This article was originally published on CFO.com.

How the growing availability of data about customer interactions can influence strategies for managing customer lifetime value.

We are all customers at one time or another. And we probably all have stories related to a customer experience that endeared us to a business (and others that did the opposite). It costs a business time and resources to acquire a customer and it’s logical to conclude that a reasonable investment to keep that customer is worthwhile. But customers change over time and the investments needed to retain them need to change to.

Let me share a couple of personal stories.

A couple of decades ago, I was a very frequent flyer — traveling several times every week and flying several hundred thousand miles a year for several years in a row. That put me in the top tier of one of the major airlines’ frequent flyer programs, with the usual (back then) perks. I knew most of the check in and gate agents at the airport (a major hub) close to where I lived and more than a few of the cabin crews on the routes I flew regularly. I even had the airline’s then CFO as a neighbor.

A couple of weeks before my daughter was born, I stopped traveling. The airline noticed and the CFO called me to ask if they had done anything to offend me — why had I suddenly stopped traveling with them?  I was reasonably impressed that they’d noticed and explained that I‘d be back on the road as soon as my wife was out of the hospital and established at home. Thought nothing more about it, until, a few weeks later, a gift arrived from the airline — congratulating me on the birth of my daughter and welcoming me back as a regular customer.

When I thanked my neighbor for the thoughtful gift, I asked how they had known my wife had been in the hospital to have a baby. He explained that they had a small team that scanned the media (mostly newspapers and local TV stations back then) for items related to their most frequent fliers and routed any relevant events to a group that could “do something nice” for their best customers. They couldn’t do this for very many people, but their data suggested that it was a very effective way to build a long term relationship – way beyond what they got from the basic loyalty program. As the CFO put it “Everyone will give you points, but we want you to understand that we really value you as a customer”.

This from an airline. I was actually very impressed.

Then, a couple of years later, I was waiting for a flight (early evening — a terrible time to fly, but choices are often limited and sometimes you have to travel outside of normal working hours) at my home airport. When you fly hundreds of times a year for multiple years you know exactly how the process works and how long things take. The information displays suggested the flight would leave on time. However, departure was now 20 minutes away and boarding had not started. We were going to be late — and an already late arrival was going to be even later. No one was happy, but you get used to this kind of cognitive dissonance when you travel. Admitting the obvious is avoided because there are seldom any good explanations.

Anyway we finally boarded and got settled. Everyone was on the aircraft, but the door remained open and there were no announcements as to why we were still on the gate. As it happens the seat next to me was empty — the only empty seat of the plane. After about 10 minutes, a final passenger appeared and dropped into the seat next to me, obviously having rushed to get on. We finally departed.

As I chatted to my seatmate, I discovered that he had been delayed on an inbound flight and that the airline had delayed boarding and then held our flight so that he could make a connection and avoid an overnight stay. A fellow member of the top tier of frequent fliers, he was pleased and impressed that they had done that for him — “great customer service” in his words. I resisted the temptation to point out that to make him happy, the airline had made 120 other customers pretty unhappy.

So context matters when assessing whether an “investment’ in a customer relationship is worthwhile. Was it a good decision to spend $500 on a gift for me? Probably. Was it a good decision not to spend $500 for a hotel room to compensate for a missed connection, while delaying 120 people? Maybe, but did the airline have the data to decide?

Back then, the airlines really didn’t know the “value” of all the passengers they had inconvenienced or, probably, the value of the one passenger they had pleased. Perhaps the other passengers were all flying on heavily discounted tickets or using points. Perhaps they were frequent flyers on other airlines who would not now be tempted to switch. Or perhaps they were actually all like me — a top-tier customer on a tight schedule who wasn’t pleased by the inconvenience of the delay.

Travel is just one “retail” business segment where customers generally have many choices when satisfying a need and where the exchange of value between a business and its customers can take many forms, from a single never-repeated transaction to multiple interactions over a long period of time.

However, in many such situations, a customer’s needs and service preferences or priorities evolve over time, and unless the business adapts the relationship strategy and associated investments, the customer will likely go elsewhere as alignment weakens or fails.

In some narrowly focused specialty retail areas, this may not be a problem as the target customer cohort is constantly being replaced. But in other areas, such as full-line department stores, or when the retail chain segments its customers by age and aspires to serve them through multiple segment strategies, understanding what triggers moves between segments increases the chances that the business can retain and potentially increase the customer’s value.

A business will generally try to increase the lifetime value of a customer (which implies a relationship over time) along each of three dimensions:

  • More spending within a category (so fly more often with just the one airline);
  • Spending in more categories (use the products and services of affinity partners or adjacent services, such as vacations); and
  • A longer duration of engagement (stay with the same airline for many years, no matter where you live).

Different investment strategies in each dimension can increase the value exchange and thus enhance lifetime value. The sum of these strategies can be thought of as a form of active Customer Value Management. Efficient allocation of resources across the three dimensions can significantly improve customer lifetime value, while a lack of understanding of how customers perceive value in the exchange can waste resources on programs with minimal yield. So how can a business build a system that tracks the evolving preferences and priorities of its customers and respond appropriately as these change?

A “life event” model allows a business to monitor available public information sources, actual customer interactions, and opt-in programs for data that indicate a trigger event has occurred and that the value management system should adapt in response.

Some examples:

  • Graduating from college;
  • Starting a job or getting a promotion;
  • Getting married or divorced;
  • Buying a new home or adding to an existing home;
  • Having a child;
  • Starting a business; and
  • Retiring from full time employment.

In the past, scanning for this trigger data for all customers was difficult and expensive, but the advent of the internet (in the mid-1990s) and social media (in the early twenty-first century) in particular and the digitization of content in general has made the process both technically possible and cost effective.

Behavioral analysis, based on the accumulation of customer interaction data over an extended period of time, also enhances the possibility of using predictive models to anticipate a consumer’s needs and to act proactively to defend current relationships or capture potential additional business. (That’s what, in my first example, the airline did, in a somewhat primitive fashion, when it noticed I hadn’t travelled with them for two whole weeks.) In many retail businesses, where margins can be very thin, defending, or capturing, even a small increase in share of wallet can be critical to continuing profitable growth.

As evolving technology and social behaviors create more and more opportunities to accumulate information about customers — the essence of the “big data” opportunity in all forms of “retail” — the potential for customer lifetime value management will continue to increase. Business that understand their customers evolving needs and preferences will be better able to build mutually beneficial long-term relationships based on what a customer values (even airlines are starting to do so, for example, with pre-ordered meals and mobile device-based passenger manifests). Those that do not will be relegated to merely transactional commerce and will likely struggle as a result.

Where’s your business heading?

About the Author
John Parkinson

John Parkinson is an Affiliate Partner at Waterstone. John brings extensive experience to the topics of technology strategy, architecture and execution having served in both senior operating and advisory roles.