Carl Sewell, the wildly successful Houston Cadillac/Lexus, coined the term, “lifetime value of a customer” (LVC) in his book Customers For Life in 1990. Since then, many CX business cases have used LVC as the foundation. While this still makes good sense, how you calculate LVC is critical to using it successfully. Remember that your critical audience is the Chief Financial Officer.
Sewell’s original book used a customer at his Cadillac dealership as his example. He stated that over the twenty-five years of loyalty, a Cadillac customer (in the 1990s) would spend upwards of $300,000. This was the value Sewell defined as the value of such a customer.
To a finance person, there are two glaring errors in that statement. First is the stability of the marketplace over such a period. I had a finance manager in a manufacturing company who said, “Who knows if we’re even going to be in that business five years from now, let alone a longer period?”
Second, any finance person knows that revenue earned in out-years must be discounted by the cost of capital. With inflation surging, this becomes even more important.
There are four steps to assure that finance is your friend and not a critic of your CX business case.
1. Select a painfully conservative estimate of the value of a customer
As a rule of thumb, I use three years of revenue in a market where long-term customer loyalty exists. To the degree that others cite many customers staying for much longer, that makes your case more compelling.
For large purchases that are only made every few years, this might appear to be a problem. The good news is that the larger the purchase, the more critical and impactful CX investments can be. For autos, where a customer may replace a car only every five years, we still use a three-year revenue value or only 60% of the value of a purchase. The $25-50,000 value is still more than enough to justify investments in CX. At Toyota, we assumed that the average loyal household would have two cars so, on average, a car was replaced every 2.5 years and the value was more than enough to justify CX investments.
2. Ask the resident finance cynic what he or she would use as a value of a customer
Getting them involved early gets their buy-in and understanding. I always seek out the strongest cynic and walk them through the methodology without numbers filled in and then ask for their estimate of the LVC. I then reduce that number by 20 percent. When we then present the business case and the CEO asks finance what they think, the usual answer is, “I’d actually use a bigger number, so if anything, I think the business case is too conservative. The payoff is bigger.” When finance criticizes you for being too conservative, you have carried the day.
During this conversation, ask the finance person about recent service interactions they have had and their impact on loyalty and word of mouth. I always ask about their experience with their car dealerships and internet companies. The CFO of a major electronics firm mentioned his car dealer and how angry he was. When I pointed out that his company had similar customers, I could see the light bulb go on in his head – he got it.
3. Point out that customers who complain are usually twice as valuable as the average customer
We’ve seen this behavior in travel and leisure, auto dealers, medical devices, and financial services. The heavy, long-time product user is more likely to complain because they have a lot invested, do not want to go to the trouble of switching brands, and really want you to fix your processes. The result is that customers using your service system are probably significantly more valuable than the posited LVC.
4. Add positive word of mouth (PWOM) and social posting as extra benefits of investment in CX
Acknowledge that it is harder to quantify but that companies with great PWOM have to spend less acquiring customers. For example, the former President of The Cheesecake Factory, Mike Jannini, noted that their marketing costs were less than one-third that of their direct competitors because “we let our customers do our marketing for us.”
Likewise, Chewy, the online subsidiary of PetSmart, benefits from social media posts about their great CX. PetSmart/Chewy has one of the most comprehensive customer engagement programs that incorporates almost all of the 15 delight actions identified in CCMC’s study. Its employees are often pet owners allowing for genuine identification and connection with the customer, enthusiasm for their pets, and empathy for customers’ pet’s issues, both minor and major. This leads to great PWOM and social postings.
For instance, a customer recently reported her experience with Chewy on the Nextdoor social network with the following post:
“When my neighbor called to cancel her periodic order because her pet died, Chewy sent flowers and a kind note the next day”
(7/13/21 Nextdoor, Bethesda, MD), 162 Neighbor reaction,33 Comments
This post prompted these two additional comments, among more than 30 others:
“Yes, Chewy is not only an efficiently run company, but a compassionate company. It also expressed condolences when my Mother’s cat passed away. I really was so surprised.”
“That is surprising this day and age. I use chewy.com off and on, but knowing they have some morals and compassion, will start using them exclusively.”
The point to make in adding PWOM and social impact is that a good story in a social post or word of mouth can create a significant amount of new business and customer awareness.
You may be concerned that selecting a conservative estimate of the value of the customer will undercut your business case for investment in CX. This has seldom proved to be a problem. The reason is that when you start focusing on the revenue impact of CX rather than cost savings, the payoffs become much bigger, often ten to twenty times as much.
LVC remains a foundation of CX business cases. The key to using it successfully is to be conservative, get finance buy-in early and supplement it with factors like PWOM that enhance its value without subjecting it to skepticism.