I wrote recently about online retail marketing after the recession, and since then, a thought has occurred to me: while the global consumer landscape is now different (expectations have shifted, etc), fundamental marketing research is still valid.
Today, I'm talking about the concept of customer lifetime value (CLV). In marketing, this means how much the average customer is worth to a business over the lifetime of the relationship between the business and the customer.
Of course, this is a highly variable thing, and not easy to calculate. It varies for each business type, industry and model. Contractual businesses (think real estate, subscription-based companies like insurance, cell phone service providers) rely on customers to renew a contract on a periodic basis. The reverse is called customer migration. Either a customer buys Product A from a business, or they do not.
If a customer doesn't renew a contract with a subscription-based company, they are considered lost. If a customer doesn't purchase Product A from Customer Migration Business A, they still might in the future. Determining the CLV metric for each business type is quite different.
In my opinion, drilling down CLV for customer migration businesses is much harder, as the marketer is not always certain when the relationship is over (from the customer perspective).
Once a business understands its CLV, it can use this metric to determine how much investment to make on customer acquisition, per customer. Example:
Ted's Toys Co. sells toys, and on average, customers spend $185 over the course of their relationship with the company. Marketer Jane from Ted's Toys knows that their products have an average 30% profit margin. This means, of the $185 spent per customer, $55.50 of it is profit for the company. Therefore, Marketer Jane must spend less than $55.50 to acquire each new customer, for the company to remain profitable. The lower she can get that number, the more profitable the company is.
Customer lifetime value is considered a long-term metric. It's not used for short-term goals, and generally emphasizes customer service and customer satisfaction as key barometers. Since we know that customer purchase behavior and expectations of value are now greater, CLV goes hand in hand with marketing to our post-recession world.
This week I was shopping for a round-trip plane ticket to Beijing, from Las Vegas. This isn't the first time I've been to China, and it probably won't be my last. I had done some research since my last trip, and had discovered Hainan Airlines. From what I've read, Hainan Airlines is an exceptional company. They are rated 5-stars by some publications, and the customer reviews I've read are largely positive.
With credit card in hand, I visited their website to purchase my plane ticket. Except, their reservation system wasn't working online, and I only received error messages. No problem…I called their 1-800 number. However, when I tried to make the exact same reservation over the phone, I was quoted a price 40% higher. When I expressed shock and mentioned the price on the website, the agent advised me the higher price was the best she could offer.
I got off the phone and sent a friendly email the customer service department of Hainan Airlines, expressing my disappointment in my experience. I said I had heard good things about the airline, that I was a ready-to-buy customer, and could they honor their online price. I even included a screenshot of their online quoted price.
It took about 24 hours, but I received a response, inquiring about my contact number. I responded with my cell phone number, and promptly called the manager who had sent me the email. Voice mail; message left. No response. I sent a message to their Twitter account. Nothing. I waited two more days, and opted to make my purchase with a different airline. Three days later, I still have not heard back.
The cost difference on the plane ticket was about $500 – significant to me. I have no doubt that if I flew on HA, my experience with the company would have improved, and I would make them my first choice when I fly to Asia. Surely that $500 has some margin built in to it. Surely the airline president would want my business at the online quoted price, if it meant I was more likely to buy again in the future.
This brings up several organization and marketing points:
- Marketing and customer service need to work hand in hand to understand each other.
- Marketers should be aware of common objections and front-line CS staff should understand CLV and be given leeway to assist customer acquisition.
- Concepts like CLV need to be organization-wide knowledge.
- Maybe it’s not necessary for shipping personnel to know what CLV is, but maybe Joe Boxmover has a brilliant idea for packaging coupons? Innovation can come from anyone, and SHOULD be encourage throughout the organization.
Bottom line: Understanding key business metrics, like customer lifetime value, will help online retail marketers make better investment decisions in customer acquisition and retention.
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