Customer Lifetime Value

You are what you measure. Companies need to focus much less on product profitability and more on customer profitability. This concept isn't new -- many retailers have implemented a loss-leader strategy in an effort to secure a relationship with a customer and, it is hoped, do business in other more profitable areas. What needs to be addressed along with this is the measurement of customer lifetime value (CLV).

In my last post, "Are You Focused On the What or the Who?," I discussed the need to put the customer rather than the product offering at the center of the marketing department's focus. When an organization takes the bold moves to do this, it can mean significant changes to the org chart, the elimination of sacred cows, and a new focus on what is measured and why.

Customer relationship management is a term that has been corrupted over the years to mean something different. When uttered, CRM typically conjures up images of the latest software package, some great new technology that helps automate a process and make marketing and sales more efficient. The "relationship" part of the term is missing. When an organization truly puts the customer rather than the product offering in the center, it becomes less about measuring the value of your product equity or brand equity and, instead, measuring customer equity -- customer equity being equal to the sum of the lifetime values of all your customers. Your product or brand is simply a means to an end: clients who pay you repeatedly and are willing to pass the word on to others.

I have witnessed many times in the online ad industry the quick rise of the latest and greatest retail site, another flash sale business model, and new DSP exchange offerings. It's amazing how quickly and inexpensively an organization is able to secure ground and develop rapid growth in revenues. In our culture, we reward the short-term. Public markets with quarterly reporting emphasize the need to achieve quick results.

 If a company (or an outsider of the company) is to attempt to judge the performance of an organization on these short-term results in such a fast-paced world, key metrics are overlooked. A company in decline may be showing amazing current returns (often using gimmicks and accounting tricks to create the illusion of success) while facing a bleak future due to poor client retention, low Net Promoter Scores, or an unsustainable business model.

We need to focus our attention on metrics that bring the long-term health of an organization into view. CLV is one of those metrics, where you track the future profits generated, properly discounted to reflect the time value of money. I believe we're currently witnessing movement where metrics such as CLV, client retention rate, and long-term contract value are considered assets that should be reported on financial statements.

I also believe strongly that the more we -- as individuals, companies, and a nation -- focus on the long term versus the short term, the health of our organizations will improve. I have often admired the CEOs of large public companies who are willing to turn their back on Wall Street's pressures for quick results and instead make tough decisions now about what's right for increasing CLV and the long-term prospects of the business.

As the world economy continues to struggle to build momentum, this is the time to focus on steady, sustainable growth. That growth will come only by focusing on customers.