customer they need accordingly.
Think of it this way. In 2014, Gallup did a study on the value of the fully engaged customer to a company that took some of this into account in its own determination of value. They found that a fully engaged customer provided a 23 percent premium over a normally engaged customer. The value metrics they used were customer loyalty, revenue, etc. No matter how you cut it, the value of customer engagement is immense. It's now time to quantify exactly what that immensity is, and with the work that Kumar is doing, we are on the right track.
Paul Greenberg is the managing principal of The 56 Group, a customer strategy company. He is also the author of CRM at the Speed of Light, which is in nine languages and is currently in its fourth edition. He is the author of the upcoming Commonwealth of Self Interest, to be published in 2016.