Virtually every notable leader in business over the past half century can be attributed to at least one quote on the importance of customers to organizations. Some quotes resonate with folks more than others. One that resonated with me is by Professor Michael LeBouf. Professor LeBouf said, “Treat your customers like lifetime partners”. It’s short and sweet, yet chock full of meaning. Consider the quote for a second. Questions should be swirling around your head. Jot them down. I did when I first read the quote. One question that I want to bring to light that was inspired by this quote is, “What is a lifetime partner worth to an organization?” We could ask many others, “how does a customer become a lifetime partner?”, or, “what does “treat” mean?” All valid. However, for this post, I want to center in on the question of value, and more precisely, “the value of a lifetime.”
This important point dovetails with my last blog post on the economics of CX. In that post, I briefly discussed that a CX value equation has been developed by Oracle, and how they use it to foster CX discussions with customers. How this value equation supports the math behind CX economics, how customers could implement such a codex to link CX investment to their income statement and individual employee performance. Today, I want to dig deeper into the CX value equation itself. It’s the cornerstone in the CX economic discussion and one organizations need to button down to make a CX program effective.
The CX value equation has 3 tiers. Each tier is aligned. Tier 1 is represents the top of the model, and the ultimate reason behind CX – “Organizations invest in CX is to grow customer lifetime value (CLV).” At the highest level, this statement, tier 1, is about 3 key things; Improving cash inflow to the business via customer spend and new customer acquisition, increasing the duration a profitable customer’s relationship with the organization, and maximizing the use of capital in both of these pursuits.
Tier 2 of the CX value equation, the tier that rolls up to CLV (tier 1) is comprised of 5 levers. These levers can be moved singularly or in combinations to affect CLV. Tier 2 of the value equation is comprised of the following 5 levers;
- Customer spend (yearly)
- Acquisition (initial & on-going) drive, cost, rate
- Yearly cost of support/retention
- Average duration of relationship
- Advocacy monetization
The first 3 levers above when calculated will supply the value of a customer in a 1 year period. If you multiply that number by the average duration of the relationship (in years) and apply net present value (NPV) to that number, you will get the “value of a lifetime”. This is the simple CX value equation. I have also expanded it to include advocacy as a key lever, and how by advocating/tracking advocacy, new revenue streams (new customers) will open up that can be tied to existing customers. In essence, an advocacy web of sorts that spiders out and potentially reaps benefits for years to come. In this web, an existing customer represents value to us in 2 different ways; the value they bring directly through their relationship and, the indirect value they bring through advocacy/word of mouth that brings in new customers and streams of revenue. Each is important to track. We’ll get into advocacy in a future post.
Tier 3 of the CX value equation is comprised of many operational key performance indicators that organizations use every day to track organization, business unit and individual performance. Each of the 5 levers in Tier 2 has a corresponding set of operational key performance indicators attached to it. By doing so, we can illustrate for example, how an action, or key metric rolls-up to support the 5 levers in Tier 2 that support CLV or Tier 1. These operational indicators include metrics that marketing, sales, and service delivery use to measure hourly, daily, weekly performance.
The power of the CX value equation, something I stated previously, is that all 3 tiers are linked, and improvement at tier 2 or 3 of the model will ultimately drive improvement in CLV. Additionally, because these metrics are largely operationally based, or those metrics that the business uses daily to measure its performance, employees in the trenches can see how what they do every day, improve the firm’s profitability. Lastly, the linkage system supplied by the model can be used to scrutinize investment. Can a particular investment in resources, technology, etc. be ultimately linked to improving CLV and firm profitability?
As you can see, the potential behind the use of the CX value equation is enormous. I have been spending quite a bit of time refining it over the past 3 years as I meet with more and more organizations. I am currently working on several versions of it that will be vertical industry focused in nature, and, include good practices and ideas for how to move the 5 levers specific to that industry. If you have interest in learning more about it please feel free to reach out to me. I’ll be back in a week or so. I’ll dedicate the next 5 blog posts to getting into detail about each of the levers in tier 2.
