Q

Methods to increase customer lifetime value via customer loyalty

Don Peppers discusses some effective methods to increase customer lifetime value via customer loyalty in this expert tip.

What are some effective ways to build customer equity for a customer that has been loyal for a few years but has not increased the amount they are spending with us?

There are several ways to increase the value of a customer. The first and usually the most impactful way – and the method most firms focus on first – is simply to improve the customer's longevity, or loyalty. The longer a customer remains loyal, the more valuable the customer is to the firm, not just because the customer will buy more, but also because:

  • Loyal customers cost less to serve. Being more familiar with your products and services, and with your overall offering, they are likely to make fewer mistakes and consume less "service" time.
  • Loyal customers refer other customers. Usually a customer only remains loyal because they are generally satisfied with your offering, and so they naturally are your best references.

    Loyalty's benefits may sound intuitively obvious, but the truth is that loyalty itself is not so easy to define. If a person buys $100 of product from you every month, but one month he only buys $50 from you – is that because his loyalty has declined? Or if a person comes to your store every week, but only buys 10% of what he could buy, is that loyalty?

    As a practical matter, therefore, it's important to have other metrics in place to track whether your customers' values are increasing or not, and whether your own sales and marketing efforts are paying off.

    Another way to visualize and manage the value a customer provides to your firm, for instance, is think about your share of customer for each different customer. Simply increasing the number of products or services a loyal customer is buying during any set period of time will dramatically improve that customer's value. If an otherwise loyal customer is only buying one of your products or services, but is an eligible consumer of more, then you have a "share of customer" problem.

    To facilitate improving their share of customer, we recommend that business managers not think of their business in terms of trying to find customers for the products they have to sell, but in terms of finding products for the customers whose needs they understand. The better you understand each individual customer's needs, the more effective you'll be at offering products and services to meet those needs. So in this sense, when we say "share of customer," what we really mean is "share of needs." What share of a customer's needs are you meeting?

    Especially if you have a loyal customer to start with, you should be expanding your offering as much as you reasonably can (within your firm's competence) to meet more and more of that customer's needs. And outside of your company's core competence you might even consider creating alliances with other firms in order to meet a greater share of each customer's needs. If your product or service is commodity-like, then you should de-commoditize it by "expanding the need set" you address for customers. Step back from the physical product being sold, and visualize how different customers are using your product for different purposes, or to meet different needs, and then try to address these needs more effectively with additional or supplemental products or services.

    Just to take one example forward, consider young boys who are customers of Lego toys. Lego knows that its young male customers might use the same Lego sets to satisfy at least three different types of needs:

    1. Role playing. A boy could pretend that he is the captain of the spaceship he's just built with Lego blocks.
    2. Constructing. He might enjoy using the diagrams that come with the blocks to figure out how to construct something, in a similar way he enjoys putting puzzles together.
    3. Creativity. Or, he might use the blocks simply to create interesting and novel things, avoiding the diagrams and anyone else's suggestions.

    Determining which type of play tends to predominate for any particular child may sound as if it is an inordinately difficult proposition for anyone, let alone a large, successful plastic-products manufacturer but one of the benefits of the Web is that it allows even large manufacturing firms to craft interactions with customers designed to uncover exactly this kind of information.

    Now if Lego actually knows that a particular seven-year-old boy is a "constructor," it could offer on-line diagrams too numerous to include in any box. A "role player" could be sold videotapes and story books to accompany the Lego sets he owns, and so forth.

    The same principle would apply to digging into and better understanding the needs of a mobile phone customer, or a gardening supplies buyer, or a software user.

  • This was first published in August 2009

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