Editor’s note: Terry Vavra and Douglas Pruden are senior partners at research firm Customer Experience Partners. Vavra is based in Terry Richmond, Va. He can be reached at vavra@customerexperiencepartners.com. Pruden is based in Darien, Conn. He can be reached at pruden@customerexperiencepartners.com. This is an edited version of a post that originally appeared under the title, “Celebrating customer loyalty.”
One of the most productive activities a successful marketer can engage in is nurturing customers’ lifetimes. Feargal Quinn, the legendary supermarket visionary of Ireland, passionately advocated this orientation in his book, “Crowning the Customer.” Our philosophy, and practice of aftermarketing, is a compendium of activities and actions all aimed at lengthening the lifetimes of current, desired customers.And so, we were particularly interested, and pleased, when recently a blue Tiffany box arrived on our doorstep from Stephen J. Squeri, chairman and CEO of American Express. The box carried two lovely Tiffany Champagne flutes along with a note from Squeri thanking us for having been an American Express cardholder for 50 years! This unexpected gift validates that Squeri and his colleagues at AMEX certainly believe in celebrating their customers with extensive lifetimes.
The backstory
Early in our journey developing aftermarketing, we (and others) promoted a common rally cry: “the company retaining the largest share of its customers wins.” Later, based on research undertaken when writing our book, “Loyalty Myths,” our advice evolved. We warned the marketing community that not all customers were equally valuable to a business. To profitably succeed, we explained, a company should focus on retaining only its desired customers – those customers who generated profits by virtue of the value of their purchases exceeding the costs of servicing them.
Going one step further, the marketing community has accepted the fact that loyal, committed customers create additional value for a company beyond the revenue generated by their purchases. They engage in word of mouth, winning more customers over to a business. This contribution has been dubbed customer referral value (CRV). It has become common practice to recognize that some of the new customers won over by a current customer might have become customers, even without the referral. So, sophisticated models account for two types of referrals: type one, new customers who would not, without a recommendation, have become customers; and type two, new customers who likely would have become customers even without the recommendation.
The understanding is that committed customers have a cumulative future value to a business both through their own, continued stream of purchases and through the new blood they attract by their positive referrals. Calculating the present value of each customer’s combined worth to a business, this value has commonly been referred to as the customer’s lifetime value (CLV). (We believe it makes sense to combine CRV within the calculation of CLV, but some prefer to keep the two concepts as separate criteria.)
Back to American Express
Business decisions, like all decisions in life, are never easily made or defended. Here’s the interesting conundrum. AMEX chose to wait for 50 years to send us the champagne flutes to our high CLV. Some bean counters would criticize this expenditure as spending to encourage a behavior which is reaching its temporal conclusion, approaching the end of a customer’s mortal lifetime.
Morbid thinking or an astute observation? This argument has been around for a while. It reduces to the following. Should marketers bestow rewards early in a customer’s lifetime to encourage their further lifetime spending, or should marketers wait until a customer proves their value through accumulated actual expenditures to bestow rewards? Or perhaps both?
One consolation, to mollify criticism of the late spend in a customer’s likely lifetime is that the rewarded customer will, no doubt, contribute substantially through referrals – boosting their CRV (We’ve just contributed to that value with this blog.). Our perspective aligns with advice we heard some time back. It referred to the ubiquitous “customer appreciation day or week.” Such an event, the logic goes, begs the question, “What of the customer the remaining 51 weeks, 364 days?”
Continuous praise
We haven’t sent the champagne glasses back. We rather like them. But it would have been nice to have been shown a bit more appreciation intermittently over our 50 years as a customer. True, AMEX representatives on the telephone are usually very good in initiating an interaction by recognizing a customer’s tenure. But that fleeting recognition is easily overlooked or soon forgotten. And it’s completely intangible. We prefer continued, tangible reminders of appreciation for a customer and the customer’s business.
Customer lifetime value and customer referral value are core marketing metrics which ought to be much more present in our everyday practice of business and in our longer-term strategic planning.