It's Time to Look at Customer Value Differently

It's time to move beyond simple, outdated measures for determining the value of a customer. A new set of metrics is required!

I still continue to see organizations use what I view to be outdated marketing methods for measuring customer value, typically some version of either RFM (recency, frequency, monetary value) and/or CLV (customer life-time value) by itself.

Neither of these metrics, RFM or CLV, really captures the true overall engagement value of any given customer. Why? They ignore several very important dimensions of a customer relationship with a brand (covered later in the post).

A Simple Example regarding Customer Value (Tale of Two Customers)

To make my point, let's use a simple example of two different customers, Sarah and Nancy, who both shop an athletic apparel brand across both online and retail stores throughout North America.

First, meet Sarah. Sarah, is a huge fan of the product, but, not a very vocal one. Sarah has been a customer a little over three years buying at least three to four items every time she shops, online and in stores. Every time she shops she spends about $375 (average order size). She shops three to four times per year, so that's roughly $4,500 in total (when you do the math) over a three-year period. However, while she loves the product, Sarah has never posted a single product review on the website, participated in the companies on-line forum, and/or responded to an on-line survey. In addition, she is not very active on social media. She does follow the brands Facebook page, but, never really posts or comments on anything. Her value as a customer is purely limited to her own financial contribution to the brand based upon individual purchases (transactions). She has what i'd call a somewhat "transactional" relationship with the brand.

Now, meet Nancy.  Nancy is also a huge fan of the product, however, she is much more engaged with the brand both directly as well as sharing her experience with others. Nancy doesn't have nearly the spending power as Sarah with her purchases being limited to only one or two items every time she shops. Often she is looking for a deal. But she shops with greater frequency than Sarah, six or eight times per year, always making sure she is spending her money wisely. Her annual purchases amount to roughly $750 (about half of what Sarah purchases annually). However, Nancy is very active when it comes to engaging with the brand. She is a fan and an active one at that. She has written several detailed products reviews across product lines. Her reviews are frequently referenced and have been voted upon as being very helpful to others in making purchase decisions based upon their detail regarding product quality, material, usage, comfort, and fit.

Nancy also is an active participant on the on-line forum providing input and feedback on both existing and planned product. Her input and feedback has directly influenced the design of several product revisions as well as new releases. Recently, she even took an evening away from her busy daily work and home schedule and attended a focus group being held at her local store. She was excited to have the opportunity to meet with members of the Product Team giving her input and feedback on what she liked and didn't like about the planned product line. When asked, she has provided feedback thru several on-line surveys regarding the website experience and how to make it better for not only herself but other customers.

More recently Nancy has become very active in the new referral program launched by the brand. She has already referred over 10 new customers in just the past 6 months and has accumulated almost $75 in discounts towards future purchases.

Finally, Nancy is quite active on both Instagram and Facebook having shared or engaged in many posts regarding new product launches and/or company events. She enjoys posting pictures of her active lifestyle wearing one of her favorite brands while working out and running errands.

Who is more Valuable to the Brand?  Sarah or Nancy?

Now that you have learned a little more about both Sarah and Nancy, who do you think is more valuable to the brand?

While Sarah's individual value to the brand is significant given individual purchases, buying at least twice as much as Nancy on an annual basis, her overall relationship with the brand is not nearly as powerful. Sarah's relationship is somewhat one dimensional (transaction only) while Nancy's relationship with the brand is both deep and broad interacting with the brand across several dimensions of the overall customer experience (product and service).

If we were to simply rely on measurements such a RFM and/or CLV to assess the relative importance of these two customers one would perhaps, in error, rank Sarah as more important than Nancy. When, in fact, quite the opposite is probably true (using a more robust customer value measurement). Consider the value associated with each website conversion when someone buys a product after reading a product review she posted and/or the cumulative value of the 10 individuals she referred to the brand in just the last six months.

Nancy's much more in-depth and broader relationship with the brand when looked at holistically makes her at least as valuable to the brand as Sarah if not more.

The Dimensions of Customer Value which both RFM and CLV which Ignore

The specific dimensions of the customer relationship that both RFM and CLV ignore are the following:

• Knowledge or Feedback - the degree to which a given customer provides value to the brand based upon their feedback regarding products or services;

• Influence - the degree to which a given customer influences others to try the brand based upon their own experience and sharing the brand with others via social media; and

• Referrals - the degree to which a given customer directly refers another customer to the brand (incentivized or not) whom become loyal customers of the brand.

These above dimensions, in addition to a customers individual lifetime value, collectively define the customer's overall engagement value to the brand or company.

A New Formula for Calculating a Customer's Overall Engagement Value

Therefore, a more advanced formula for calculating a customer's overall engagement value (or CEV):

CEV = CLV (customer life-time value) + CKV (customer knowledge value) + CIV (customer influence value) + CRV (customer referral value)

calculated as a weighted average of each dimension. This formula was first introduced by V. Kumar in 2013 in his book Profitable Customer Engagement (Concepts, Metrics, and Strategies).

It's time to measure the value of your customer's differently! Not simply looking at their individual transactional or purchase value, but, taking into account their overall engagement and relationship with the brand.

Happy to talk with you in further detail about your own internal efforts to improve how you measure customer value.