For managers and marketers
alike, the power to calculate what customers might be worth is alluring. That’s
what makes customer
lifetime value (CLV) so popular in so many industries. CLV
brings both quantitative rigor and long-term perspective to customer
acquisition and relationships.
“Rather than thinking about
how you can acquire a lot of customers and how cheaply you can do so,” one
marketing guide observes,
“CLV helps you think about how to optimize your acquisition spending for
maximum value rather than minimum cost.” By imposing economic discipline, ruthlessly prioritizing segmentation,
retention, and monetization, the metric assures future customer profitability is top of mind.
For all its impressive
strengths, however, CLV suffers from a crippling flaw that blurs its declared
focus. The problem is far more insidious than those articulated in venture capitalist Bill Gurley’s
thoughtful CLV vivisection. In fact, it subverts how customers truly become
more valuable over time.
When my book Who Do You Want Your Customer To Become? was
published, five years ago, its insight was that making customers better makes
better customers. While delighting customers and meeting their needs remain
important, they’re not enough for a lifetime. Innovation must be seen as an
investment in the human capital and capabilities of customers.
Consequently, serious customer
lifetime value metrics should measure how effectively innovation
investment increases customer health and wealth. Successful
innovations make customers more valuable. That’s as true for Amazon, Alibaba,
and Apple as for Facebook, Google, and Netflix. No one would dare argue that
these innovators don’t understand, appreciate, or practice a CLV sensibility.
Pushing organizations to
rethink how they add value to their customers stimulates enormously productive
discussion. A fast, cheap, and easy exercise for clarifying the innovation
investment approach emerged when I operationalized my book’s principles.
The simple but provocative tool generates actionable insights. Having
facilitated scores of workshops around it worldwide, I know it gets results.
Ask people to complete this
sentence: ”Our customers become much more valuable when…”
The immediate answers tend to
be predictable and obvious. For example, customers become much more valuable
when “they buy more of our stuff” or “they pay more” or “they reliably
come back to us” or “they’re loyal to our brand.”
There are no prizes for
recognizing that these initial responses reflect the variables that go into
computing traditional CLVs. While everyone agrees these things are important,
participants in the exercise quickly recognize how limited, and
limiting, those instant answers are.
It doesn’t take long before
the answers start to incorporate an investment ethos that sees customers more
as value-creating partners than as value-extraction targets. For example:
Our customers become much more
valuable when…
- they give us good ideas
- they evangelize for us on social media
- they reduce our costs
- they collaborate with us
- they try our new products
- they introduce us to their customers
- they share their data with us
Almost without exception,
these follow-on answers are disconnected from how the firm calculates customer
lifetime value. But, almost without exception, these responses push people to
revisit and rethink how customer value should be measured. At one company the
immediate response was to look for correlations between CLV and net promoter
score. At another, the conversation led to discovering a core group of
top-quintile CLV clients, who served as essential references for closing deals
with firms identified as top-decile CLV clients. Those reference firms instantly
won renewed attention and special treatment.
The more diverse and detailed
the answers, the more innovative and insightful the customer investment. The
most-productive conversations came from cross-functional, collaborative
interaction — not just from marketing, R&D, or business unit
leaderships.
For example, for a global
industrial equipment provider, customers became more valuable when they
performed more self-service diagnostics and shared that information with the
firm. That led directly to the firm’s technical services teams offering
cloud-connecting APIs and SDKs that let customers customize remote diagnostic
gateways for their equipment. Customers embracing self-diagnostics inherently
boosted their CLV. Not incidentally, information access swiftly redefined how
the company qualified prospects and computed lifetime customer value.
By investing in and enabling
new customer capabilities, firms create new ways for customers to increase
their lifetime value. Making customers better truly does make for better
customers.
But in keeping with the
segmentation spirit of CLV, the question can easily be edited and modified to
produce targeted insights. For example, at one workshop we used two versions
of the sentence: “Our best customers become much more
valuable when…” and “Our typical customers become much more
valuable when…”
The innovation investment
insights for one’s best customers proved qualitatively and quantitatively
different from those for one’s typical customers. Forcing people to
rigorously define the distinctions between typical and best frequently
leads to even greater creativity around customer value.
My favorite CLV vignette
emerged from a session at a global financial services giant in London. As the
responses grew longer, richer, and more detailed, one of the participants
called attention to an interesting fact. Some of the answers, he observed,
began with “we,” as in, “Our customers become much more valuable when we do
something.” The others, however, began with “they,” as in, “Our customers become
much more valuable when they do something.”
“What is the difference
between the potential customer lifetime value when we do something versus when
they do it?” he asked. After a few moments of silence, the conversation
went to a whole other level of engagement, around how the firm wanted to engage
with and invest in its customers.
The best investment you can
make in measuring customer lifetime value is to make sure you’re investing in
your customers’ lifetime value.