Friday, March 25, 2011

Is There a Better Measure for Customer Value?

The Customer Institute has long believed that one of the better measures of a customer is the customer's Lifetime Value (often referred to as the CLV - Customer Lifetime Value). Now a group of professors has offered an alternative to CLV which they refer to Customer Equity (CE).

They pose the argument that CLV focuses only on existing customers and ignores the notion that companies often have a significant number of potential customers that will ultimately be acquired and produce cash and add value to the company. The CLV argument is that CLV represents the upper bound of what a company should be willing to spend to acquire a new customer. Thus, the CLV argument looks at one customer at a time and ignores potential customers.

There is a strong argument, that potential customers also have value; otherwise, why chase them. While companies often say they want loyal customers, and they really do, those same companies will spend most of their marketing money trying to capture new customers. If that is the case, then a model that attempts to capture those potential customers into its measure of customer value has a valid point from our perspective.

The CLV model is particularly appropriate for evaluating individual customers and can compute the total customer value based on the individual customers in the customer base. By continuously monitoring this LTV companies can detect trends in their long term customer value (which may be particularly important if the company is looking to be acquired).

The use of the customer equity model brings the future into the perspective of the value of the customer base. Of course, the concern would be how does one decide when a potential customer should be included into the calculation. There are many who would argue that such an inclusion could lead to erroneous assumptions of which to include and may end up leading to a complete distortion of who the real potential customers are and their value to the company.

While the CLV method brings a measureable quantity that can be reproduced, it certainly undervalues the customer base by excluding those potential customers. On the other hand, customer equity brings a higher value to the customer base but includes some assumptions that may ultimately be misleading.

The bottom line is there needs to be further clarification of what characterizes a potential customer that is unambiguous and repeatable. It will be interesting to watch how these metrics evolve and which one will ultimately dominate.

Thursday, March 17, 2011

Loyalty Begins with "T"

While The Customer Institute continues to seek quality research in the areas of customer satisfaction and loyalty, there are times when a little diversion may lead to some new ideas on the subjects. This blog will focus on a different concept for customer loyalty; namely, looking at a business process that might provide a path to customer loyalty.

The process is one that we often use and may not be aware that such a process can be accurately labeled. The concept is that there are three Ts that often lead to better relationships.

The first T is transparency. By transparency we mean that there are no secrets between the customer and the company. The company (and all the best salespeople) make sure that the customer is completely aware of all the facets of the relationship.

The second T is trust. As the customer and the company become aware of the completeness of the transparency, trust follows. It is very difficult to build trust between a company and its customers if there is no transparency. Without transparency, there is always a lingering doubt about the true relationship. (This is not being offered as a guide to personal relationships between two individuals).

The third T is truth. With knowledge of complete transparency and trust, both the company and the customer are usually willing to tell the truth. The likelihood of getting the truth without these previous conditions (transparency and trust), is small.

The bottom line is loyalty does not come quickly nor should it. Loyalty often implies a sharing relationship. These three Ts appear to offer such a foundation for a strong relationship which could become the basis of the sharing relationship that will lead to loyalty.

Wednesday, March 9, 2011

Money Isn't Everything

In reviewing some older research there was some interesting research documented in 2004 by Xavier Dreze and Joseph Nunes regarding the concept that loyalty points are often worth more than money. (Using Combined-Currency Prices to Lower Consumers' Perceived Cost"). They postulate that "combined currency-points" transactions may have more appeal to customers than money or points individually.

They point out that there hasn't been much research on the underlying principles that make a loyalty program work of not work for a firm. The authors of the research examined different kinds of currencies that consumers can accumulate and spend. Consumers generally have points gathered from airlines, hotels, car rentals and individual credit card points. The hypothesis behind the research is that there may be a best combination of points and currency that would be more appealing to the consumer than using either one separately to purchase additional products or services from the firm.

The authors present a mathematical proof that outlines the conditions under which a price delineated in multiple currencies (points and dollars) can be superior to a single method of payment. One of the outcomes of the research was the combined currency pricing can bring in more revenue for a company and pricing can either lower the psychological or perceived cost associated with the pricing scheme or raise the amount of revenue collected given a perceived cost.

Another interesting outcome was that consumer preference for the combined currency indicated that each point or dollar spent is not valued equally. They conclude that it would be preferable for a company to charge a combined currency when two conditions exist; namely, the consumer does not value each unit within a currency equally and the perceived cost function of one of the currencies is "convex." Convexity implies that the value of one of the currencies is not linear. Using airline miles as an example, the number of frequent flier miles for a free flight is worth more than twice the value of one half the number of miles for a free flight. If it takes 25,000 miles to get a free flight, that is worth more than twice the value of having only 12,500 miles. This seems to be true since people don't appear to value miles or points the same way they value money.

The bottom line is we get a first glimpse into the psychology of point value versus money from this research. Although many researchers would not think about finding a model that maximizes consumer satisfaction with a loyalty program by mixing reward points with currency to get a "best" solution, there is now some evidence that such is the case. When both the company and the consumer win in a transaction that includes the loyalty program, we are taking another step to demonstrate the value of loyalty programs.

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