When will retailers wake up and smell the CLV?
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By Peter Fader, professor of marketing, Wharton School of the University of Pennsylvania and co-founder of Zodiac
For 30 plus years now, I've been spreading the "customer centricity" gospel to anyone who will listen. While most companies mistake the concept for a friendly philosophy about the importance of being "nice" to every customer, it's quite the contrary.
A truly customer centric company is one that aligns its products and services around the wants and needs of its most valuable customers. In other words, it's about using customer lifetime value (CLV) metrics to identify the ones who are likely to continue to spend money with you for a long time ahead, and finding more like them.
Naturally, I get calls from all sorts of curious companies desperate to increase the future profitability of their top customers. Gaming companies, pharmaceutical firms, hotel chains, telcos... you name it. They are making great strides to use CLV to become more customer-centric.
But retailers? All I hear are crickets.
It frustrates me to no end because when it comes to the power of harnessing the future value of their customer base, no one stands to gain more than retailers.
So what's holding them back? Here are three excuses I hear, and three reasons why they're baloney.
EXCUSE 1: "In retail, that's not how we do things. It's all about moving product."
From the ancient open-air markets of Babylonia to the modern, high-touch Fifth Avenue department store, the basic principles of traditional retail has changed very little. It's all about keeping costs down and moving as much merchandise as possible.
The manifestation of this mindset is that most large retailers live and die by the success of each individual department.
Take a typical department store. Each department, from women's shoes to luxury bags, operates as a standalone profit center, each with its own sales goals and marketing team. Front-of-house sales associates are incentivized to compete against one another, and at the end of the day, each department is only as good as its numbers.
It's a never-ending hamster wheel of expending every drop of energy on pushing product to meet those quarterly, seasonal, and yearly sales goals.
The problem with such a product centric mindset? Retailers are inadvertently ignoring the needs of their best customers. In this world, customers are just nameless, faceless hordes with credit cards.
A customer centric mindset, however, helps you understand that customers are actually miniature profit centers that can power your company's growth for a long time ahead.
EXCUSE 2: "There's no way we can possibly predict their value of our customers in the future. They're all so different from each other."
Not true! Quite to the contrary, the shopping patterns for retail consumers are very regular, predictable, and interesting. Companies in the gaming and hotel industries under-stand this, and go to great efforts to better understand — and fully leverage — these patterns.
Retailers, in contrast, seem content to ignore customer shopping patterns. At best, they'll often base their promotional campaigns off of cheesy, catch-all customer personas like "Housewife Harriet," "Working Wanda" or "Supermom Sally." It's a strategy that blatantly ignores the the true nature and extent of the differences across their customer base. The hard part isn't collecting the data — it's about having the courage and creativity to build a proper business model to best take advantage of these patterns.
EXCUSE 3: "We're already looking at CLV. We have our own home-made model, so we’re covered."
This excuse is the most frustrating. Once you've made the commitment to measure CLV in order to transform into a more customer centric company, you've got to do it the right way. And the right way requires patience and an open mind.
Most companies that dip their toes in these waters are often guilty of two mistakes: (1) They don't project far enough ahead and (2) they don't look at the CLV data in a sufficiently granular manner.
Let me explain. Say a retailer wanted to make a bold, forward-looking statement about how valuable one set of customers will be as compared to another set of customers. To do this, they may start by analyzing three key data sets from the previous year: The date of each customer's last transaction (recency), how many times each customer purchased something (frequency), and the average size of their purchases (monetary).
The problem? Looking back one year to predict the next quarter isn't painting the most accurate forward-looking picture — and it's a far cry from CLV. A lot of today's so-called CLV models are just quarterly forecasting projections. That's a fine tool for certain purposes, but if you really want to know which customers will have the greatest lifetime value then you need to think differently, and develop models that are uniquely well-suited for this purpose. That's when the real value will arise; not just some "nice to know" metrics that don't really drive the business ahead.
Fader is a graduate of MIT, and has more than 30 years experience as a consultant to leading brands. He is the author of "Customer Centricity: Focus on the Right Customers for Strategic Advantage."