Retailers need to focus on customer lifetime value for long-term success
Through a special arrangement, presented here for discussion is a summary of a current article from the Retail TouchPoints website.
A strong case for customer lifetime value (CLV) was made by Peter Fader, professor of marketing at The Wharton School, and Neil Hoyne, head of customer analytics for Google, during the recent Sourcing Journal Summit.
Companies like Adobe and Salesforce along with platforms like Facebook and Google offer data, analytics and technology to “make each customer visible to us,” said Prof. Fader.
In addition to making marketing more effective, CLV can positively impact financials, R&D, sourcing and product design.
“If you can come up with a lifetime value measurement, it’s like a number shining over each customer’s head,” he said.
CLV, however, leads to a different framework for running a retail or brand business. “Rather than focusing on product, you would want to figure out what you could do for these really valuable customers,” said Prof. Fader. “What products and services should you offer to enhance the value of those customers, and to find more customers like them?”
The goal is creating a two-way conversation between the retailer and the customer.
For example, e-commerce platforms tend to continuously steer customers to a certain product purchase once they show interest including offering coupon incentives at the expense of margin. A CLV-focus responds to shifting preferences throughout the shopper journey and follows the consumer afterwards so the relationship doesn’t start again each website visit.
Mr. Hoyne stressed: “The relationship doesn’t have to end with the purchase. You can project it forward by multiple years. Then you can answer questions like, How do you find more of these people? How do you develop the ones you have? And how much should you spend to retain them?”
Focusing on CLV doesn’t mean ignoring the remaining 80 percent of customers, but it does mean paying more attention to the high-value 20 percent. “Most people are content to buy once from a retailer, and then never buy again,” said Prof. Fader. “That doesn’t mean you’ve failed; it means they’re not looking for a relationship.”
Discussion Questions
DISCUSSION QUESTIONS: What are the pros and cons of a customer lifetime value-centric approach for retailers and brands? What are the practical issues that need to be addressed for those looking to shift to a CLV model focused on retention?
Poll
BrainTrust
Focusing on customer lifetime value has plenty of merit, but the challenge retailers/brands have in making this work is in creating meaningful engagement with customers. The reality is that it is very difficult to track customers through their entire journey and then provide front-line staff with the tools and information they need to effectively deliver a differentiated service experience based on CLV. When it’s done effectively, it can be very impactful; when it’s not done effectively, it’s not good for the customer or the retailer/brand. It seems that loyalty programs are the primary mechanism for this and these are hit or miss.
One practical issue that needs to be addressed right away is the challenge of measuring costs and investment against a boost to CLV. Part of the reason why so many retailers focus on acquisition costs is because it is easy to measure the investment and the return. Retention investments always get tangled up in arguments about whether customers would’ve spent the money anyway – even when there is study after study that shows it’s cheaper to keep a customer than to get a new one, and the value of moving a customer up a loyalty tier is exponential when it comes to measuring CLV. The internal metrics and the culture has to change – an emphasis on a long-term view over the short-term hit to sales. In this day and age of living and dying by the quarterly report, the pressures against making the move to CLV are enormous.
Understanding the lifetime value of a customer is something indie retailers do very well; chains and brands, not so much.
I have strong connections with store associates but with the actual retailers? Forgettaboutit. Those associates frequently contact me to recommend product, but if they leave to work at another retailer that sells the same product, my business goes right with them. My loyalty is to that associate because the retailer has no idea who I am or how frequently I buy.
With all the data available today you would think that retailers would use it to engage customers but they don’t. At least none of the retailers that I shop with do, and I frequent lots of big names that tout how great their service is. The service may be good, but aside from masses of email blasts, the connection with shoppers is not. Sadly, in most cases the relationship ends with the purchase. Over and over and over again.
The right data can be useful when making business decisions, and that includes when and how to approach customers. However, I see today that we are relying too much on data and getting away from the basics that can help retail sales. Walk into an Apple store for example, when do you not feel like “I love being here?” Apple knows how to excite their customer, not just with their products but the experience. They are interested in you whether you’re buying today, tomorrow or next year. They let you play with their merchandise, answer your questions and provide unsurpassed service. When I’m in the store, they’re not asking me questions and putting my answers into an iPad, and they barely ask my name unless I have to get service on something. The point is to make sales and how we approach and engage a customer still matters the most. Online is different because there is no human interaction but if stores would realize that they have tremendous opportunities for making more sales by merely employing and training staff to provide the best in-store experience possible like Apple and others they wouldn’t need to spend significant dollars on data that is usually old by tomorrow. Technology is excellent and certainly provides many services and conveniences, but it also makes sense to invest in what is going to drive immediate results and when it comes to stores the answer is simple — invest in the people that work there, and you’ll see the difference.
The pros are that both off-the-shelf services and custom analytic methods based on a lot of data sources can help inform CLV scores to enable this approach. The con is that once high value potential customers are identified, what’s the optimal approach to engagement and treatment? I think that is a much harder question for retailers to answer. It speaks to the way the unique customer experience is articulated, and challenges related to content marketing, and life stage or lifestyle marketing. Otherwise, simply targeting unique discounts to these customers continues the drain on margin affecting almost all retailers.
CLV is an underlying principle of good customer relationship management. Retailers and service providers have far more data available to identify and cater to their “best customers” than they did even five years ago. The growth in data has been driven by the number of touchpoints available to customers today — in-store visits, social networks, e-commerce shopping, mobile interactions and so forth — and the challenge is to use data science to take action on all of this information.
I recommend an article from the November 1st edition of the Wall Street Journal on this very topic. It dives into some of the “secret” techniques that retailers have developed to put CLV theory into practice.
When we talk about CLV issues and plans, we have found that there is usually one aspect that is normally missed by retailers today. We focus on all the comments above, but rarely do retailers think/know how they can leverage current great customers into disciples of the store. Customers believe other customers about how great a store is before they believe that same message from the store. Why? Stores are supposed to tell you how wonderful they are and how they love their customers. Customers are not required to do that unless it is real, and that can be the most powerful marketing tool in the world to grow the next great group of customers. All a retailer has to do is to create an event/program to get the current customers to endorse the store to their friends. Word of mouth!
It’s not a secret that returning customers are better for your business than new customers. Studies have shown that a returning customer is less expensive to convert and has a higher average order value than a new customer. One of the biggest issues or obstacles to shifting to a CLV model is that many retailers are focused on measuring total sales and same-store sales, as this is what Wall Street focuses on to measure company performance. What they should really be focused on is RFM (recency of a purchase, frequency of the purchase and the monetary value of the purchase). For many years this has been the mantra for successful omnichannel retailers, but it appears that the new economy has a different metric … maybe we need to go back to the future. According to BRP’s research, most retailers have KPIs for sales, average order value, comparative sales and conversion rates; however, fewer than 50 percent of retailers have KPIs for the following metrics that measure customer loyalty: customer satisfaction (net promoter score), customer retention and post-purchase customer survey results. Understanding the value of loyal customers and repeat purchases, retailers need to pay more attention to the lifetime customer value. The top two high value deciles (the 20 percent) are not static — people move in and out based on good and bad customer moments. Obsessively tracking and correcting these bad customer moments are the key to retail success!
Executing a CLV strategy requires a shift beyond creating a CX to an LX (loyalty experience). A CX is for everyone. An LX is for your most valuable customers – their relationship with your brand should be fundamentally different and can even start before they have ever made a purchase (if you know how to find more of “those people” as the article suggests.)
Often overlooked too is that CLV isn’t always just about dollars and cents. It’s about satisfaction, it’s about influence. A consumer who repeatedly purchases in a silo might not have as high of a true CLV as one who purchases a single time, but tells everyone they know how awesome their experience was. Measuring that type of value is extremely difficult, but vital for brands who truly want to figure out where to invest their resources.
Home Depot loves this perspective and owns it as a market imperative. This combined with low margin pricing and returned goods in any condition policies could easily make a customer relationship more expensive to the extent of expanding losses. Small and medium businesses might do better looking at turn and market threshold pricing for the solutions they need.
This model explains recent private label investments. Driven by data on what’s in demand, more retailers — including Amazon, Walmart, Kroger, Target and Aldi — are creating their own private brands to increase loyalty and lifetime value per customer.
For instance, if we love Jack & Cat girls’ dresses and Simple Truth organic products, we can only visit Target and Kroger, respectively, to buy those exclusive product lines.
As for key success factors, constantly listening to consumers through data analysis, adapting those insights into unique, quality products, and selling a variety of exclusive items can help retailers retain consumers over the long-term.
If you define loyalty marketing as we at rDialogue do — paying attention to customers and acting (treating them) accordingly — the pros of a CLV approach are obvious. Customer marketing and delivering the proper customer experience should be a function of not only realized customer value but also future CLV. Equally important is managing customers based on changes in CLV, recognizing customer actions and brand (merchant) activities that impact the measure.
CLV is absolutely necessary, but it’s not successful without also looking at basket sizes, frequency and other more immediate metrics. It’s not a “one without the other” scenario. By keeping an eye on BOTH the short game and the long game, retailers are able to limit any shortcomings of a singular approach. Immediate metrics keep operations going. CLV and other long-term metrics build longevity as a brand.
I’ve been saying for a long time that retailer-customer relationships shouldn’t start and end with a purchase. I think some of the best brands are now really starting to take that on-board and create real ecosystems around their products and services. If you think from a CLV perspective then a smart hairbrush can provide customers with information about the quality and type of their hair, recommend and sell them personalized hair care products (perhaps even signing them up to a regular subscription service), provide them with personalized tips and styling videos for their hair type, etc. That seems like a much better offering than just a one-time purchase of a hairbrush. Obviously it takes more work and investment by the retailer to put in place, but I believe ecosystems really are key to the future of customer-retailer relationships.