Saturday, September 26, 2020

Life-Time Value and Sudden-Death Sales Syndrome

“Customer centricity can allow your organization to make far more money from your most valuable customers who will buy from you more often and spend more when they do buy from you.”   --Peter Fader, Marketing Professor, Wharton School


Customer Lifetime Value (CLV) is a concept that describes the total worth of a business customer over the life of the relationship.  According to an article in Harvard Business Review (Jan/Feb 2010) CLV is the basis for marketing geared to serving the customer as opposed to selling brands and products. This approach is developing as the core concept for business long-term health and valuation (along with competitive industry equity). 

CLV makes a 180-degree shift: from quarterly profits on sales to focus on long-term customer metrics, limiting spending to acquire new customers by placing a premium on the existing customer.  Customer profitability (CP) measures the past profit; CLV looks forward to the future value that results from active cultivation and deep knowledge. In this scheme, the relationship is lifetime, not short-term, calling for a bird’s-eye view of every transaction as having effects not just in the present but into the far future. 

Case Study: Health Club Memberships.  For nearly 20 years I’ve belonged to the Bellevue Sporting Club, the premier health club in Center City Philadelphia.  It carries a hefty monthly pricetag, which I’m always trying to work around by shopping some less expensive options around town.   But pool and indoor track are hard to find downtown, which are the main club attractions.  When I heard that the pool is now narrowing use to three lanes and requiring timed reservations for swimming, I thought this was my signal to leave—after two decades.  (For the Sporting Club, this represents over $30 K in membership and monthly fees.)  I decided to disenroll.

I entered the sales office and spoke with two young sales agents, explaining that the pool core of value to me now seemed too unwieldy for my schedule.  I was sorry to withdraw my long-term membership, but it looked as if I wouldn’t be getting much pool use (the track would be collateral damage because it could be replaced elsewhere, at least 80%, by a treadmill).  Without missing a beat, the girls cheerfully explained how I could easily quit online (no in-person apologies needed!) and handed me a multi-step instruction card.  Could I just sign something, now that I was here in person? I asked.  Not really.  Perhaps I’d like to go up to the business office, maybe get some help there.  Were they really saying goodbye to a long-time loyal member so easily?  Clearly they wanted to close my case in order to get back to bigger things—like signing up brand-new members. 

In the business office, Bridget proved more helpful. First, she asked what the problem was—something Sales didn’t really seem to care about.  That was easy; the pool.    She pointed out that the lane shrinkage and reservations to swim laps were temporary, imposed only as COVID measures.  At some point, pool life would return to normal.  The freeze I requested when the club closed down in mid-March could be extended to January (I hadn’t even thought to request such an extension).  Here was the Business office more aware and proactive in customer retention than the sales team downstairs.  The three-month grace period allows me more time to re-think leaving and preserves my CLV – all to the club’s benefit.  Why didn’t the gang in Sales do the same—assure me that the pool program was only provisional?  Did Sales even probe to see why I wanted to leave—or care?  Did they do any math, realizing it is five to seven times more costly to recruit a new member than to retain and cultivate those already on the rolls?

A health club is a great example of an experience-based offering that benefits members for life.  The club is just the stage set shell of space and equipment; none of this has any value without the energy supplied by the user.  But blocks like COVID can interrupt lifetime value unless companies appreciate their threat—and appropriate interventions--to the User Experience equation.

These quitting points are known and predictable.  Health clubs are well aware that New Year’s resolutions last about six weeks, then wind down as the expected progress isn’t rewarded in any quick progress toward goals. Far less than half of all members even appear regularly. Currently, for many, the nonstarter is masking up while exercising; for others, suspended showers or even towel service.  Still more just don’t welcome the viral risks of shared water or locker rooms. 

In the Sporting Club case, this customer didn’t want to quit the club—she just wanted someone to discover how to stay enrolled, and keep those payments coming in.  In this case, the Accounting office showed a superior grasp of the long-term benefits of customer retention.  They apparently know where the money comes from.   

Plenty of companies pay lip service to a customer-centric culture, but their behavior shows their ongoing dedication to sales rather than service, and marketing those products versus cultivating their buyers.  Social media has revolutionized interactive (not one-way) communications.  This is a dynamic that deserves a totally revised orientation to the purpose of business—to create value for its customers. This is the root of success for IBM (B2B), American Express, and Nokia (with its Beta Labs in Asia) in understanding and serving customer needs as they evolve by paying close attention to the plentiful interactions that contain plenty of intelligence – when you know how to read them.