Can customer lifetime value scores work against retailers?

Photo: RetailWire
Nov 28, 2018

A recent Wall Street Journal article — “On Hold for 45 Minutes? It Might Be Your Secret Customer Score” — pointed to some of the benefits and downsides that consumers may receive from the use of customer lifetime value (CLV) scoring by retailers. While the headline focused on the negatives for consumers associated with the use of the metric, retailers may pay an even bigger price if CLV is not put to its proper use.

Among the challenges: 

  • Transparency: Unlike credit scores, CLV scores aren’t accessible by consumers and aren’t monitored by any government agency. Many propriety formulas are not disclosed for competitive reasons.
  • Accuracy: Some CLV measurements are based only on transactional data. Others take in online behavior, customer-service interactions, social-media profiles, geolocation data, demographics and other factors. The myriad of inputs being used by various firms can lead to inaccurate scores.
  • Inequality: A customer scored as “high-value” may not receive a discount as quickly as the average customer because they’re expected to remain loyal shoppers, but they generally receive better perks and service than perceived “low-value” customers.

In an interview with RetailWire, Peter Fader, a marketing professor at the University of Pennsylvania’s Wharton School and a CLV pioneer, agreed with many of the concerns in the article and called for greater transparency.

As with credit scores, giving consumers knowledge of CLV scores could incentivize better shopper behavior. Moreover, similar to how an actuary can estimate when a person is going to die based on an average individual with similar characteristics, marketers might lessen the “creepiness” of CLV by disclosing their calculations were disclosed, Prof. Fader believes.

Standards should be established and be based on transactions or RFM segmentation (Recency, Frequency, Monetary Value), according to Prof Fader. Demographics and other behavioral data “really hurts the accuracy” of CLV scores, but can be used in a second step to support profiling efforts.

Prof. Fader doesn’t believe, however, that CLV should be used to “treat anyone badly.” A baseline of “reasonable standards” should be established for low to mid-tier customers. Then, CLV can be tapped to “treat the better customers better.”

Said Prof. Fader, “It’s playing defense with the rank and file and then playing offense with those at the high end.”

DISCUSSION QUESTIONS: Do you see customer lifetime value (CLV) scores facing hurdles with consumers as their use becomes better known? Do you agree that greater transparency and establishing standards would be beneficial for retailers employing CLV?

Please practice The RetailWire Golden Rule when submitting your comments.
"Retailers don’t have to disclose the algorithms they’re using to make their calculations, but by all means they should provide feedback to customers. "
"...loyalty programs usually have a huge blind spot – they can’t track purchase behaviors outside of their own “walled gardens.”"
"CLV scores, if calculated to include longevity (which they should actuarily) are inherently discriminatory."

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20 Comments on "Can customer lifetime value scores work against retailers?"

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Bob Amster

Like KPIs for other parts of the business, CLV is a metric to apply to customers. What decisions a retailer makes about one, or a group of customers based on CLV is the key, not whether or not the retailer informs the consumers what their individual CLVs are. The use of CLV can be beneficial or detrimental to both the customer and the retailer. As in most cases in retail, it’s about the execution.

Phil Masiello

Customer lifetime value (CLV) is a metric for retailers and e-commerce companies to understand their customers’ behavior AND to understand how much they can spend to acquire a new customer and what it costs to lose a customer. If there are retailers using this metric to determine what level of services to provide to a customer then they do not understand the metric.

I would never give this information out to consumers or make this information public. This should only be an internal metric. A secondary goal of the metric is to look at those consumers who are at or below the average and determine ways to increase their CLV. If a retailer is using this information to prioritize customer service then they certainly will fail at that goal.

I do not think that the WSJ article reflects the norm. I think it reflects a small percentage of retailers who are out of touch.

Adrian Weidmann

Any type of scoring, targeting, and/or profiling will be misused and abused by some. That is the nature of marketing and the temptation to squeeze additional dollars out of every transaction. I suspect there are (or will be) marketers that whose compensation/bonus will be based on some calculation involving the Customer Lifetime Value (CLV). While it started as an academic exercise by Prof. Fader, CLV will be modified by a host of different agencies to further their businesses. Transparency would certainly help the creepiness factor. Rather than creating standards, it would be better if the folks using this metric would police themselves in order to create value for the shopper. When (and they will find out!) the shopper or your customer finds out that they are paying more because of some scoring/profiling agenda by a brand — that brand will be exposed and pay the price in the court of public opinion.

Nikki Baird
There are very few things that retailers do or keep around customers that should not be made transparent to consumers. If you’re making a calculation or a decision in such a way that you don’t want to make that transparent to customers, then you should probably seriously rethink what you’re doing. Retailers don’t have to disclose the algorithms they’re using to make their calculations, but by all means they should provide feedback to customers. Don’t position it as a negative – it’s just like a loyalty tier. We have no problem telling consumers “Hey, if you spend $200 more, you’ll move up a tier” (both DSW and Sephora – not to mention Delta – are telling me that right now). So why not share, “If you keep returning things at this rate, your status is at risk” or “If you visit my store three times in the next six weeks, you can improve your status”? The one big caveat: if you’re going to reward high status with perks and benefits, then you better make sure… Read more »
Sterling Hawkins

Agreed — if retailers or brands are doing something around consumers, it should be transparent to consumers. The best part about this (as Nikki also highlights above) is that once information is available, consumers can and actually do participate. Nobody can play a game in which there are no rules. As thresholds and performance is outlined, consumers can know the game they’re playing. (By the way, if retailers don’t create a structure, consumers will create their own, likely not in service of the retailer — find the cheapest price, etc.). Loyalty programs proved this 30+ years ago and new technology and new measurements make this stuff more important and effective than ever.

Min-Jee Hwang

I’m not optimistic a metric like CLV will become well-known among consumers. Its a strategy employed by retailers and shoppers are likely to not buy in to yet another score they have to monitor and keep up. Therefore, there could always be improvements on the retailer side to CLV scores — but how consumers react to them is low on the list for now.

Shep Hyken

CLV is a great metric for a number of reasons. One of my favorites is to let employees know what the average CLV is, which is why ALL customers need and deserve to have the best customer service. CLV on an individual customer level helps create “loyalty tiers.”

The concern that consumers are worried about is that their CLV is going to be used against them. Rather than treat a lower CLV with less respect (yes, some companies treat lower CLV customers with a level of disrespect), treat them in such a way that they would want to do more business.

Joanna Rutter
3 years 1 month ago

I passionately believe that the future of marketing, especially in retail, lies in an equal exchange of data for value, where customers willingly share pieces of information in exchange for an experience that is truly valuable to them, and in which none of it feels like a weird ask at all, so much so that those exchanges are imperceptible (and protected by real, real good security). That’s my dream, anyway. Standardization helps make this easier for everybody, transparency makes it less creepy, so I’m into it.

Cynthia Holcomb

CLV as a method to rank a customer and once it is known to a customer it may elicit unintended consequences. To some, it may feel like being graded against some unknown metric as to their (human) value to a particular retailer. To others Big Brother watching and to some it will not matter. Retailers need to be very careful with CLV profiling. Rating one customer against another does not serve a customer. A dangerous ranking once exposed could anger many customers into retaliating and shopping with a retailer they know they can trust. What happened to the “good old days” of carefree shopping, where a shopper could be a shopper and have some fun?

Mark Heckman

Taking a longer view of the customer’s value to your business has always been a good idea and largely unappreciated by retailers who live from week to week, sales period to sales period. However, the formula the retailer uses to calculate value is certainly key to the effectiveness of any CLV effort.

RFM modeling is clearly a component but, as we all know, the value of the shopper changes radically as they progress through the various stages of life and must be considered along with other factors influencing shopper behavior.

Most importantly, for senior management to find CLV a credible tool for growing their business, it must be cogently linked to more traditional measurements such as sales performance, profitability, transaction size, and customer counts.

Ralph Jacobson

I don’t believe customers need to know this metric, any more than they are aware of their average transaction value, shopping trips per month, or any other KPI. The responsibility lies squarely in the retailers’ hands to manage each customer and the promotions offered to them via the tools available today. CLV as a metric holds enormous value for the retailer, and it should be one of many KPIs leveraged to paint a more complete picture of every individual shopper.

Doug Garnett

The big downside to CLV is the incredible risk of adopting measures without understanding their limitations. While CLV may seem interesting (especially given the incredible belief in loyalty programs among retail marketers), there are clear risks.

Byron Sharp’s work on marketing’s Law of Double Jeopardy shows that strong brands become strong by building higher numbers of low value shoppers. And, by doing so, on average each shopper buys more.

Except CLV focus ignores low value shoppers, perhaps even penalizes them, despite the low value shoppers being exactly where brand growth happens.

We do well to remember Goodhart’s Law when dealing with metrics: “When a measure becomes a target, it ceases to be a good measure.”

Joel Rubinson

CLV scores, if calculated to include longevity (which they should actuarily) are inherently discriminatory. Because they are also arbitrary (who really can estimate the probability that someone will be a customer seven years from now?) I say be very careful about using them.

Ananda Chakravarty

CLV is a metric that provides one more way to segment a customer base. What retailers do with the data is a separate issue altogether — for retailers of a luxury yacht dealership it may well be their livelihood, while a grocery store can only make limited store changes and recommendation engine adjustments. The fact here is that customers are already aware of CLV, and concerns around whether they are not getting the best discounts really aren’t a privacy threat. It can play to loyalty programs but the retailer needs to decide how transparent they want to be. It won’t be a game changer.

Phil Rubin

There are certainly hurdles facing not only consumers but even more so retailers (among other industries). Those hurdles include not having the right data and accompanying insights to derive CLV, not having other meaningful customer metrics and, more importantly, not having a well-developed customer marketing/management strategy. The last item is what separates leaders like Delta Airlines from others. Delta has always been clear that to get a better experience it takes being a premium passenger. It’s Delta’s business strategy linked to its brand and marketing strategy and directly tied to its loyalty strategy.

Amazon sets its bar at Prime membership and some retailers like Nordstrom do a smart job of tiering value and experience in terms of customers and the business.

How many others can say the same thing? When they can it’s much easier to be transparent about CLV and why that’s important for the customers and the brand.

James Tenser
While the term “Customer Lifetime Value” is seldom used in customer-facing communications, a proxy already exists for this in the form of points and miles programs. In airline programs “gold status” is a signal to the customer that they have attained a higher-value tier. Members are aware of the rules – the more you fly or spend, the higher your status. Lots of travel years ago is worth less in this formula than lots of recent travel. That’s the definition of RFM. Retail loyalty programs have sometimes applied the same principles, but most seem to have steered away from “bronze-gold-diamond” tiers in favor of personalized offers based on more specific buying behaviors. This is important because loyalty programs usually have a huge blind spot – they can’t track purchase behaviors outside of their own “walled gardens.” This means two customers with identical calculated CLVs may have wildly different potential value. Two quick examples: A grocery retailer may have two households that spend $70 a week in its store. Equal RFM. For one, that may be… Read more »
Jeff Miller

The two examples of credit scores and how an actuary uses data for insurance are counter examples in my view to the idea of transparency. Yes, I can see some of that info and have some idea of what impacts my score, but no real transparency at all in terms. And don’t get me started about Experian, Transunion and Equifax. As others have said, CLV is a metric used to make a decision. The decision could be algorithmically driven or in the case of a lot of retail, just a person making a decision to help a customer in a different way.

Jennifer McDermott

The CLV may become common knowledge by consumers, but I doubt it will make a difference in their behaviors unless directly linked to a loyalty program. If the CLV is making a direct impact into the level of deals offered or customer service received however, brands should absolutely be transparent. Knowing your overall experience will be based on a made up number would certainly impact desire to shop somewhere.

Ken Morris
Ken Morris
Managing Partner Cambridge Retail Advisors
3 years 1 month ago

I don’t see retailers explaining to consumers how they calculate the CLV scores. If the calculations are complex, it would only confuse consumers.

While classifying customers based on some of their profiles, may be inaccurate, it is important for retailers to really scrutinize the logic and algorithms to help avoid false assumptions. Maybe they should just go back to the basics tried and proven metrics of RFM (Recency of a purchase, Frequency of the purchase and the Monetary Value of the purchase). It is NOT discriminatory in any way to track when someone shops, how frequently they do so and how much they spend. LTV which is the original name for the current CLV mnemonic has been around for 50 years … nothing new, just recycled.

Sid K. Hasan

FICO was created in a pre-internet world (1989) and is in need of a make-over. It’s wonderful to guess the present and future value of a customer, but there is a long-term strategy rooted in establishing the value of a present and future state of value; on and offline.

"Retailers don’t have to disclose the algorithms they’re using to make their calculations, but by all means they should provide feedback to customers. "
"...loyalty programs usually have a huge blind spot – they can’t track purchase behaviors outside of their own “walled gardens.”"
"CLV scores, if calculated to include longevity (which they should actuarily) are inherently discriminatory."

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