Steve Barton’s comment (MW May 19) that loyal customers are not necessarily profitable is correct, of course, but our new return on customer (ROC) metric doesn’t value loyalty in a customer, unless it generates a higher lifetime value (LTV).
He’s also correct that word of mouth is an important marketing effect that should be tracked and encouraged, but we think the benefits should be taken into account in calculating LTV, whenever possible. We also suggest that word of mouth and customer referrals are a type of “leading indicator” of LTV change.
We think Mr Barton is also probably correct in his assertion that marketers will put up strong resistance to ROC because it won’t improve market share in the next quarter. That is, of course, the precise point we are trying to make about today’s marketing – that it is focused almost exclusively on short-term results when, in fact, a customer also creates value for a company when his LTV increases. Not that short-term results aren’t important, but long-term value creation is also real, and should be taken into account. Maximising ROC requires a balanced approach that uses a mix of aggressive, current-period marketing with longer-term customer satisfaction, profitability, and LTV improvement – ironically, the very things most likely to generate “word of mouth”.
Mark Runacus understands this and endorses our point of view when he says that ROC would go against “the current grain of short-termism that characterises much business today”. The main question he raises has to do with the difficulty of calculating ROC, given the imprecision and inaccuracy of most customer data. Well, we certainly agree with him. Bad data is a problem. But you have to start somewhere, don’t you?
To track ROC, a company must track and measure customer LTVs for a number of different types of customer, involved in different types of activity, probably relying on historical transaction patterns as well as overlay data. If your company has a good customer transaction database, then you have a leg up on the analytics task. But even if you don’t have the hard data, you should be planning to acquire it in order to solve tomorrow’s marketing problems.
Peppers & Rogers Group