The traditional way of looking at the value of a customer is customer lifetime value (CLV). That’s the measure of how much a customer is worth to a company over the life of their relationship to the company. It’s often couched in terms of net present value (NPV). In the last three editions of CRM at the Speed of Light, I’ve used the formulation that I still prefer—that of my colleague and friend and CRM pioneer, Mei Lin Fung.
But the same changes to the world that made me into a liar and fostered a fourth edition ofCRM at the Speed of Light also impact how to measure the value of a customer who is now a social customer. Traditional CLV by itself is no longer sufficient.
Close your eyes and visualize this scenario: The customer you see in your mind’s eye isn’t very wealthy, so his “official” CLV doesn’t add a lot to your corporate customer equity. He is, let’s say, a low to lowermid value customer. But this customer is an ardent advocate of your products, has considerable influence in his immediate circles, and is somewhat influential on the social web in some capacity—either as a blogger or reviewer on social sites. What does that make his referral value to you? How about his brand value to you?
Good questions so far? Let’s throw another one into the mix.
I was speaking to the Association of Banks in Singapore in 2006. In he course of the discussion after the speech, I raised the specter of CLV in financial services with the immediate family as the core unit being measured. I was corrected by a bank mogul and told in Asia it was “household”—the extended family including employees and closest friends in addition to blood relatives and in-laws—being affected.
What does that mean to the measurement of the value of an individual customer? How do these considerations affect what you measure?
Frankly, if I were alone in all of this, I’d be scratching my head at about this point. However, I’m not and, thus, neither are you. There is a remarkable group of minds led by Dr.V.Kumar who are working on the more advanced, more extended (household) views of CLV, as well as developing the benchmarks, metrics, equations, and answers to how the social customer gets measured beyond their future purchase history.
Introducing Managing Customers for Profit and CLV, CBV, CRV
In his seminal 2008 work, Managing Customers for Profit: Strategies to Increase Profits and Build Loyalty, Dr.Kumar introduces a number of new equations and approaches to customer value. Chief among them is the extension of CLV through the addition of both customer brand value (CBV) and, for my purposes, most important, customer referral value (CRV). Coupled with CLV, these provide a well-rounded forecast of future customer behaviors and a quantifiable way of identifying real social value, not just their potential profitability—though that too.
What makes his value proposition even more interesting is that it begins to address the fundamental issues of creating or at least identifying advocates—something that NPS, despite its good intentions, doesn’t do.
Customer Lifetime Value
Customer lifetime value is a measure that identifies the direct contribution a customer makes over a period of time toward a company’s profitability. The most common definition is that this is the “net present value of future profit from the customer.” It is a progressive (forward-looking) metric that uses expense, revenue derived, profit derived, and customer behavior to determine what the value of the particular customer is over time.
Its easy value is that it can identify on a curve what the growth of profitability is going to be for an individual customer. That means how you allocate resources to that customer is based on how profitable a customer is at either any given point or over the lifespan of his or her relationship to you. It allows you to determine what kind of customer strategy makes sense to increase customer equity on the one hand and, on the other, what management can do to optimize the individual customer experience based on an expected return.
I prefer to measure (though I’m not sure what it would entail) the CLV of households. This would incorporate the head of the household’s future profitability, but also, for example, his direct relatives such as his wife, children, and sons-in-laws, and perhaps those he immediately affects, such as best friends or housekeeper. But is even the more robust CLV I’m proposing or the traditional CLV that’s normally administered sufficient?
It isn’t, because of the additional opportunities the social customer brings to the table.
Individual Brand Value (IBV) and CLV
Brand value has often been seen as something apart from the value that the customer brings. But brand loyalty, which is the customer’s pattern of repurchasing from the same company, if not the same products, and brand advocacy, the customer’s willingness to put the company forward to their friends, are part of the customer equity portfolio that is needed to know the 21st century customer.
To reiterate, the reputation of the company is the brand. Trust is the driver of that reputation. Thus attitudinal (long term) and behavioral(short term) commitment are part of the equation when it comes to determining the brand loyalty of the customer to the company. The company’s establishment as a trusted resource to the customer is key to this determination. As Dr.Kumar rightfully puts it, “Hence, when evaluating a brand, it is not only the financial value generated by the brand that should be considered, but how the customers perceive the brand.”
Perception of the brand stems from the brand knowledge, attitude, and behavior. Obviously, the more you trust a brand you are very familiar with, the more likely you’re willing to spend the extra dollars on the brand that you trust. Harley-Davidson, because of those tattoos, owns 63 percent of the motorcycle market. The owners trust the brand and see its ubiquity, which gives them a sense of long-term awareness and comfort, which makes them say, I’ll spend the few extra dollars for the Harley because it’s going to be here for a while and they make great machines and they are really cool and they have a Harley Owners Group (HOG) that I can join for an experience of community. This factors into the CLV of the individual motorcycle owner.
But that still doesn’t answer the measurement of the social customer and the advances of Dr.Kumar beyond NPS.
Customer Referral Value (CRV)
Forgive me if I’m oversimplifying, but this particular extension of CLV is the key differentiator as a measure and equation. This is where the value of the social customer over a fixed time period transcends the historic CLV metrics.
Dr.Kumar defines CRV as the ability of managers “to measure and manage each customer based on his ability to generate indirect profit to the firm.” The impact comes from the recruitment of new customers by the referrers—the advocates, really—which reduces customer acquisition costs to nothing or nearly so. As community retailing companies like Karmaloop make it easy to see, it also increases the number of new customers and purchases by those customers due to the referral activity of the advocates.
What makes this part of Dr. Kumar’s work particularly important is that while he goes as far as Reichheld in correlating the willingness to make a referral with the growth of a company’s profit, he stops there and asks the most important question: Does the willingness to refer this company to someone you know mean that you actually make the referral?
Aha! Having the desire and carrying out that desire are two different things. We all know what the road to hell is paved with.
Dr.Kumar did a study of financial services firms and telecommunications companies asking the four questions that need to be asked— beyond the mere one of NPS. Pay very close attention to the questions and memorize them. Don’t even read beyond Table until you have.
Table:The Four Questions:Customer Referral Value Goes Beyond NPS
There are two conclusions that can be drawn from this. Intent to refer and ultimate value are not strongly correlated, though there is some correlation. Even more importantly, the social customer’s CRV is a major addition to the arsenal of measurement in contemporary Social CRM strategy development.
CLV, IBV, and CRV make a powerful combination in determining what kind of customer equityyou have as a company and what kind of value your individual customers are capable of providing. That gives you a much better, but more complex and decidedly trickier, capability in determining what kind of investment you’re going to make in your customer over time and what kind of offers you are going to provide. But what do you do with a customer who has a low traditional CLV but a high CRV, for example? If you proceed to invest in them, how do you keep them engaged, which will require a continual investment of something—time, money, both—so that their value is retained?
From Long Term to Real Time
Once you discover the long-term value of your customer, and you’ve made some investment decisions on what you’re going to do with them, you still need to keep them engaged and then watch that engagement in real time if possible. That way, you’re able to see if there are changes to the status of the customer (hear that, United Airlines?) or if there are things you can do for that customer. Any of those real-time or near-real-time customer activities can have an impact on the customer’s long-term value, so interacting with the customer or monitoring their interactions becomes something that has to get done to protect the valuation and improve the situation.
The Web is where much of this plays out and, because of that, I’m bringing in the big gun to handle this part of the discussion.
Conversation with Jim Sterne:Online Engagement
Meet Jim Sterne, an accomplished author, speaker, consultant, thought-leader. . . an accomplished everything. He’s the author of eight books on Internet marketing, the founding president and current chairman of the Web Analytics Association, and the producer of the eMetrics Marketing Optimization Summit every year. The man just brings it. Your podium, man.
Will you hang on my every word? (Read my blog!) Will you see the world through my eyes? (See my photos!) Will you follow my every movement? (Watch my videos!) Will you follow along, absorbed while my thoughts flit from topic to topic? (Follow me on Twitter!)
I need to know if the effort of all my narcissistic outpouring is worth the pixels that give their all for me. I need to know how many times a day you think of me, write my name on a napkin, and sigh deeply while looking off into space. Because if I can’t tell, I’m going to go back to standing in the middle of the street, tearing at my shirt and screaming, “Stella!”
Tortured, twisted pleas from the inner heart of teenage angst? No, this is the conversation that’s happening where advertising meets web analytics meets social media. It’s the discussion about the E word—engagement.
In the good old days, engagement was a promise between two people to marry. Today, it’s measured in seconds and proven by clicks and posts. Did you watch my ad on TV? Did you see it again online? Did you go to my website? Did you rate my products? Did you post a comment on my blog? Did you e-mail my name to your friends? Has any of this had an impact on whether you’ll buy my products?
As trifling as this sounds, brains with many more synapses than mine are digging deep into these issues. If this is where you are spending your money, or reaping your compensation, then you need to tune in to:
Eric goes on to posit the following formula
Avinash Kaushik of Occam’s Razor suggests that things are not so cut and dried, “‘Engagement’ Is Not a Metric, It’s an Excuse’: An excuse for an unwillingness to sit down and identify why a site exists. An excuse for an unwillingness to identify real metrics that measure if your web presence is productive.”
How you capture the right data elements in order to calculate a metric is the stuff of long, deep discussions. Follow the threads of the four listed above, and you’ll come across several dozen people who have differing—and interesting— opinions. But they are determined to come up with a solid, universal definition.
While Eric goes to extraordinary lengths to calculate his own website’s engagement factor, Charlene Li from Altimeter Group takes a more generic view that feels a lot more like that place where PR meets branding. In her report, back in her Forrester Group days, “The ROI of Blogging: The ‘Why’ and ‘How’ of External Blog Accountability, ”described on her blog, Charlene discusses measuring the increase in brand visibility, the savings on customer insight, the reduced impact from negative user-generated content and increased sales efficiency.
I fear that engagement is a number that will only be useful for navel gazing. It’s important to understand that I was born and raised in California, so I firmly believe that there is a valuable place for navel gazing, but one cannot compare one’s navel to another’s. There will never be a universal navel standard.
Eric Peterson got it right when he spoke of “a clearly defined set of goals.” And ay, there’s the rub. Goals are unique, once you get past the Big Three:
As an Internet marketing strategy consultant, I am constantly asked, “Jim, how do we make our website better?” My immediate response is always, “Better at what? What are you trying to accomplish?” That invariably kicks off days of political discussions exposing me as a corporate therapist who uses the Internet as the conversation starter.
Now that I am focused on online marketing optimization, my clients ask, “What should we measure?” My response is, “That depends. What are you trying to accomplish?”and we’re right back to discussions about goals and priorities.
Eric’s clearly defined goals are true for his site, and for sites that are very much like his. While some metrics seem appropriate for all (recency), others are very much in the “it depends” category.
If you spend a lot of time on a website designed for customer care, it may indicate that you are dazed and confused. Alternatively, you may be frequently interrupted by phone calls or friendly cube-farm visitors. A two-click stay for 17 seconds may have been a wildly successful visit if your prospect found the specification they were looking for.
Were they engaged? If depends on how they feel after the fact.
The number of clicks, the amount of comments, the frequency of visits, and many more hard numbers are subject to my favorite David Weinberger quote, “The universe is analog, messy, complex, and subject to many interpretations.”
The hard-numbers people are due for a reunion with the fuzzy-numbers people. Branding folks have been at this a long time—it’s called talking to your customers and listening to your marketplace. The goal is to ask people their opinions and measure how many of them feel one way or the other about your company and your offerings. These time-honored metrics include:
A poor web experience may have a larger impact on a company’s brand than a poor telephone call, a disappointing stock-on-hand experience, or a bungled presentation by a field sales representative. These may be considered unfortunate incidents that can be remedied by the next call or visit. But a website visitor knows that the website has been planned, prepared, and produced by teams of smart people who were tasked with expecting the needs of each visitor. If, after years of development and testing, the website does not deliver on the promise, then visitors leave with a sharply diminished opinion about your company—your brand.
How your customers feel is central to whether a website is successful. You could say that all other metrics are simply there to drive customer satisfaction. Higher satisfaction will lower costs and increase revenues. It will encourage people to talk about you in a positive light and you will reap the benefits of a positive reputation.
How many times they look at your website does not reveal their level of engagement. It’s all about how they feel about it.
The future of engagement as a metric is not to be found at a universal level, an industrial level, within a company, or even within a department. Engagement is to be codified at the project level, the campaign level, and useful only in comparing this project’s progress to itself. Narcissistic, indeed.
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