One of the core premises of sophisticated marketing over the past decade has been the idea that companies should consider the lifetime value of their customers. By taking the longer-term view, companies can optimise their customer relationship strategies.

The customer lifetime value can be used to drive decisions such as which customers to target, how much to spend on acquiring them, what is the most effective media to use to communicate with them, and how best to serve them to ensure that they remain loyal for years to come.

Airlines, for example, have long been known to reward their most frequent flyers and those who spend more on high-cost fares. Casinos are also known to treat their high-rollers to various indulgences, such as free drinks, meals, and accommodation.

Applications of the lifetime value concept can be found, however, across many other industries and products. Mobile phone operators, for example, have devised extensive promotional plans that entice consumers with new handsets, combined with voice and text bundles, that tie customers in for 12, 18 or even 24 month contracts, hoping that they will either spend more during the contract and/or remain a customer after the initial period has expired.

Banks, which traditionally have had a hard time relating to customers across product lines, are increasingly developing a holistic view of their account holders. It is not uncommon for a bank to offer customers lower rates on loans, for example, provided they also open a current/checking account, with direct deposit of their salary.

Some other lifetime value applications are more difficult to detect. For example, a high lifetime value customer calling the company’s support line may be routed to a special queue with shorter wait times and higher-level experts on the other end of the line.

But how is customer lifetime value measured? As more companies adopt customer lifetime value strategies, the question becomes more critical.  

A tale of two customers
Consider George, a hypothetical yet highly realistic coffee consumer. George practically runs on coffee. He visits the High Coffee chain store by the office on his way to work, pops down for a mid-morning refill, then for an after-lunch espresso. He stops after work for another cup, ready for the journey home. Being a guy that exercises a lot and can easily afford the extra calories, he usually cannot resist the temptation of something sweet to complement his caffeine intake. Once a week, he buys a bag of beans to use at home, although now that there is a High Coffee store in his home town, he sometimes sneaks down there at the weekend.

Based on his purchase volume, George’s lifetime value for High Coffee is invaluable. As a High Coffee cardholder, he has earned platinum status, which rewards him with occasional free drinks and extras. To Rita, the head of the loyalty program at High Coffee, this makes a lot of business sense. Because the competition is also interested in heavy coffee drinkers like George. A recent ad campaign from a competitor, the Coffee for Less chain, showed a George-look-alike bragging about their new coffee, that not only cost less, but presumably also tasted better. By keeping George happy, Rita knows that his heavy spending goes to her chain, and not to the competition.

Earlier this year, however, George did switch to the competition. It was actually Kevin, the guy from accounting, who persuaded George to try something different. Kevin himself is not a big spender like George. In fact, he wasn’t much of a coffee drinker until a few years ago. After spending some time in Italy, he developed an appreciation for a good espresso shot, which he is always happy to tell you about. When Kevin and a group of co-workers go out to lunch, he always manages to drag them to his favourite coffee place to join him for his fix.

Kevin and George often lunch together, and will get their espresso shot on the way back. When the Coffee for Less store near the office sent Kevin a text, informing him that his comment card had been acted upon and the chain had introduced his favourite tipple, he switched allegiance – taking George with him in the process.

Kevin was also a High Coffee cardholder. With the little spending he did, he was only at the bronze level, and got little to no attention from Rita’s loyalty program. Clearly, George’s move to the competition was a big loss for High Coffee. But it was actually Kevin’s move that caused it.

Kevin is one of those individuals who have the power to cause George and others to move to the competition. The problem is, Rita and her group at High Coffee didn’t realise that. If they could have figured it out, they would have attempted to keep Kevin happy with their chain at least as much as they tried to keep George happy. (They would have had to do different things to keep Kevin happy, but that’s a topic for another article.)

For a real life example, look no further than David Murphy, editor of this very same magazine. He recently told all his readers about the brilliant offer he received from UK network 3 (If you haven’t already read it, you can catch it here.) Imagine the difference to 3 of losing him and having him tell his ‘close friends and family’ about the amazing offer he’d received from the competition!

The new customer lifetime value measurement
To avoid losing influential customers like Kevin, organisations need to adopt a new measurement of customer value. It should incorporate not only individual purchases but also those influenced by each customer.

The distribution of a company’s customer base typically looks something like this:

• Wealthy Snobs (15 per cent of customers) – high value, low influence
• High Spend Influencers (3 per cent) – high value, high influence
• Quiet Majority (75 per cent) – low value, low influence
• Everyday Influencers (7 per cent) – low value, high influence

For many companies, the rule of thumb says that 80 per cent of its customers generate only 20 per cent of the revenue, with the other 20 per cent generating the other 80 per cent of the revenue. Most customers fall into the ‘Quiet Majority’. They neither spend much, nor influence others to spend. The ‘Wealthy Snobs’ are the ones that spend a lot, but have little influence on others (George would be one). They are still important, but most companies already recognise them and treat them according to the value they generate. The ‘High Spend Influencers ‘are the ‘super customers’ – those that spend a lot and also influence others. Even if they already get preferential treatment due to their high spending level, they should be treated like gold.

The customers overlooked by companies that apply traditional customer lifetime value strategies are the ‘Everyday Influencers’. Like Kevin, while they don’t spend much themselves, they have a strong influence on others’ decisions – where to shop, what to buy, and what services to use.

Companies that want to get maximum advantage from the customer lifetime value approach need to change the way they measure customer value. Rather than basing the value solely on the individual’s purchases, they should now include the value of purchases influenced by each customer. So Total Customer Value equals Individual Customer Value + Customer Influence Value.
To learn more about Customer Influence Value and how it can be used to optimise customer relationship strategies, you can download our free eBook, The Influencer Marketing Revolution, here.

Ran Shaul is co-Founder and EVP solutions at Pursway