You Can’t Afford To Ignore Customer Lifetime Value

While many service-oriented businesses have embraced quantitative based methods of identifying and focusing on their most profitable customers the potential of squandering this powerful data brings its own risks. The proliferation of customer loyalty programs in recent years seems to support this, but too often this results in what amounts to a glorified rebate for the consumer. A more thoughtful and creative application of marketing to these customers creates the potential to create more satisfied and passionate repeat customers.

When a loyalty program simply consists of converting a percentage of revenue generated into “points”, a company risks having what could be a more personal relationship with the customer turn into a strictly transactional one. When the relationship with the customer has been changed in this way, a competitor that is willing to undercut the rebate offered can take customers away that no longer feel they are being taken care of.

A demonstrative example of this occurring would be in both the Hospitality industry in addition to Casino Gaming. Many hotels have very similar loyalty programs, that amount to rebating the consumer between 1 and 5 percent of their total spend based on frequency of travel. While a family that goes on vacation once per year may not care about signing up, business travelers that make up the bulk of revenue during slower times of the year do not dare miss out on the chance to earn “free” travel and hotel stays for personal use. But paradoxically, if every major chain is offering a similar rebate to customers then absent external factors the customer will not have a strong loyalty to any brand, and simply go for who is giving him or her the best offer at any given time.

This effect is even more pronounced in Casino Gaming where the actual product being offered is so difficult to differentiate. While Gary Loveman had recieved attention in Academia on the subject of Customer Lifetime Value having co-authored the paper “Putting the Service Profit Chain To Work”, as CEO of Caesars Entertainment he was widely criticized within the industry for an over-reliance on using CLV for decision making. In a nutshell, under his tenure he determined with extensive statistical analysis that the most profitable customers for the firm were not high-rollers lighting tens of thousands of dollars on fire at the blackjack tables, but rather retired women with disposable income that visited on a regular basis. Targeting these customers worked extremely well in the short term, but when the recession hit the type of middle class consumer that was the companies bread-and-butter exceptionally hard, Caesars Entertainment lacked the ability to be nimble and replace these lost customers. (There were additional structural problems with the company that had to do with a overpriced leveraged buyout, but for purposes of discussion we only care about marketing issues in this context) This is not to say that offering a points reward program is at all a bad thing, but rather that if all the participants in a market have similar reward offerings, firms will struggle to differentiate themselves.

If just a small fraction of the marketing budget for such efforts were redirected into more creative uses that directly engage the consumer, the potential exists to generate repeat business that will inflate Customer Lifetime Value while at the same time create customers that are more willing to evangelize for the company. Perhaps it takes the form of offering a personalized phone call when doing research, or for exclusive promotional events that reinforces the relationship as being more than just a company giving the customer a discount. There is a reason that Customer Lifetime Value is so important, namely that it acknowledges the massive advantages in getting repeat business vs. needing to spend money to acquire a new customer. When a relationship is this important, nothing can be left to chance and it must be taken seriously, but how a company chooses to develop it is the centerpiece of a holistic marketing plan.

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