Peter Fader, Wharton Professor and author of Customer Centricity: Focus on the Right Customers for Strategic Advantage, is fond of saying: “There is no average customer.” He argues that marketing strategies and measurement systems that focus on pleasing the average customer can lead to disastrous results. Instead, marketers – and indeed corporate valuation systems – should be based on increasing the Customer Lifetime Value (CLV).
Here’s an example from Fader’s book: There is a time-worn story of Nordstrom’s allowing a man in Alaska to return a set of worn-down tires. The story is remarkable not because the tires were obviously used, or because Nordstrom did not sell that set of tires to that man. The story is remarkable because Nordstrom does not sell tires at all. Whether or not the story is true, it has provided Nordstrom with a memorable anecdote about its legendary customer service.
However, Fader argues, Nordstrom was wrong in accepting that return. While customer experience strategies would point toward satisfying the customer, that man was not a Nordstrom customer, or he would not have tried to return the tires to the store. And since he was not a Nordstrom customer – much less a premium or high-value Nordstrom customer – the store created no corporate value by letting him return the tires.
Customer Lifetime Value, according to ClearActionCX.com, “measures the cumulative profit contributed by each of your customers and prospect during the entire duration of their purchases with your company.” By focus on CLV, everyone in your company understands the potential value of each customer relationship, and factors that into decisions that impact keeping and attracting customers.” So, we need to develop marketing strategies and programs that serve the needs of and attract more of our best customers – those with the highest CLV.
For another example, consider B2B companies whose sales forces are often incentivized by quarterly goals and rewards. But does that create value for the customer – or the corporation? What happens is that salespeople go to their accounts and ask them to speed up their purchasing. After all, if you were going to purchase next month, why not move it to this month so your salesperson can get a bonus? Does that strategy create any value for the firm? No, the customer purchases the exact amount they were going to without the incentive program. Only the timing of purchases changes. On the other hand, if we incent salespeople based on how much additional product or service clients purchase over their previous levels – that would move the needle on value.
Fader believes that we must understand how much corporate value marketing strategies create over what it would have been without those strategies. Simply having strategies – including strategies focused on customer experience delivery – without understanding whether and how they create customer and corporate value will not ensure long-term success. Taken a few steps further, if a corporation is focused on creating value for its best customers, the overall valuation of the corporation should follow.
Another quote from Fader’s book: “the customer is not always right. Rather, the right customer is always right.” By focusing on delivering value to our best customers, marketers can drive the overall corporate valuation. But we can only do that if we measure to identify our highest-value customers. An additional bonus is being able to link marketing strategies to the long-term value of the corporation for greater accountability as well.