The constant flurry of news emanating from Amazon about fashion and appliances, Prime Day results and the Whole Food acquisition triggers the concept and value of Customer Lifetime Value (CLV). Wharton’s marketing professor, Peter Fader, is an expert in this area. He stunned a standing-room-only audience of about 300+ Shoptalk attendees in March when he pronounced marketing dollars on creating superior customer experiences and services are wasted unless these efforts are accurately counted and benchmarked by the marketing department and ultimately used by finance and accounting, and understood across the organization.
After requesting that the audience stand, raise their right hands and pledge, “to embrace customer valuation, to practice it vigorously and regularly or get steamrolled by Amazon,” Fader provided a solution as a defense against Amazon’s relentless pursuit of everyone’s customers.
What Isn’t Counted Doesn’t Count!
Bottled water at the door, children’s playrooms in the rear, even the surprise and delight of winning a free trip to Tahiti, doesn’t create customer lifetime value, which in turn is foundational to any firm or corporate value. “None of these tactics have value unless you value them, that you know the value of the customer before and after the campaign,” Fader says. Too often, marketers only loosely capture the ROI (return on investment) of marketing spend. Fader’s message is to take the best practices of accountants, bankers and financial professionals and project future cash flows and discount them back to today. He says math and pesky numbers are key to unlocking consumer and corporate value.
I recently caught up with Fader to gain a better understanding of his notions around CLV. He explains he is drilling into the concept of customer centricity, the same idea Robin Lewis believes holds the key to success in today’s and tomorrow’s retail battlegrounds. For Fader, CLV data is paramount to a successful customer centricity strategy. Without the data, customer centricity is just “cheap talk.”
The disruption occurring in consumer businesses reflects the rapid and accelerating transition from product centricity to consumer centricity. In the former, CPG companies are forever chasing the next big thing, a best seller, and a product that can “comp the comp.” This strategy, even when successful, leaves too much value on the table. Fader believes the success of product strategy has plateaued reflecting product commoditization due to the forces of technology, smarter customers and nimbler competitors. He says tagging and tracking customer data will yield a wealth of insight. It will also change the nature of new product development from an end in itself to become a bait to lure in new customers and enhance CLV for existing customers. Ultimately, products should be created in service to the consumer and the creation of customer centric value.
In a consumer-centric worldview, customers are not intangible assets on the balance sheet, but rather real assets dynamically valued reflecting new data collected daily. This changes the way marketing expenses flow through financial statements, allowing for capitalization versus immediate expensing. Both have the same impact on cash flows, but capitalization reduces the immediate hit to profitability on the income statement. This approach could be a game changer for public companies.
Fader provides multiple examples of firms doing CLV the right way. Starbucks is a company rooted in product centricity, including coffee roast, store ambience and in-store experience. It has evolved into a CRM company that monetizes through coffee. An overhaul of its loyalty program changed to rewards based on dollars spent, from the number of transactions. Investments in mobile payments has enabled Starbucks to capture data, tag and track customer behavior, see what kind of marketing campaigns customers respond to and better calculate the value of those customers.
Customer Centricity Generates Better Decisions Across the Organization
Fader cites Dress Barn’s promotional and product discipline that captures data on high-value versus low- value customers with the goal of elevating the value of its customers, not just moving product through the stores. “No company does CLV better than Electronic Arts,” according to Fader. With product centricity no longer a viable strategy, Electronics Arts VP of Marketing Science and Analytics, Zack Anderson, tasks his team to do everything around CLV. All day, every day EA collects data on what games their customers are playing, with whom, for how long, and whether they are spending any money in the game. They update the CLV daily for a billion customers around the world.
CLV changes how new product success is judged. Fader explains that creating future customer centric value is worth 1000x more than the value of the product shipments. Fader argues that brands need to better recognize their high value customers. If your best customers are happy, chances are good that other customers will follow suit. It’s a superior strategy in contrast to developing product blindly and then crossing your fingers at launch.
Customer Based Corporate Valuation
Amazon’s investors implicitly understand CLV. Do the math: How else could you justify the 195 P/E (price/earnings multiple) AMZN shares trade at (versus 18X for AAPL (Apple shares) or 24X for the S&P 500) or its $497 billion market cap, up 1135X since its 1997 IPO $438 million market cap. From its start as an online bookstore, Amazon has been customer centric, capturing data, iterating services, and entering new categories/white spaces, using the “divine discontent of the customer as a North Star,” as Bezos said to Fast Company (March 2017). The launch of Prime and its success is a game changer likened to a flywheel, adding more services that attract more Prime members who spend more. Cowen and Company internet analyst, John Blackledge, calculates the lifetime value of an Amazon Prime member at ~$3000, and he estimates one half of U.S. households are Prime members, about 50 million members and growing.
Corporate valuation from the bottom up—customer based corporate valuation — is not black magic, but rather based on publicly available data. Fader has charts exhibiting the superior accuracy of quarterly sales based on consumer based data when compared to that of Wall Street analysts, based on simple data available in quarterly filings. His analysis is better, faster and more actionable than Wall Street.