Customer Life Time Value

Woman Doing CalculationsI just fired up an old laptop to retrieve a document.  This was a list of topics I planned to write about, and I thought it would be instructive to review the list.  I had searched through all my current folders several times when it occurred to me that it was created a while ago and it might me on the old Sony.  It took a little work to get the computer working.  When I located the file I checked the date:  May 18, 2005.  The very first item on the list was “Lifetime value of a customer.”

I was first exposed to the concept when I read Customers for Life by Carl Sewel.  I wrote a post about Sewel a couple of years ago.  His book was published in 1990 and at the time Sewel calculated the life time value of his customers at $330,000.  In 23 years I’m sure that value has gone up, and the number is going to be different for every business.

I have a renewed interest in the concept as I have been studying marketing metrics.  This spring I audited a University of Calgary, course called “Metrics and Measurement” taught by Jeff Nelson and Joanne O’Connell.  The text book for the course is “Data-Driven Marketing: The 15 Metrics Everyone in Marketing Should Know” by Mark Jeffery  The course is excellent and one I recommend.

Sewel`s number was a life time sales number.  The academic approach and a perspective that a business owner should be taking today, treats Customer Life Time Value (CLTV or CLV) as a forward looking metric that predicts future profits represented by a customer.  In effect it is a present value of a customer relationship.  If the relationship were viewed as an asset what would its value be?  This number allows a company to set an upper limit on what it is prepared to spend to acquire a new customer (customer acquisition) and the lengths they would go to, to keep a current customer (customer retention).   In future posts I will expand on these two very different metrics.

I won’t go into CLTV formulas and such here but  a good overview of the concept can be found in Wikipedia here.

Lessons From Sam Walton

Sam Walton, founder of Wal-Mart

This is the first in a series of posts on what I like to refer to as Retail DNA.  This is a new category and something I will write on from time to time.  Some owners of retail businesses seem to have a sixth sense when it comes to running their business. They approach things differently.  They don’t need to be told, they figure these things out on their own.  It’s like it’s part of their DNA.  The good news is, the rest of us can learn from them.  We are going to look at a few of my favorites, I hope you enjoy the ride and let me know what you think.

Now this different approach applies to the way they treat both their staff and their customers. If you read Sam Walton’s autobiography “Sam Walton: Made in America” you will learn from one of history’s greatest retailers. I read the book many years ago and there are lessons that are part of the fundamentals I use when working with a retail client.

First, let me say that this post is not intended to be part of any discussion about how Wal-Mart is perceived today in terms of their treatment of employees.  I am aware there are opinions on both sides but this is not something I have studied and therefore am not qualified to weigh in.  This post is meant to share some thoughts and ideas that you can apply to your own retail business.

Now back to my example. Many business owners keep information from their front line staff. The fear is that the information might be misused or competitors might learn this inside information. Sam Walton respected his front line staff. They weren’t clerks they were associates and he shared information. My daughter early in her working life worked in a Walmart store. She wasn’t “part-time” she was a “prime-time” employee.  On her first day on the job was told exactly what that stores sales were the previous day. Sam felt there was value in sharing the information with everyone as it made them feel an important part of the success of the store. This benefit far outweighed any possible damage that might occur from people outside the company gaining access to the information.

Make your employees feel that they are important to your success.  Share information with them and give them an opportunity to show you what they are capable of.

A Sports Analogy

Here is a business anaylsis excercise that can make your company better.  In sports, leagues are always changing the rules.  This is done with the intent of making the league better.  When these changes are viewed at an individual team level it is good for some teams and maybe not good for others.  The team management has to asses the rule changes and determine how it might effect them and discuss how they will change to adjust to the new rules.  This is standard practive.  Keep in mind that in sports, rule changes are made during the off season and teams are informed of the changes.

In business, change is ongoing.  Sometimes businesses are unaware that a “rule change” has occurred.  Every year it is worthwhile to sit down and determine what has changed in your business, in your industry, in your marketplace and with your customers.  What do you need to change in order to continue to win under the  “leauge’s” new rules?  A useful technique to employ as part of the exercise is to say “If we were to launch a business to complete against us, what would we do?”  Put together a plan.  Now ask yourself, “Is there any part of this plan that might be seen by consumers as better that what we are currently doing?”  If the answer is yes then you should seriously consider implementing this in your business.  If you aren’t able to, or decide against taking this new approach develop a plan to bullet-proof your business from competitors that might use this approach.  It might be a simple as developing a communications plan to explain how your plan or offer is superior.

If this exercise is done on a regular basis your business will evolve and stay current and reduce the risk of having dramatic changes forced on you in the future when you are not well prepared.  Be proactive.  It’s almost always better to have change be an evolution instead of a revolution.  Good luck.

Zagging

It is important in business to know what your competition is doing and anticipate how it might affect your business. A key strategy is to Zag when everyone else is Zigging.
Here is one of my favorite examples. In clothing retail, most businesses concentrate on their change rooms as a vulnerable point with respect to theft. To minimize theft they develop a strategy around this area. the rooms are small and uncomfortable which discourages people from spending time. They also impose rules that dictate the number of garments that a person is allowed to take into the change room.
Donald Cooper, founder of Toronto area clothing retailer, Alive and Well saw this in an entirely different way. He reasoned that the people that steal from you will find a way. The conventional approach inconvenienced the 95% per cent of customers that are honest to protect against the few that are dishonest. He designed change rooms that were spacious, and there was no limit to the number of garments a customer took in to try on.  Cooper is an example of someone who has what I call Retail DNA.
Look at your industry and identify one or two areas where everyone is Zigging. How can you Zag? Don’t Zag for the sake of Zagging, make it in an area that has meaning for your customers. Happy Zagging.

Jumping to Conclusions

     Here is an incident that illustrates the importance of finding out what a potential customer needs before you offer your “best selling point.” On a fine sunny Sunday afternoon we were touring a parade of homes. Each builder was showcasing what they felt was a great example of their craftsmanship and expertise. In each home we were greeted by a representative. In one home the representative handed us their “package” which included the developer’s promotional material on the area, along with the builders promotional material. While handing over the package, the young gentleman said matter-of-factly that they had the lowest cost per square foot in the area.
Apparently he felt that their claim to fame was that they could build cheaper than anyone else. He didn’t think that their quality was a selling point. With this bit of information as an introduction to their show home experience, one tends to use that to frame all that you are about to see. Hmmm, perhaps their kitchen cabinets are not as nice. Gee these bathroom fixtures are not as good. I wonder what corners were cut is inside the walls, that I can’t see.
     When someone is touring a show home, or viewing your offering for the first time, remember that you want the customer to first think “What would it be like if I owned this?” In the case of the home; can they see themselves living in a home like this? If there is some hesitation, what changes would they like to see? They have to imagine owning it before they will buy.
     Don’t jump, find out what they are thinking before you offer your best points, it might not be what they are looking for.