Insights: AMA's digest of the latest findings from marketing's top
The purpose of business is to create value for the firm by creating value for customers. The centrality of customer value to the purpose and success of a firm creates a situation in which marketing can and should be the hero that can take the company from so-so to exceptional performance.
In fact, research shows that marketing actions that increase customer lifetime value (CLV) have a dramatic positive impact on corporate stock performance. For example, when a firm selectively targets for acquisition those customers who match the profile of existing high-CLV customers, it increases the overall value of its customer base and this leads to above-market stock performance. In a similar way, a firm that offers incentives to get current customers to buy other products that the company offers will have a more favorable bottom-line impact when these incentives are directed at high-CLV customers.
A forthcoming Journal of Marketing paper by professors V. Kumar and Werner Reinartz of Georgia State University and University of Cologne, respectively, provides an exceptional framework to guide a firm in using CLV to enhance firm value. It’s a framework for heroic marketing, if you will.
At the heart of the framework is a focus on measuring CLV and running predictive models to understand the drivers of CLV. This is done in order to develop and implement marketing strategies to maximize CLV at the individual or segment-level, which allows the firm to realize greater market value.
Truth be told, the analytics at the heart of the framework are not for the faint of heart. If modeling options such as multinomial logit, Markov chains, quantile regression, probit, and Monte Carlo simulation induce mild anxiety in you, then rest assured, they do for me as well … but they’re not my focus and, as a marketing executive, they need not be your focus.
As an executive, the important points to appreciate are these. First, it is possible to model the predictors of CLV in a way that can guide a variety of marketing actions. Second, this approach to marketing decision-making leads to more optimal resource allocation that translates into better return on investment. Third, there are very capable researchers out there who can create these models and use them to guide your firm’s decision-making.
On the third point, keep in mind that these researchers do not have to be employed by your organization. There are many professors out there who are eager to work with companies in this way. The various tables in the paper offer a “who’s who” of capable academic researchers in this field.
Rather than getting wrapped up in the modeling possibilities, I’d rather call attention to some of the questions (taken directly from the forthcoming article) that these sophisticated analyses can answer.
A primary allocation of marketing spending goes toward acquiring new customers. A firm can increase its marketing ROI when it knows which customers to target and with which messages and offerings. If it can know the likely CLV of targeted customers, it can also evaluate how much it should invest in acquiring a given customer.
Here are some questions that acquisition research can address:
How many new customers can we acquire in this campaign?
How many orders will each of our newly acquired customers place?
How do the marketing variables, such as shipping fee, word-of-mouth referral, and promotion depth, influence prospects’ response behavior?
How long will the newly acquired customers stay with our companies?
How much profit or value will this acquisition campaign bring to our companies?
Although new customer acquisition is critical to long-term success, companies often get greater value from an extra dollar spent on customer retention. Of course, this is ultimately an empirical question. And for every dollar spent on customer retention, it is still important to know which customers should be the focus of spending, how much should be spent to retain a given customer, and how to balance spending on acquisition vs. retention.
Here are some questions that retention research can address:
What will firms have to do in order to retain a customer worth retaining?
When should we intervene and save the customers from churning?
How much do we spend on churn prevention with respect to a particular customer?
Given the resource constraints, how much should be spent on acquisition efforts versus retention efforts to maximize long-term profitability?
No matter how excellent the company, some customers choose to leave. While some may simply view this as the end of the customer lifecycle with the company, proactive companies seek to win these customers back. But here again, since all customers are not equally valuable or equally responsive to potential win-back offers, firms should selectively apply resources to winning back lost customers.
Although new customer
acquisition is critical to long-term success, companies often get
greater value from an extra dollar spent on customer retention. Of
course, this is ultimately an empirical question. And for every dollar
spent on customer retention, it is still important to know which
customers should be the focus of spending, how much should be spent to
retain a given customer, and how to balance spending on acquisition vs.
Here are some questions that customer win-back research can address:
Should the firm intervene with customer churn?
If so, how should the firm approach the customer to win them back?
What elements would help firms in reacquiring lost customers?
In this era of big data and sophisticated analytics, marketing should be the hero of new value creation. That is, marketing should be at the forefront of making decisions that have a quantifiable impact on value creation for customers and the firm. To achieve this, marketing should seek to make decisions based on an understanding of the drivers of the forward-looking metric of customer lifetime value.
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