Guest post by Peter Fader, Co-founder of Zodiac & Professor of Marketing at The Wharton School
The concept of Customer Lifetime Value measurement has slowly entered the mainstream over the past decade, with more and more businesses seeing the importance of being customer-centric in their marketing and operations. As with any new methodology, there is an adoption curve. In my own conversations with businesses, as well as those I’ve been a part of with my predictive analytics company, Zodiac, we’ve seen companies falling into the following five categories:
- Those that are totally ignorant about CLV and not troubled by it—and still are successful. Such firms are becoming more and more unusual (and finding it harder to create and maintain long-term success). In select cases, companies can thrive using product-centric methods by simply putting out outstanding products and/or operating in a very efficient manner. In my Customer Centricity book, I call out Apple and Walmart as two prominent examples of this type of firm. However, both of them have plateaued in their growth since that time and have been starting to wake up to the new reality.
- Those that are totally ignorant about CLV and are hurting because of it. You don’t have to look far to find examples in this group—just look at the long list of retailers that declared bankruptcy last year. They’re not troubled about CLV because they don’t realize what they’re missing. These companies are still treating their customers as personas or trying to appeal to trendy groupings like “Millennials” or “Gen Z” without actually looking at individual purchase behavior and using CLV to shape their offerings.
- Those that are working on some “proof of concept” CLV projects. These companies are looking to see not only whether or how CLV works, but to figure out their principal use cases for it. Some companies are inspired to try it out once they see the potential for real results, or they’re desperate because nothing else is working. In some cases, they want it to work and are doing this project in hopes that it will steer the company in a new direction. In others, they are looking to simply check a box and it’s purposely kept on a small scale.
- Those that are trying to appease internal stakeholders. In some companies, a highly placed executive such as the CEO is a CLV believer and dictates that the company must try out a CLV-based project. Often, there are skeptics within these organizations that want the project to fail. These companies will go through the motions to say they tried without putting real effort into it. In these cases, it will be very hard to show the value CLV measurements can provide because the insights will not be put into practice in a real way or for long enough to see results.
- Those that use CLV as a mainstream metric or strategy. It’s great to see firms that embrace the concept of CLV measurement and use it successfully to inform multiple aspects of their business. However, it is essential for them to ensure that they are calculating and applying it correctly. We see many firms calculating CLV in-house using inaccurate methods that incorporate average customer metrics or backward-looking historical numbers without truly predicting future behavior in a probabilistic fashion.
Companies that are experienced in CLV measurement, such as Electronic Arts, actively use it for acquisition, retention, and game development. They are proactively looking for new use cases all the time, all the way up to customer-based corporate valuation.
A CLV-Based Strategy Takes Time
These five stages represent a time-based evolution towards customer centricity. No company is just going to wake up in the fifth stage. It’s important to understand where your company is in this taxonomy and where you want to be. For some companies, being CLV-driven isn’t the only way or the best way. But if you do incorporate CLV slowly—starting with some lookalike modeling for marketing acquisition, for example, and see the return on investment, you can start to branch out to other areas of the business. The chart below shows the wide range of changes you can make to your business in order to become customer-centric, with CLV as a foundational metric.
*Table inspired by Jay Galbraith
From Walking to Sprinting
When companies are in the early stages of testing out CLV measurement, they may want to keep those projects in-house with their own data science teams. As they move to stage five and become more advanced, many companies realize the need to start looking for vendors that can provide more accurate and granular CLV predictions. Few in-house data science teams can provide predictions down to the individual customer or have the processing power at their disposal to run millions of data points through models several times, making adjustments to get the accuracy within a few percentage points.
You can also check out the customer centricity conference starting on May 17, 2018.