“Throughout history, it has never been easy to identify a deserving king!”
I attempted to address this in my previous post, in the context of customer strategy. I proposed Customer Lifetime Value (CLTV) as the key metric to identify king customers. However, I’ve found this philosophy extremely difficult to follow, which is why I wrote this post. It’s okay if you have not read my previous post. You will still benefit from this one, as you will understand why you need to chase CLTV as you build a sustainable business to attract lot of king (loyal) customers!
Business around CLTV, why?
It’s simple. If your business is on an upward trajectory, then CLTV for most of your customers will also be going up. And if CLTV is going up, then almost certainly, most other important metrics of your business – sales, customer acquisition or repeat rate, order value, and profitability – would also be improving. But the vice versa doesn’t necessarily happen. Don’t agree? Read the footnote for few examples & dialogues with self!
Okay, is it difficult?
Yes, somewhat! You never run out of uncertainty & difficult questions if you are in a high growth business! Now, add these to the list too 🙂
a) How do I calculate CLTV?
This post by Patrick Deglon on calculating CLTV captures it really well. You need to make sure you include elements of profitability, and not only sales, in CLTV. And if your business changes very fast, then consider ways to implement a predictive CLTV based reporting infrastructure. Remember, what helped you increase CLTV of your customers in the past may not help now. I have also come across Custora, which seems to have developed a decent solution for predictive CLTV reporting.
b) Are the ones with highest CLTV the only king customers?
Not always. History is quite clear – kings who became kings because they made efforts were much better than the ones who merely inherited the title. So, always ask, is it something you did or something just happened? If you don’t attract sufficient number of high CLTV customers, look at realigning your product (including any customer touch point) and marketing strategy.
c) How should I treat customers who have high CLTV just because of one transaction?
If such customers typically don’t repeat, then don’t lose any money on them. Just ensure that they feel delighted while interacting with you at any point during the transaction. Simply speaking, they shouldn’t have a reason to avoid you. However, you definitely need to design a more aggressive (CRM) strategy for customers who are likely to repeat. By the way, you might also consider ways to discount CLTV for lower repeat rates.
d) What if customers aren’t yet ready for a royal treatment?
If you think that investing $$$ on CRM strategy won’t significantly move the needle, then do lots of small experiments on cohorts of users you want to grow; find out what really works. In a high growth, uncertain business, customer loyalties may appear elusive but aren’t absent. Just like at times of war, kings knew who their friend was, and who was a foe!
e) Why should I not treat all customers as kings?
You have to differentiate and make sure your special customers really do feel special. You need to create reasons for them to develop loyalty and enjoy something extra for doing business with you.
Now what?
Thinking in black and white never helps! You can apply different tactics for different cohorts of customers. In fact you should look at ways to put CLTV as an important dimension of every possible cohort you can visualize. For example: x-axis for CLTV and y-axis for repeat rate/ NPS / visits / issues / resolution time / etc.
As you design specific interventions, keep in mind that your actions don’t alwayshave to be around selling. Use engagement-driven tactics that help you come across as a caring business; e.g. sharing useful information around products or just telling what’s new. And most importantly, you never want to design your engagement strategy solely around incentives because you don’t want to come across as a purely transaction-centric business.
As I conclude this post, I know, we tend to look at different metrics with each phase of growth. However, we must not forget to keep our focus on metrics that pass the test of time. If you are building a sustainable business, then make sure your metric also is, because
“Kings come and go, but kingdom seldom does.”
*Footnote (dialogues with self):
Under each of these examples, an important metric may be improving but at the cost of another, which is why CLTV always has to be at the forefront.
1) My sales are growing. But wait honey, you aggressively pumped $$$ into marketing campaigns, and that doesn’t always translate into sustainable sales or profits!
2) My customer repeat rates have gone up. Interesting! But why are most of your customers now buying inexpensive, frequently required goods? Diapers, really! Come on, that isn’t a sign of loyalty unless you can sell premium perfumes too!
3) My order value and overall sales have grown. Cool, did you just fund huge discounts on big ticket items?
4) I’m now profitable. Quite! Don’t celebrate yet. Are you sure these aren’t just a handful of customers driving all your profitability? Or worse, if you recently launched a profitable but non-differentiable service, you know deep down that your competition would soon catch up!
(A special thanks to Nikhil Dwarakanath for sharing his perspective; thanks toCandice Martins for reviewing the final draft)