The Hindu Business Line : Marketing magnified

“With the advent of customer-level strategies, every marketing action targeted towards a customer is linked to that customer’s profit contribution. That is the beauty of implementing Customer Lifetime Value (CLV)-based strategies and therefore marketing executives can be held accountable, said Dr V. Kumar in an interview with Business Line.

He is of the opinion that his CLV metric is ‘here to stay’ as it is not only a comprehensive measure but also a sound and logical one. Dr Kumar or VK, as he is called, is the Richard and Susan Lenny Distinguished Chair Professor of Marketing, and Executive Director, Centre for Excellence in Brand and Customer Management, J. Mack Robinson College of Business, Georgia State University, US.

He was recently listed as one of the top five ranked scholars in marketing worldwide. In this interaction, Dr Kumar points out the relevance of CLV and the benefits of implementing CLV strategies. Excerpts from the interview:

What got you started on the CLV research?

Ten years ago, a catalogue firm came to us for guidance on whom to mail the catalogue. This firm was mailing the catalogues to its loyal customer base, under the presumption that customers who were buying from the firm for a long time, or frequently buying, were loyal.

The problem was that when catalogues were mailed to customers who scored high on these metrics, the firm did not see the expected results since most of these metrics were identifying the best/valuable customers from a historical point of view as opposed to who may be the best customer in the immediate future identified by the CLV metric.

Thus, we began our journey exploring the potential for CLV.

Identifying a customer as a ‘True Friend’ (your term for a customer who is both loyal and profitable) calls for looking at the profile of a customer and then immediately acting on it to service that customer. What kind of organisational changes are needed to empower the front line agent to manage such a customer?

Changes are needed in multiple areas. Organisational change is necessary with the top management adopting an ‘interactive orientation’, which insists that customers have to be managed by the value they bring to the firm. Employees are not only informed about the importance of managing customers but also have access to the rank they belong to, such as ‘platinum,’ ‘gold’ and ‘silver’. Employees are also empowered to be more responsive to the ‘platinum’ customers.

You talk of using CLV as a metric to be maintained and reported as part of the financial reporting procedure. At one time it was the EVA (Economic Value Added) and now it could be CLV? Won’t it be seen as a fad?

We have just now concluded a study, which establishes the fact that firms that adopt CLV and develop our recommended strategies to maximise CLV have been able to show growth in shareholder value and stock prices above and beyond the expected norm. So, in my opinion this metric is here to stay as it is not only a comprehensive measure, but also a sound and logical one.

What is the difference between a loyalty programme and a rewards programme?

A loyalty programme is the one that gives points for buying goods and services and something that can be accumulated over time and redeemed for a benefit in the future. A rewards programme is the one that gives instant benefits such as cash back, or some price off for a future purchase, or a one-night off for a three-night stay at a hotel or a resort.

While the loyalty programme thanks past behaviour, rewards programme encourages future behaviour. The best loyalty programme is the one that not only thanks past behaviour, but also encourages future behaviour. This is possible if a loyalty programme provides opportunities for — earning as well as redeeming points from multiple partners; accumulating points over a longer period of time to get a cumulative benefit, and classifying the customer base into various ranks or groups.

Give us an example of an industry that has used CLV to its benefit and how.

As for the CLV implementation in some form, American Express is a good example in the financial services sector. The company offers many benefits that focus on targeted benefits to the customers, such as a first priority seating for the US Open Tennis tournament or a super bowl game. Polo Ralph Lauren, in the retail sector, is another example; there the most valuable customers are courted to keep coming back to the store with specific rewards.

How does your concept of profitable customers work with the bottom-of-the-pyramid strategy?

Our approach states that every firm should evaluate its customers from their profit contribution to the firm. Therefore, there will be high, medium and low CLV customers. The firm is expected to initiate differential customer level strategies to retain high CLV customers and convert the medium and low CLV customers to generate more profits either through up-sell or cross-sell efforts and/or transacting the customers with a low cost transaction channel. In the bottom-of-the-pyramid strategy, firms introduce products at the lower end and can still find customers of high CLV within that segment. So, the CLV concept is equally applicable.

The title of your recent book (Managing Customers for Profit) is perhaps stating the obvious. Why wouldn’t customers be managed for profit?

While it is obvious, not a single firm has been able to follow this till the beginning of this century as one needs customer level data on both transactions and marketing campaigns over time. Now that the data are available, firms need to have access to cutting edge knowledge on how to manage customers for profit. Our task is to disseminate the body of knowledge (described in my book) to the business community so that they can take advantage of these latest proven customer relationship management strategies.

You talk about making the marketing profession accountable? Haven’t CMOs been delivering value?

No, the CMOs (chief marketing officers) have been doing their job. But the issue is to be able to prove to the Board that the marketing actions taken have resulted in incremental profits. So far, the strategies have been aggregate in nature. So, it was not possible to find the link between marketing and financial performance. But today, with the advent of customer level strategies, every marketing action targeted towards a customer is linked to that customer’s profit contribution. That is the beauty of implementing CLV-based strategies.

So, can CMOs be made more accountable now?

Yes. Normally, the tenure of a CMO is about 22 months. With the evidence shown through our studies, the tenure of a CMO can be extended as they can show the increase in stock prices and shareholder value through the implementation of CLV-based strategies. We have demonstrated this increase in stock prices for both B2B and B2C firms.

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