There was a 1993 New Yorker cartoon with a lovable looking dog on a chair in front of a computer. Ears flopping, eyes shining, he looks down at a friend and says, “On the internet, nobody knows you’re a dog.”
Now though, just one number says a lot about each of us. It’s called the Customer Lifetime Value Score (CLV).
Online, on the phone, or through the mail, your treatment from a retailer is no accident. They know how long to place you on hold, which customer service rep to connect you with, and whether automatically to offer you a discount. Their decisions are based on your CLV score.
A CLV score summarizes your buying behavior. Some mostly focus on what you spend while others include a slew of variables. Your age, marital status, education, and Zip Code might matter. So too could purchases, returns, your online history and demographics. The most desirable customers shop throughout the week from work and they buy full price. Frequent returners get negative scores because two-way free shipping is costly.
Also, the type of firm makes a difference. A clothing retailer cares little about the contract switching that phone companies cope with. Walmart’s variables would differ from an airline’s.
Talking about a clothing retailer, one data firm divides its five top categories into many more data points:
However, not all are equal. First purchase history and web/app sessions get the most weight. Then, after the algorithm kicks in, they know how to treat each of us. During a phone call, they might keep me waiting for 45 minutes while you get an immediately response. Their goal? Boost how much and how often we shop while diminishing churn. (A churned customer has not placed an order for a year.)
I love this Julia Roberts scene from the 1993 film, Pretty Woman. We could say it’s the face-to-face version of a negative CLV. (At the end they add an “after” clip.):
Our Bottom Line: Supply
On the supply side of markets, firms especially care about production costs. Traditionally emphasizing land, labor and capital, economists say the supply curve shifts higher or lower when production costs change.
Now though we need to sure that other production costs are on our list. Firms want to allocate marketing costs more efficiently. They need to identify and nurture high value customers while diminishing their losses. Yes, we all know that unprofitable customers have always existed. But now they’ve become a measurable metric that affects what firms are willing and able to supply at different prices.
Returning to the New Yorker cartoon where we began, instead our puppy might be complaining about the long wait for the “chat” to begin.
My sources and more: For a an interesting short podcast, do listen to this Indicator episode on Customer Lifetime Value. It was a good start that led me to WSJ and the academic side, that, though dry, had the details. And finally, here is The New Yorker cartoon.