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Customer Analytics: Customer Lifetime Value

Customer data can help you craft a product strategy as well as a marketing approach that can help your business grow and mature.

This article originally appeared on the BeyeNETWORK.

In my last article, we discussed one aspect of customer value analytics, namely the classification of your customer base into strata based on a set of known value of characteristics. To review, after collecting our customer data from various sources (both inside and potentially outside our organization), we identified a set of attributes that are both relevant within the business environment and are quantifiable within a value range, and made sure that the representation of each customer within our analytical environment could be augmented with those attributes. For each customer, we subsequently assign a score for each attribute, order the customer set by their combined scores and segment the customers into groups from which we can discover actionable intelligence.

Taken as a first cut at quantifying “goodness” vs. “badness,” this approach can provide a significant leg up in delivering enlightenment with respect to a number of actions that can lead to business improvement. One drawback, however, is that there is the possibility that the selection of value attributes may result in a static view of your customer constituency. Yet, customer behavior and activity changes over time, as does your own organization’s. Therefore, it is worthwhile to explore this concept intellectually before discussing ways to exploit it.

Consider that as your business grows and gets older, it has different needs and desires—as a startup company, your organization might have begun in a basement or a garage, drawing on personal finances and second-hand furniture and equipment. As the company matures, there may be a need for consolidated office space, newer computer equipment and more sophisticated telecommunications solutions. At the same time, with growing revenues, the founders of the company might want to replace those second-hand chairs with sleeker, more comfortable (and expensive) “executive sitting solutions.” At a later stage of corporate maturity, the business may make different investments to benefit the organization, such as real estate purchases, sales staff incentives or sponsorship at trade shows and conventions, to name a few. Clearly, as the business grows and changes, so does the kinds of activities and behaviors in which that business interacts.

The same can be said for individual customers, although a cursory view of the marketing industry might not reveal this. We are often led into believing that there are marketing categories that are strictly age-based, such as the typically described “18- to 35-year-old male” category that is a target market for many television and radio media outlets. This age-based categorization presumes that individuals that fall into a specific range have an affinity for certain kinds of purchases, and therefore be specifically targeted to certain products. For example, a teenager may be interested in spending a limited monetary resource on fashionable clothing and the latest CDs, a 24-year-old male may want a nice television and a senior citizen may be looking to buy a large automobile.

The interesting thing is that that same teenager, at some point, turns into a 24-year old, and has a relatively good chance of becoming a senior citizen some time in the future. And as that person ages and changes, the actions and behaviors change as well. If you are lucky, and your company survives for a good long time, the people whom you capture as customers in their youth will continue as customers as they mature and grow old.

In fact, there is a concept of “customer lifetime” in which one analyzes both the expected amount of time that an individual should remain as a customer as well as the actual durations of the relationships with individuals. And because your company understands how your own products or services are used, you can be aware of the best way to not just capture the customer once, but instead make it a long-term relationship, based on understanding how the individual’s actions compare to your expectations, as well as how those actions compare to the aggregate behavior models also.

So, instead of focusing on those tightly grouped age markets, there is an opportunity to track with your customers as they move from one group to another. One can imagine an automobile manufacturer applying this principle to develop lifetime marketing plans each time a teenager buys his first economy car. Given some understanding of model behavior, geographic preferences, expectations for career development, etc., and by characterizing individuals based on how they fall into your customer segments, the car maker should be able to sell six or seven cars to any person throughout that person’s lifetime.

Because there is so much data available for enhancement, as well as the many opportunities in which individuals themselves offer their own demographic and psychographic information, one might think that companies should be able to craft their marketing messages to their customers’ life cycles, as well as develop a product and marketing strategy that mirrors the life cycle as well. However, it is readily apparent that this approach is rare in most industries. And even in some businesses that share data for marketing programs, there are some silly gaffes that indicate a lack of thought.

For example, when my wife and I flew with our infant daughter to Florida, we established a frequent flyer account for her even though we bought her a child’s half-price fare. Six months later our toddler received offers for credit cards and long distance service. But considering that the seat that was purchased for her was a child’s fare, one might think that this bit of knowledge might be established with her customer profile; in fact, knowing that we had a small child, the airline company might have seen fit to market specific vacation packages to us that were appropriate for a couple with babies. But six years later, the same airline might instead consider a variant offer for couples with 6-year-old children. In other words, capitalize on the knowledge captured as well as understanding that as time has progressed our needs and desires have changed.

Many companies may not even consider this long-term approach to customer lifetime and customer life cycles because they don’t think about long-term horizons, but rather short-term quarters. But look at the major corporations in the United States—of the top 10 in the Fortune 500, there are three oil/energy companies, one big store vendor, two automobile manufacturers, one bank, one computer hardware and services company, one insurance company and one multi-segment product manufacturer. All of these companies have been in existence at least 40 years, and some may be older than 100 years. There are a lot of customers and customer lifetimes in there somewhere. So, think about the kind of information you are going to want to know about how your company will deal with its customers over their lifetimes, and you may find that this data may help you craft a product strategy as well as a marketing approach that can help your business grow and mature as well.

David LoshinDavid Loshin
David is the President of Knowledge Integrity, Inc., a consulting and development company focusing on customized information management solutions including information quality solutions consulting, information quality training and business rules solutions. Loshin is the author of The Practitioner's Guide to Data Quality Improvement , Master Data Management, Enterprise Knowledge Management:The Data Quality Approach  and Business Intelligence: The Savvy Manager's Guide . He is a frequent speaker on maximizing the value of information. David can be reached at loshin@knowledge-integrity.com or at (301) 754-6350.

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