Do You Think "Life Time Value" Is a Metric or a Verb?

Graham Hill

What is Life-time Value Really?

Akin, Carol

Most marketers are not delivering messages that are so relevant they feel like a service. They are interrupting customers instead. An average response rate of 2.61% from over 1,100 campaigns studied by the DMA is testament to this sad fact of marketing life. But it still works well from a marketing ROI perspective, so marketers continue to bombard customers with spam, both off and particularly on-line. Marketers will only move on to other marketing approaches, for example permission marketing or open-source marketing, when it stops working well enough for them to meet their marketing targets. This is normal and to be expected in the evolution of business models.

However customer lifetime value is about much more than just off-line, on-line or even integrated marketing. It is about the big customer picture, not about the smaller marketing picture. It is about all the things that a company, its staff and its partners do that contribute to the economic value of the customer to the company over their lifetime as a customer. For example, a particularly dumb marketing campaign that alienates swathes of customers, produces negative press headlines and aggrieved customer lawsuits will destroy customer lifetime value, even for customers that were not targeted by the campaign. It may even destroy the company. Remember the Hoover free flights fiasco? But deft action by PR, or by customer service may not only recover that customer value but may even increase it still further. Sadly in Hoover's case it was too little, too late.

Only by taking this systemic, long-term view of what drives the economic value of customers can we hope to use customer lifetime value sensibly. Just looking at the ROI of a marketing campaign without looking at all the other impacts it has is not enough. And Customer lifetime value is only one part of the larger metrics picture. It is a backward-looking financial metric. That is why Kaplan & Norton developed the balanced scorecard in the early 90s to provide a more balanced view of business metrics.

Before we get carried away with micro-managing campaign-driven ROI, let's look at the real customer lifetime value as part of a balanced scorecard of metrics.

Graham Hill

Graham Hill

The Value of Relationships

Carol

I couldn't have put it better myself. Customer lifetime value as currently measured is too simplistic. As you say, the value measure needs to cover not only the future economic profit that customers themselves generate, but also some of the value that they deliver through influencing others. The latter part of the extended value equation is still very much work in progress.

But even this extended view of customer lifetime value is inadequate. It only covers the value of the customer to the company. We also have to look at the other side of the coin too, at the value of the company to the customer. Only by understanding how customers receive value from a company, can it hope to understand how it can create more economic profits from customers through a mutual exchange of value. And guess what, this is still very much work in progress too.

Graham Hill

Graham Hill

Not Everything That Counts Can Be Counted...

Akin

The value of a customer's relationships with others is a new concept and is not at all well understood. We must be careful not to over-extend early research to the whole networked world. Sunil Gupta's work you quote in the first paragraph - How Do You Value a "Free" Customer? - was a simulation of customers in a multi-sided market where the value accrues to the platform provider, not a real-life example from a conventional one-side market where the value accrues to the selling firm.

And this warning against over-extending simple real-world models (or worse, simulations) to entire business models applies generally. There is so much that we still do not know about conventional customer lifetime value (the sort measured through DCF), let alone real-options valuation for those harder to forecast futures, customer betas to account for customer segment risk and customer portfolio valuation. The value of relationships is a more complex matter entirely. As the work of Barabasi, Watts, Newman and others shows, we are only just starting to scratch the surface of social networks and their impact on customer bahaviour. It is much too early to be applying their early findings as generalisations.

Management is better off sticking to the customer lifetime value basics, like measuring costs accurately, knowing how far forward they can forecast reasonably and how to share the results appropriately with key staff, than worrying about a developing a Sheldonesque customer lifetime driven future.

As a sign hanging in Einstein's Princeton office put it, "Not everything that counts can be counted, and not everything that can be counted counts". Not for the time being anyhow.

Graham Hill

Graham Hill

Back to Basics Indeed

Akin

You point is a very good one. Interactive CRMers need simple tools to help them decide what works and what doesn't.

My simple advice is to work through their organisation's through-the-line customer strategy to decide what strategic interactive initiatives to follow (see the recent McKinsey study on How Businesses are Using Web2.0 for details of general strategic initiatives being planned), but to carry out as many tactical experiments within the strategy to see what works best, i.e. what attracts people to the site, what makes makes them do whatever you are trying to get them to do(!) and ultimately, what drives economic value.

One big strategic challenge is getting locked onto a low-peak on the marketing fitness landscape through over reliance on champion-challenger. This is where experimentation comes in. Another big tactical challenge is making statistical sense of the clickstream noise that interactive CRM so easily generates. This is where keeping things statistically simple comes in.

Some interactive CRM can be measured in a way that contributes to a more rounded picture of customer lifetime value. Interactive CRMers should feed this into the bigger customer lifetime value picture. But a lot of interactive CRM still cannot be reliably measured. Or the measurements still cannot be reliably interpreted. These should not be fed into the bigger customer lifetime value picture. Not yet.

To quote Einstein again, "Make everything as simple as possible, but not simpler". Interactive CRMers should bear this in mind when thinking about applying customer lifetime value to their work.

Graham Hill