CLV versus EVC

The concept of CLV or customer lifetime value has been used for many years to describe the value of a particular customer or customer segment to a company.  It's easy to get caught up in the concept of what's good for the company because that's where profit comes from. However, it might be appropriate to look at EVC, a new concept, but often overlooked. EVC refers to the economic value of a product or service to a customer. For as CLV measures the value to the company of a product or service, EVC measures of value of the product or service to the customer.

Few organizations pay attention to EVC because even though it is a simple concept. The calculation has some challenging variables. The general formula for EVC can be stated simply as:

EVC = tangible value + intangible value

The tangible value is usually easier to calculate since it will refer to improved productivity, speed, or some other metric that is easy to measure.  The intangible value usually refers to variables that are not easily measured, such as color, ego satisfaction, keeping up with the Joneses or satisfying a whim.

The reason the concept of EVC is a worthwhile metric is that it is one of the easiest ways to compare products and services between competitors and even within an individual company with multiple products and services. So long as the EVC of a product or service is greater than the competitor’s it will have a greater attraction for customers. 

Another reason to use the EVC metric is to compare the value with the price of the product or service. When the price of the product or service exceeds the value of EVC, the attraction of the product or service will likely diminish in the eyes of the customer.

The bottom line is that the concept of EVC should become part of every company’s product analysis.  It is not a measurement that is taken once and forgotten since the value is obviously going to change as the market changes and hence should be a part of every periodic product or service review.  It's time to start measuring EVC.

The State of Customer Loyalty in Small Businesses

A joint study of approximately 900 small business owners presents an interesting insight into what small businesses are doing in the world of customer loyalty. The surveys were performed through a joint study by BIA/Kelsey and Manta in 2014. Some of the top level findings from the study are noted below:

1.      61% of small businesses now generate the majority of their annual revenue from repeat customers.

2.      62% of small-business owners are now spending the majority of their annual marketing budget to retain existing customers.

3.      The survey reported that a repeat customer spends 67% more on average than a new customer.

4.      Only 34% of small businesses have a loyalty program.

5.      Of the small businesses that have a loyalty program, only 46% are in digital form, such as an e-mail list.

6.      Only 29% of small businesses use a customer relationship management (CRM) tool to track customer information.

7.      When asked about the purpose of their customer loyalty program the dominant answer was “improve customer relationships”. Only 39% of those with a loyalty program noted this as their primary purpose. The secondary purpose was to “grow revenue”, which occurred with 36% of the small businesses.

There appears to be a dramatic change over the last several years for small businesses. Surveys done in 2012 found that small businesses focused on customer acquisition seven times more than customer loyalty and retention. In the 2012 Survey only 6% of the small businesses surveyed spent more than half the annual marketing budget on customer retention.

The bottom line is that small businesses seem to be migrating to the concept that loyal customers provide a greater source of revenue from each loyal customer than a newly acquired customer.  It is also obvious, that loyal customers lower the cost of customer acquisition and provide a more sustainable revenue flow.  Customer loyalty programs work for small businesses just as well as they do for large businesses. It's about time that all the small businesses think about customer loyalty and make the decision to make it a strategic component of their business.

Some Tthoughts on the Loyalty Impact of Kiosks

Kiosks are one form of self-service technologies that are being introduced into the marketplace. We're seeing that self-service technologies can change the way customers act. Dr. Ryan Buell, an assistant professor at Harvard Business School is studying this interaction between operations and customer behavior. He has identified some interesting characteristics that appear between customers and self-service technology aspect of the kiosk.  There are four additional researchers at the Rotman School of Management at Duke’s Fuqua School of Business and the National University of Singapore who are also examining these self-service strategies.  The findings of these researchers show both positive and negative aspects of self-service technologies. Some of the examples that they give are:

1.      Market share of difficult to pronounce items increased 8.4% when customers had no need to pronounce the item.

2.      At one McDonald's  they found the average check size was increased by 30% using the kiosk

3.      By using self-service technologies fast food restaurants have seen an increased market share by 1 to 3%.

Some of the positive benefits of kiosk self-service technologies are:

1.      Reduced labor cost

2.      potential for increased market share

3.      Reduced time to complete a service.

4.      Possibly reduce customer waiting time when placing an order

Some of the negative aspects of self-service technologies are:

1.      loss of flexibility - the kiosk can only do what it was designed to do and cannot adapt beyond its design

2.      the use of the kiosk may be confusing to the customer and reduce customer loyalty

3.      loss of the ability to delight the customer with special considerations

4.      May not contribute to building long-term customer relationships.

The bottom line is that the kiosk has a place in business. There are service operations where self-service can be beneficial.  On the other hand, the loss of the customer-employee interaction will often make the difference between having a loyal customer and the non-loyal customer.  Research continues to support the notion that customer-employee relationship is one of the key elements for building customer loyalty. The challenge for every service business is to examine self-service technologies and apply them in areas that are appropriate for increased productivity while making sure that the customer-employee relationship is maintained.

A Measure of Customer Experience

Peter Kriss is a senior research scientist at Medallia and the Director of Research for Vision Prize has recorded some quantifiable evidence that the customer experience provides significant performance improvements for companies. He focused the research on two different companies with different revenue models.  One company was involved in a transactional-based business while the other was a subscription-based business.

The transactional-based business was focused primarily on how frequently the customers returned and how much was spent each time the customer returned. On the other hand, the subscription-based business focused on retention.  In his research his team controlled for other factors that might affect repeat purchasers to remove any bias by those factors.

His results were truly amazing as noted below:

1.    For the transaction-based business, customers who had the best past experiences spent 140% more than those who had the poorest past experience

2.    For the subscription-based business, members who gave one of the top two experience scores had a 74% chance of remaining a member for at least another year, whereas those who had the poorest experience had only 43% chance of being a member a year later.  The real difference was that members who gave the lowest scores were likely to remain a member for a little over year, compared to the members who gave the highest scores who were likely to remain a member for another six years.

 The bottom line is obvious because the numbers tell the story. Customers that rated their experience high were much more profitable and loyal.  While these two companies provide only anecdotal experiences, each presents a great case for considering the metric of customer experience as a way of measuring customer loyalty while providing increased profit.

Share of wallet may be the best loyalty yardstick

Tim Keiningham, global chief strategy officer for Ipsos Loyalty has developed an interesting statistics regarding loyalty.  Many companies rely on the NPS measurement to define their customer loyalty. However, Mr. Cunningham has some statistics that seem to provide some serious questions about the NPS measurement of loyalty. In effect, a report for a client with customers right in a five as loyal with the NPS criterion. However, more than 90% of the time the same customers had an NPS loyal score for another brand.

There is an interesting new book titled the wallet. How location rule which was co-written by Prof. Lerzan Aksoy and Mr. Luke Williams also of Ipsos.  In this new book the authors give an example regarding a retail grocery chain.  The authors note that while 53% of the customers gave high marks when asked would they would promote the store, only 43% listed the store as their primary shopping location. The authors point out that 57% of the customers with a solid satisfaction score still prefer competitors. It was further pointed out that customers often chose to shop elsewhere due to lower prices and one of the other stores had a location that was more convenient.

Rather than using the NPS score estimator of loyalty. The authors offer three performance indicators that may provide a better measure of loyalty. The authors suggest the following three metrics:

1.       1.  Measure the percentage of customers that list them as their first choice

2.       2   The average number of brands used by the customer

3.       3.   The share of the customer’s wallet captured by the company.

Dr. Keiningham references another study of a financial services firm that found 90% of the customers who would indicate they would promote a brand might not list it as their primary brand in the field. 

The bottom line is that customer loyalty identified as a 9 or 10 on the NPS scale may not accurately reflect loyalty according to the following definition.   Many companies believe loyalty means that their company will be considered first when an engagement opportunity occurs (the customer will spend his money with the company because they are loyal).  Based on these statistics, that may not be true.

What is Better Than a "WOW" Experience?

Many companies are looking for ways to delight the customer or provide the customer with a ”WOW” experience.  There are many marketing research organizations that provide all sorts of metrics to demonstrate how the customer experience is improving. There are companies that believe in creating strategies on the basis of improving the customer experience and is one of the best strategies they could have to improve their business performance. Is it possible they could all be wrong?

In a survey of nearly 100,000 US consumers who participated in online interaction with a business, the researchers Matt Dixon, Nick Toman and Rick DeLisi found “there is virtually no difference at all between the loyalty of those customers whose expectations are exceeded, and those whose expectations are simply met”.  They go on to note that there is virtually no statistical relationship between how a customer rated a company on a satisfaction survey and their future customer loyalty. From a statistical perspective the survey found that the correlation coefficient was just slightly greater than 0.3, which when translated suggests that there's only about a 10% information transfer between satisfaction and loyalty. That means 90% of the information that causes loyalty to change occurs from areas other than customer satisfaction.

The Customer Institute continues to focus on dissatisfaction as a key driver of loyalty/disloyalty. Satisfaction may aid in the development of loyalty but dissatisfaction has been shown to be one of the greatest drivers for disloyalty. As an example, cleanliness of a restroom in a fast food establishment will be a strong dissatisfier that will have more influence than features, such as the quality of the food or the speed of service.

Since dissatisfaction is such a dominant factor in the customer relationship, the obvious conclusion is that the best customer experience would occur when all the elements that create dissatisfaction are eliminated.  The study noted above suggests that a customer service interaction is roughly 4 times more likely to drive disloyalty then to drive loyalty.

The bottom line is that the most important aspect of customer loyalty is the absence of actions that create dissatisfaction.  Another way of stating this is the adage “customers may stay when satisfied but will surely leave if dissatisfied. “   The statistics prove it!

Loyalty May Not Be Rational

Customer loyalty is not always based on rational thinking. Customers often make decisions based on feelings and emotions. Psychologist Joel Weinberger, an expert in unconscious processes, is also the founder of Implicit Strategies, a consulting firm. Some of their research indicates that when you ask customers such as "Why are you loyal to the store", you may not always get an honest answer. The customers are not lying but may not be aware of some of the psychological aspects that drive their loyalty.

Weinberger suggests that loyalty can be increased when a business creates a caring relationship with its customers, which is based on a mutual basis of obligations to take advantage of the possible effects of unconscious implications of the contact. The company needs to treat its customers with respect, fairness and consistency. Similarly the customer on the other hand, needs to be respectful to the company.

Weinberger suggests that unconscious motivations often drive loyalty. While this is a relatively new idea, some of the research being done in behavioral psychology and neuroscience suggest that we often times make decisions based on feelings and emotions. There are two implications regarding loyalty that come out of this research regarding decisions based on feelings and emotions; namely,

1.       First impressions by customers may find one quality appealing and customers will use that impression to extend to other qualities not connected with the initial impression. An emotional aspect of this first impression is that if a customer has a positive predisposition of the brand, then we tend to have a positive predisposition to everything else associated with.

2.       Customers often place more weight on the first piece of information they receive than information contained in a later point in time. Quoting Weinberger “in everything you learn about someone or something is filtered through the first impression".  Hence, all aspects of the product or service will bedirectly influenced by the first contact.

The bottom line is that there are a few steps every business should take to accommodate these feelings and emotions of custoemrs that arise from the first contact/impression.

The first obvious step is to go out of your way to offer the best possible deal to first-time customers. You want to make sure that your first impression sets the perspective that you are a good company to do business with.

The second obvious step is to make sure that your customers know you and are familiar with you.

With that second step, and the third step, which is to make sure that you and your personnel are familiar with your customers; namely, build a relationship with each one.

One caveat to remember is the fact that the best deal you offer to first-time customer should be one that you can live with on an ongoing basis. Don't price yourself out of business.

The old adage that the first impression counts has been verified by the psychological research.