Some non-conventional perspectives on the conventional wisdom of customer management in turbulent times
So, I’m going to talk about turbulent times, and in particular, about some non-conventional light on conventional wisdoms of customer management. And before that, I’d like to really thank Amit and the Optimove people for inviting me, for arranging this.
And I’m an academic. I’m a professor. So, typically, I go to academic conferences and not to practice conferences but from time to time I do and when the Optimove People ask me, I come. And the reason is they’re really thought leaders. They’re really the kind of companies that I’m looking for that bridge the gap between the knowledge that is created everywhere and in practice. And their blog is one of the few blogs that I recommend my students to read which is about the ultimate compliment that I can give. And we’re drowning, all of us. I am drowning. You’re drowning. We’re drawing from numbers with numbers and data and information.
And I remember myself as a doctoral student in the U.S. in the 1990s, and if you wanted to know something about customer management, there were a few academic articles and a few business journals and that was it, more or less. Today, I can only tell you that I really pitty marketing managers. And if you want to understand what’s going on, you need to take account blogs, social media feeds, numerous other business outlets, conferences like this one, plentiful academic findings. And in these years, it’s much easier to get to academic staff through the internet. And I can tell you, whether you believe me or not, that there’s so much in academic work which is relevant to you. So this is really a lot of data and really people cannot handle that. And I’m talking to people in the industry. And what people do is, to a large extent, base themselves on some conventional wisdom.
With all this information, with all these data they say, “I cannot handle it but I heard that or I read something that.” And what’s interesting about this something that everybody quotes everybody, so it can be the same thing that everybody says in the question is it really founded. And since I have a bit more time, so I think I can swim a bit better in this lake, I want to talk about some of these conventional wisdoms, and to challenge or at least to think about some of them, and to see if I can bring out some facts out of this lake.
So I’ll talk about a few subjects, customer lifetime value, retention, satisfaction, word-of-mouth. Probably I wouldn’t be able to cover all of it but at least I’ll try some of them and I’ll give the presentation to the Optimove people if anyone wants to look further. So I’ll start with lifetime value.
Using Customer Lifetime Value to Increase Customer Equity
And I was among the group of academics that started working on lifetime value issues in the end of the 1990s. I introduced it to the academia in Israel, to the Technion, to Tel Aviv University, to IDC, to the MIT Sloan School of Management in their teaching. So I’m very attached to lifetime value. I base my teaching on that.
And I’m not the only one. If you think of what’s going on around, what people tell you, you know, customer lifetime value, the only metric that matters, measure of customer lifetime value and then increase it. Customer lifetime value, the end goal guiding your transformation. And I ask is it really the end-goal? We can, to a large extent, get a very nice high average lifetime value and still not make a lot of money. The story is that we can increase lifetime value but this is not our aim. Our aim is to increase what I call Customer Equity.
And some of you may use this term and those of you who don’t, I really recommend to start using it because this is the story. The story is customer equity which is the sum of the lifetime value of current and future customers.
And this should take into account, also, the acquisition rate of future customers, of course. So we’re not interested in increasing the lifetime value of an individual or even a group but of all of them, now and the future ones.
If you think of the new product, so when your product is really a bunch of lifetime values coming, so we have the growth the new product and each new customer group of customers that enter has a lifetime value and the net present value of all of that is really the value of the new product. This is how we begin to think today about new products and, if you’re interested, in the next month, there’s a book coming.
Why Customer Equity is Important
I’m part of Elie of Harvard and Atan Molo from IDC and NYU. And we talk about innovation equity, about how you think about new products in terms of lifetime value, about the customer equity that is being created.
And generally, when I teach today, whatever I argue with students what people should do, I would say, “Go to customer equity. This is the only matter.” I’ll give you just a quick example. Let’s say we have current customers and the length of the line represents the lifetime value, expected lifetime value of each customer. Now we want more customers. So we want to attract them and we offer a deal, a deal only for new customers which many of you do and many of us do around. And what is the consequences? So when we do that, we say, “You know something? Even with the deal the lifetime value of our customers would be positive.” So, okay. So we offer the deal and this is what we expect certain lifetime values now and in the future. But these people talk. These people talk or these people just observe these people so they see that the new customers get a deal that they didn’t get and some of them are pissed.
So we may lose some of them. We may have a lower lifetime value because now they’re more pissed. So the retention rate goes down. Is it worth it? Maybe. But it’s a customer equity question. You have to look at all of them to take into account the existing, the new ones, and to do some summary. You know, you may be doing it anyhow but maybe not in a structured way. I would urge you. I would argue, and there books about customer equity. So the story is equity. It’s not customer lifetime value. And the same goes to something that many of us talk about, acquisition versus retention. I’ll talk about retention in a short while. But generally, if you look at the business literature, people say, for example, customer retention should outweigh acquisition is better, should outweigh or not. This is something that many people deal with.
And when I’m asked about it, I say, “I don’t know. It depends on the case.” It’s a customer equity question. In some cases, you should invest more in retention. In some cases, it’s time to invest more in acquisition. In all cases it’s time to look at customer equity and make the calculations. It’s all a matter of customer equity. So this is number one. Number two, another well-known idea that I also talk about in class, for a new venture, we need to ensure CLV greater than CAC, customer lifetime value is greater than customer acquisition cost. We have a new product and unless we do that we don’t make money. Right, the answer is wrong. And so, when you look at, indeed, what a venture capital firm say, they say it’s hard to read here but generally, if you want a well-balanced business model, you want the LTV to be greater than CAC. And in the industry, now there are all kinds of rules of thumbs. So greater than three, we really want, one to three, we’re not sure, smaller than one, your business model is broken. I’m not sure it’s still broken. Here’s the story. Actually, we need to take into account customer social value as well. And I talked about it last year when I was here but I’ll mention it again. So customer social value is the effect of a customer… you should be greater than customer acquisition cost. And the story is of timing.
What I will argue that early on, when you’re here, this is…let’s say this represents the growth of the new product. When you are here, the innovator is so, probably or in many cases, CLV is smaller than CAC. But you still want to invest because early on, it’s much harder. It’s much harder and we invest much in getting customers and it’s not clear that we will get customers with lifetime value greater than customer acquisition cost.
Now, what happens with the new product lifecycle, as more customers join, they affect others and they join. So the customers early on have, in particular, a high customer social value. This is what enables us to invest in customers early on. As time goes on, social value goes down. We don’t need the word-of-mouth that much, and customer acquisition cost goes down as well because there’s more word-of-mouth in the market so we don’t need to invest that much. By the way, this is just to get the range of the numbers.
This is a calculation done for the online banking industry. You can see that for the innovator, the first 2 and a half percent and early adapters, the next 13 and a half percent, the social value is really large. But then it goes down dramatically. So it’s a matter of the combination of both and it probably looks like that. So social value is high early on. I can say that, generally, very early on, it’s probably higher than lifetime value. At some point of time, lifetime value begins to dominate. So it’s the combination of both.
Overall, over the product lifecycle, you want CLV to be larger than CAC. Early on, probably, you will not get it. You’ll have to take into account customer social value. And if you do not explain it well to your venture capital firms, they might not invest you. So these are two things about CLV.
The Value of Customer Retention
Let’s talk now about customer retention. And in the same way that I’m connected to CLV, of course, I talk a lot about retention and the need for retention and of course, I’m not the only one. And Optimove People talk, and you talk. And customer retention is the king, and why is it so important, and importance, and so on. Everybody talks about retention today.
And, as I said, I came here to be the devil’s advocate to some extent. So let’s think a bit more about customer retention, taking into account that indeed, it is very important. So here is one of these conventional wisdom that I read a lot.
It costs five times as much to acquire a customer than to retain one, something that I’m sure that many of you have quoted. I tried.
Mostly, they say five, some people, six to seven, even more. And the question is where does it come from and is it right? And the answer it comes from nowhere. There is no such study that showed that. It’s all people who quote other people that quote other people that quote other people.
Some people trace it so some study in the 1980s. There are a couple of studies that are mentioned, I try to find them. It’s very hard. But it clearly depends. It clearly depends. It depends on the case. It depends on the time.
And there’s no rigorous study that have shown irregularity like that across cases. And you know you that deal with this issue, know how nontrivial it is to quantify it. And this is related to my second point on that, is that retention is a must. So we need zero defections. This, you know, seldom in the life of academic studies, you have an article that is so powerful in effect. This is the article that was published in 1990 in the Harvard Business Review, “Zero Defections: Quality Comes to Service.” And before that, I mean to mention one of the findings they’re going up 5% will increase the profit by so and so.
So this is really one of the most quoted articles and really affected this whole CRM movement. And they showed how much we lose when we lose a customer. And therefore, they said you must strive to get zero defections.
You know, you come from today’s world. This is the flowery metrics of retention over 30 days in the up industry. And the good ones have about 50% retention after 30 days. Now, we can argue about the numbers. I’ve seen numbers here and there and they move but clearly nothing like zero defections or nothing even close to that.
Customers have a lifecycle. You know that. And some of them, as part of the life I’ve lifecycle, leave us. And of course we’re trying to enlarge its life cycle and work on it but they will leave us. And there are some segments which we all know, not necessarily like, but we all know the variety seekers, the deal seekers. It’s not trivial to retain them. In particular, and many of you come from digital worlds, apps, games and so, product lifecycle are short.
I’m looking at this data from time to time, compare it to the classical data I’m looking at, this is on steroids. This is nothing that we’ve seen in the past. Customer lifecycle are short as we’ve just seen. New products are entering the market all the time. Can you really talk about something even close to zero defections? I’m suggesting to move to what I call a product network. Or you are going to call it platform or ecosystem. And it’s very simple. Retention is in the customer level not in the product level necessarily. So people will leave our product. The question is can we make sure that they will leave to the right product.
So the question is if and when and where to proactively move the customers. Some of you are doing cross-promotion. This is exactly what you’re doing if you’re moving them to other products that you have. So you have…
Actually you can look at your product as a network of products in which, at one point of time, we want to move some customers, before they churn naturally, we want to move them to our next product, to another product. And the question is how to do that. And this is a very good question. There is no intuition on that in academic studies. I don’t know if you have. I’m doing research on that these days. So if anyone has data that can help on that, trying to optimize what you do, I’ll be glad to hear.
So again, not zero defection. We need to take a product network view in that sense. Conventional wisdom to see. The question is retention versus acquisition. So as I showed you, we talk a lot about retention versus acquisition. But when we talk about, when we teach, when we think about customers and the customer mix, we have acquisition, retention. Acquisition, getting new customer, retention, making them stay, and development. And this is something we often forget. So customer development. It’s what we do to increase the profitability of current customers, the cross selling, the upselling, increasing the amount of frequency, increasing markup, selling for a higher price.
And we can ask the same way that we asked about acquisition versus retention, we can ask retention versus development. And this is really interesting. People have just begun in recent years to talk about it more. And one of the question is how much do they buy? Do we want really to retain everyone in that sense? McKinsey has some interesting finding in their article from beginning of the 2000s, and they talked about what they call Download Migration.
So they looked in the retail banking industry, in the airline industry, at how the profitability of customers change, and in their case they lost these the companies. They looked at lost money due to defection, but there was a lot of movement due to reduced balances and increased balances.
So a lot of money here due to reduce balances. This is a loss in development. And the loss in development may, in some cases, outweigh the loss due to retention. Do we really look at that or just wait for customers to leave in that sense. The interesting issue, if we think about the investment in development and retention, is that they are correlated. So this is the good news.
Look at Cox Communications. So we see the average monthly customer churn from people who have video only, it’s 3%, and then video and internet, video and phone, and so on. From video internet to phone, the churn rate is 1.4%.
Similar results with other telecoms. Now think about Cox in that sense. If you take the people who have video only and converge them to have video, internet, and phone and you don’t make money on internet and phone. So you do it at cost. It’s very easy to show that you still double the lifetime value. So when we are able to do cross-selling, and we increase the switching costs, and we increase retention, and we increase profitability, so the question of where to put our money in more development or directly, retention is a good one. But, again, should be taken into account thinking of customer equity.
Conventional wisdom 2D. I show my students these two companies. One of them has a retention rate or 50%, the other one of 90%.
And I said, “Who should work on retention more?” And they say something like, “You know something company B, 90%. You’ve done a good job. Maybe go rest a little. Company A, you should start working on your retention. This is more important for you right now.” And I said, “Really?” So I’m going back to what Amitt quoted before this famous bank studies that 5% increase in customer retention can boost profitability by 75% or 95%, or 25% to 95%.
And this the original graph from this article. And you see a range of numbers. What happens if you increase your retention rate by 5%? Now, people think typically that there was some in-depth analysis of each industry there and it was not. The story, really, here is just the level of your current retention. If you look at what we call retention elasticity, how much, for example, a change of 1% in retention changes the lifetime value of a customer, you’ll see an interesting finding. You’ll see that the higher you are, the higher the elasticity. So when you go from 90% to 91%, the effect on lifetime value is much higher than going from 50% to 51%. I can show it mathematically. It’s straightforward when you think about the process there is because you enlarge the life of someone who’s already larger. And you may argue that it’s much harder to go from 90% to 91% than 50% to 51%. You’re right, probably. But you should do still the analysis. It’s not clear that if you’re up there you should rest.
In fact good work is a motivation to work harder. If you’re up there, you’ll make even much more money if you’ll go a bit higher up.
So, moving from retention to a close topic, customer satisfaction, and again, all of us want satisfied customer. And let’s talk about satisfaction and market share, for example. So many of you measure market shares a popular measure of success. And we would and we measure satisfaction. And of course, we expect that higher customer satisfaction would lead to a larger market share. Would it? Let’s look at these three nice companies, McDonald’s, Burger King, and Wendy’s. McDonald’s is, of course, the largest.
The much smaller Burger King, much smaller Wendy’s. And constantly, in the American Customer Satisfaction Index, if we look at satisfaction one, two, three, McDonald’s has the lower effect of satisfaction. And it’s not really McDonald’s. You see it here, it’s like in the life insurance industry, in the banks and credit unions, discount at retail, personal computers, if there is something there is a negative correlation. The higher the satisfaction, the lower is your market share. What’s going on here? Should we throw out all our CRM knowledge about the world? Not exactly. And when I saw that I thought of one of my favorite retail places in Israel, some of you may recognize it, it’s the Pickle & Herb’s Area in the Tiv Taam Store in Ramat Ha’hayal one of my favorite places that I like to go. They have great pickles, they have a great bakery. And from time to time, they have some stuff that you can get nowhere else. And over the years when I think I went to them from time to time, I’m really happy with them. And most of my purchases I did with the supermarket near my house. Because, you know, they’re still near my house and I had all kind of discount. But I was much happier with Tiv Taam.
So this story is that mass market doesn’t ensure satisfaction. In fact, it’s much easier to have a satisfied customer. Let’s say you are in the food industry. So you may sell healthy food, very healthy food to a niche. They will be very satisfied. Very delicious food, in fact, to another niche, they will be very happy. You may have the mass-market brand that caters to everyone. They will not be particularly happy but you’ll still have the larger market share which is makes a good question whom should I compare my customer satisfaction level to? Is it fair to compare it to anyone? And if you look at many of the cases, in the CRM cases, in all this book that give you a great example and I teach by, many of the great examples are companies that really had a niche and greatly cater to this niche. Could they cater to the mass market as well in the same way. Next one, a conventional wisdom 3B, Net Promoter Scores. How many people here use or used NPS? Not too many. I think it’s used by most of the Fortune 500 companies.
It’s really an interesting story of, again, the same people, the same people that brought us the 5% increase in the beginning of the ’90s. Then an article in 2003, Harvard Business Review. And the claim was that something like, “Forget about all these customer satisfaction surveys. You have one ultimate question which is would you recommend my products to others.” And what they did is they look at the numbers and the 0 to 6, they called detractors, 7 and 8, passives, and 9 and 10, promoters. These are the people who like us more. And you get the percent of promoters minus the percent of detractors gives you the Net Promoter Score. And what they claimed is that this explains success better than anything. This simple question, one question you ask, and it explains success better than anything. And here is what they showed, for example. This is the correlation between the Net Promoter Score which can be negative, of course, and some measures of success. Here it’s, typically, shipments or growth to some extent. And you see sort of a regression line. And this has really an effect.
Net Promoter Score
I was teaching at that time and suddenly my students were beginning to ask me about it because their managers came to them and said, “Forget everything. Our CEO took a seminar somewhere and they always talked about NPS, and this is the thing now.” And it is highly used in the industry now, all over the world, a norm to some extent. Then the people use NPS to analyze markets. People compare NPS in different places in the world. And, to some extent, I can see why. It’s one question. It’s very intuitive. You know, saves a lot of time, all this satisfaction surveys and so on. And it explain better. And the question, does it? And this is, again, the Net Promoter Score.
About four years after it was introduced, we began to do academic studies on that. And this is what we saw. If you take the Net Promoter Score versus the same measure, and then take the American Customer Satisfaction Index, the general satisfaction score, you get very similar results. And I can tell you because there have been research since then, generally, constantly, over, not numerous but enough studies. NPS does not predict success more than the satisfaction question that we used for a while, or at least the two-top boxes of satisfaction and so on.
Should you still use it? Probably you should. It’s a nice way to think of satisfaction. It’s something intuitive to explain to managers. There are benchmarks all over the world but you should be aware that unlike what many people say, it is not a new thing. It does not do necessarily a better job that than mere satisfaction. I want to end with the topic of customer social influence which is something I deal with a lot. I deal a lot with word-of-mouth, and social value of customers. And when you talk about word of mouth, typically, you very quickly get to this question of negative word of mouth. And this is one book. There are many of them saying something like that. Satisfied customers tell three friends, angry customers tell 3,000 and so on. And what we see actually in research that when managers are interested in word-of-mouth, it is mostly in negative word-of-mouth. They say, “You know, positive is nice but we just want to avoid catastrophes especially today with all the spread of social media and internet word-of-mouth, what we call online firestorms, they’re really hysteric about negative. Our job is to avoid negative word-of-mouth.
And I want to challenge this. And I want to challenge it and I want to say in advance, I talked about this subject to a group of managers a few months ago and someone I know was in the crowd. And he had two people talking to them. So it’s like, “No, no. What he’s saying is not true. Maybe, you know, the professor doesn’t know what he’s talking about. Maybe in America it’s like that. Here in Israel, it’s the other way around.” And what I want to tell you is that, generally, there is much more positive word-of-mouth in the market than negative one. And we see it across studies in the industry, in academic. It’s very constant. There is much more. It is right that a single word of mouth talk if it’s effective, if it’s negative, it has more power than positive. But that there is much more positive all around, much more. And one of the issues that people that deal with customer complaints with service, they see the negative all the time. So it seems to them that all customers are negative and they don’t like us and this is what we read. Much, much more positive in any way that we measure. And positive, this is the Toyota crisis about six years ago. It was mostly positive word-of-mouth and then in the crisis a bit more negative after a few years it went back to positive again. So all of you that see all kind of crises, that all kinds of people say they will never get out of it, they would destroy the firm, not that easily. Finally, I’m more or less out of time. And there’s a saying that speakers never finish on time. So I’ll try to challenge it. I’ll try to do that. And any complaints about the quality of the presentation to here, otherwise, I’m out. Thank you very much.