The True Value of a Customer Part 2:
The Customer Value Trinity
In the first part of this series, we discussed the importance of being able to measure the true worth of a customer to your business, and we introduced the concept of customer lifetime value (LTV) as a means of understanding that worth. This ability to value a customer with thoroughness and accuracy enables for the critical ability to sensibly determine such things as reasonable customer acquisition costs, reasonable customer retention costs, and ultimately whether or not the costs associated with any given expenditures are justifiable (e.g. whether or not said expenses will generate a positive return-on-investment, or at least determining what would be necessary in terms of resulting customer activity in order for those expenses to generate a positive return-on-investment). For the purpose of demonstration by example, we imagined that we are marketing or revenue-generation agents associated with a hypothetical coffee chain called Buckstar’s Coffee.
With Buckstar's Coffee, we imagined several hypothetical examples of possible expenditures and discussed how understanding the worth of the customers associated with each expenditure was critical for intelligent decision making. Perhaps most intriguing among these examples was the situation involving a hypothetical customer named “Tabitha”. Although Tabitha’s purchasing habits at Buckstar's Coffee were relatively insignificant, the impact she was capable of generating on our company’s financial health through her influence on the purchasing habits of other customers was far from trivial. Through this example, we were able to suggest that traditional means for valuing a customer–which typically disincludes any element of a customer’s activity apart from their own purchasing habits–may be antiquated and in need of evolution to be current with the modern, digital era of social media, mobile smartphones, and review platforms.
After all, the result of modern consumer technologies which have exponentially increased the person-to-person interconnectedness of our society has enabled outspoken consumers to have a tremendous and widely-spanning influence over the opinions and habits of other consumers. Whether an online review, a social media post, or anything in between, consumers today wield an unprecedented ability to influence the shopping habits of other consumers. Today, a single and seemingly random post on social media can demolish a business’s ability to survive and thereby drive it into financial ruin1. Today, disgruntled customers can use social media to completely devastate a business’s reputation beyond recovery, all within the span of a mere 24 hours2. This is the remarkable force and velocity with which public perception can be influenced today as a result of even a single customer digitally expressing their sentiment. This is the age of viral growth, where trends and ideas propagate far and wide with mind-boggling rapidity through digital communication means such as social media.
But this reality is far from spelling only doom and gloom. In fact, this age of viral growth also has a luminously bright side as far as customer relations are concerned. With the right strategy and technology in place, this consumer interconnectedness can also be used to generate unprecedented brand and revenue growth with a speed and scale that is simply not possible through any other means. Viral growth applies just as well to eliciting positive public sentiment and stimulating customer traffic, driving massive and rapid growth for both big and small businesses alike3,4,5,6,7. Examples of this sort of massive viral growth generating near-overnight financial success includes the Dollar Shave Club, Dominique Ansel Bakery’s now-famous “cronut” pastry, Nusr-Et Steakhouse AKA "Salt Bae", the ridiculous "Tide Pod challenge" which significantly increased sales of Tide Pods, Peloton exercise equipment, or even the Ice Bucket Challenge which generated over $220 million in fundraising for ALS research.
The Customer Value Trinity
Today, the true value of a customer can no longer be adequately understood without taking into account the tremendous value that a customer is able to contribute beyond simply their own purchasing habits. In the age of viral growth, customer-to-customer advocacy has become the most powerful means of marketing, delivering an ROI far higher than any traditional form of marketing8,9. In other words, a business’s own customers have now become their single most powerful marketing engine! This modern reality -- wherein a customer’s own purchasing habits make up only a fraction of the revenue they are capable of generating for a business-- necessitates a more holistic paradigm for understanding customer value. To that end, this author proposes a simple, birds-eye-view model for conceptualizing customer value called the Customer Value Trinity. Each of the three spheres that make up the Customer Value Trinity (“CVT”) represents a separate foundational element of the value that a customer is capable of providing to a business: (1) Purchase, (2) Social Influence, and (3) Insight.
The Purchase Sphere
The Purchase sphere of the CVT represents the value a customer is capable of contributing by purchasing goods and services. Quite simply, this sphere encompasses the value attributable to a customer as a result of their own spending. Traditional means of measuring the value of a customer typically fails to extend beyond this, whereas in the CVT this element of a customer’s activity makes up only ⅓ of our paradigm for understanding customer value. In Part 1 of this series, we introduced the concept of customer lifetime value (LTV) and described a typical function for calculating it. Given that typical views on customer value account exclusively for a customer’s own purchasing habits, the traditional means of calculating LTV is a strong means of measuring a customer’s value only as it pertains to the Purchase sphere of the CVT.
Another method for evaluating a customer's purchasing value called “RFM analysis” looks at a customer’s purchasing habits from multiple angles: “R” for “recency”, describing how recently the customer made a purchase; “F” for “frequency”, describing how often the customer makes a purchase; and “M” for “monetary”, describing how much that customer actually spends. There are some variations on RFM analysis that account for additional factors, such as a prediction of future customer behavior, that can also be useful depending on the goals associated with a given analysis. Like other traditional means for calculating customer LTV, RFM analysis is often used to optimize marketing and growth strategies and to determine the magnitude of resources that should be expended to acquire or retain specific customer segments, with customer evaluation focused exclusively on their purchasing habits.
The Social Influence Sphere
The Social Influence sphere represents the value a customer is capable of contributing through their influence on the actions and behavior of other customers. Ultimately, this sphere represents the value of customer-driven marketing wherein customers act as the creators and propagators of social signals that influence the actions taken by other customers, both established and potential. In Part 1 of this series, we used the example of a hypothetical customer named “Tabitha” to demonstrate the importance of this "Social Influence" segment of customer value. We had discussed how 90% of potential customers make their purchasing decisions by first consulting online reviews10, and observing 1-3 negative posts from customers on a business’s digital footprint will deter 66% of potential customers from making a purchase11. The influence of negative customer posts is so powerful that 86% of potential customers feel reluctant to make a purchase after seeing just one negative post11, and it takes 10-12 positive posts just to make up for the impact of a single negative one12.
On the positive side, customer-to-customer (AKA “peer-to-peer” or “p2p”) advocacy in regards to commercial products or services is equally as powerful, being the leading influence on 90% of consumers’ purchasing decisions9. With 95% of consumers considering friends and family to be the most credible source of information on goods and services13, and consumers being 16x more likely to read and digest content created by friends and family as compared to content created by a business or organization14, the value that customers can contribute through their social influence today is immense. It would be no stretch to suggest that the most powerful marketing team a business owner can utilize today is their own customers. Digital means of communication such as social media and other platforms have become a fundamental driver of the modern consumer’s purchasing habits, and there is no engine for directing those habits that is more influential than the voices of other consumers.
Peer-to-peer marketing in the form of “influencer” marketing --wherein a social media celebrity called an “influencer” with a large following is paid to advocate for a company on social media-- has already become a standard form of marketing15,16. Potentially costing hundreds of thousands of dollars or more for just a single social media post17,18, influencer marketing may seem exorbitantly costly at first glance. Yet, it has been shown to deliver an ROI that is 3-11x higher than self-promotional marketing19,8. But the effectiveness of influencer marketing doesn’t end there. Beyond typical influencers (“macro-influencers”, as we’ll refer to them here, which generally have 10,000+ followers on social media with some even having millions of followers), there are also “micro-influencers” with less than 10,000 followers --”real people”, as they’re seen in the minds of consumers20.
As compared to macro-influencers, micro-influencers have been shown to generate 7x the engagement rate21 with a cost-efficiency that is 10x higher than that delivered by macro-influencers22. But how can this be? The answer lies in the fact that people’s shopping habits and commercial opinions are typically more strongly influenced by those who comprise their real-world social circles than they are by strangers, even when those strangers are social media influencers or celebrities23,24,25,26. As already discussed, 95% of people believe that their real-world friends and family are the most trustworthy source of information on commercial products and services13, and they are also 16x more likely to read and digest content created by friends and family as compared to content created by a business or organization14. As a result of the tremendous digital interconnectedness within the consumer landscape today, the cutting-edge secret weapon to generate customer acquisition for a brand has become their own customer base. Average people in the form of a brand's customer base have become the “sleeping giant” of modern marketing, capable of generating customer acquisition with unprecedented scale and speed that is simply not possible through any other means, just waiting to be awakened by those with an effective strategy in place to do so27,28.
The Insight Sphere
The Insight sphere is just as important as the two other spheres for a business’s financial success, representing the value a customer is able to contribute by directly providing customer insight straight "from the horse’s mouth", as it were. This sphere encompasses the importance of understanding your business by understanding your customers and their motivations. Essentially, this sphere encompasses the value of the sorts of critical customer and market intelligence that can be explicitly gathered directly from customers themselves.
What are the addressable reasons for your customer turnover?
How can you get those customers back?
What brings customers to your business in the first place?
With regard to the customer experience, what is your business doing wrong?
With regard to the customer experience, what is your business doing right?
What can you do to drive your customers to spend more money than they currently are?
Barring blind luck, this sort of intelligence is the difference between business failure and business success. After all, the ability to identify demand is the ability to identify business opportunity, the ability to satisfy demand is the ability to generate revenue, and the ability to influence demand is the ability to create business opportunity.
Customer intelligence is a critical determinant for each of these aforementioned abilities, and this sort of market intelligence can be gathered today directly by engaging at-scale with the very customers who comprise those markets. With 99% of Americans owning a smartphone today and 80-90% of Americans using social media, businesses have a far greater ability to connect with customers than ever before. Yet this connection remains massively underutilized, as up to 99% of a business’s customers don’t provide any feedback whatsoever regarding their customer experiences29. And while 96% of dissatisfied customers will not provide any kind of actionable feedback to the business, they will publicly decry that business by spreading the word about their negative experience to an average of 15 friends30.
Understanding your customers enables each of the aforementioned critical abilities associated with running a successful business: identifying demand by understanding what your customers actually want, satisfying demand by understanding what elements of your business operations are successful and what elements are causing customer dissatisfaction and attrition, and influencing customer demand through an intimate understanding of what motivates those customers to action. To illustrate the significance of such customer intelligence, let’s return to our hypothetical coffee company from Part 1 of this series: Buckstar's Coffee.
Let’s begin with using customer intelligence to determine how well we are satisfying market demand. Even at its most basic level, to say that our market demand is simply in regards to receiving coffee with no other strings attached would be a tremendous oversight. Although our market demand indeed involves coffee, it’s also in regards to the quality, price, and service associated with that coffee. We’d be hard-pressed to find a significant number of customers with demand for coffee who would be satisfied with our establishment if we charged $75 for a cup of room temperature, 3-day old coffee sold to them by employees who simply stand there and blatantly roll their eyes at customers while making bigoted remarks. Although our hypothetical company is very much in the coffee industry, there are many additional aspects of our business besides simply offering a beverage for purchase that we need to ensure we are doing well in order for our company to succeed.
Suppose that, at one of our locations, the management has hired an employee named “Thomas” who, when left unsupervised, has the tendency to be rude and condescending to our customers. Given that the two single biggest reasons for customer attrition are customers feeling unappreciated and having to deal with rude or unhelpful staff31, and given that customers are 4x more likely to defect to a competitor if their dissatisfaction is service-related as opposed to product- or price-related32, Thomas’s behavior poses a significant problem for this location's financial health. In fact, 59% of customers will never do business again with a company after a single negative customer service experience33.
But let’s be conservative here and assume that Thomas is only angering an average of four customers per month. If Thomas has been employed at this location for the last year, that’s 48 customers who are unhappy with how they were treated by Thomas. Since we’ve likely lost ~28 of those customers forever (recall that 59% of customers will never do business again with a company after a single negative customer service experience), and since our average customer lifetime value is $405 as calculated in part 1 of this series, Thomas’s poor demeanor has cost this location over $11,000 so far. And since it is widely reported that, for every one customer who complains, there are 26 other unhappy customers who simply didn’t say anything34, we could expect that only a couple of customers would have complained over the entire year about Thomas’s customer service, possibly leading the management to never realize that any serious problem even exists at all!
Employee behavior is only one among many possible problems that any given location could have that we would never even know about without the relevant customer intelligence. Suppose that a cost-cutting CEO's decision was to try to save money on expenses by cutting off the public in-store WiFi at all of our locations, or that it was to limit all Buckstar's Coffee locations to be subscribed to whatever the cheapest, lowest-tier internet package is available locally. If a large portion of our market consists of customers who demand a coffee shop with reliable, high-speed WiFi so that they can enjoy coffee while using their mobile devices, we could stand to lose out on tens of millions of dollars in revenue yearly due to our CEO's misguided attempt to save a few hundred thousand dollars annually on our associated internet costs. If our corporate C-Suite possessed the customer intelligence necessary to realize how much customer traffic we would forfeit as a result of downgrading to poor or non-existent WiFi, however, our CEO (if they were halfway competent) would simply never have made such a misguided cost-cutting decision.
As discussed, customer intelligence can also be used to identify demand such that new opportunities for revenue generation can be taken advantage of. Suppose that when we originally set our operating hours for our Buckstar's Coffee locations, we simply followed the lead of other national coffee shops we had observed and decided to set our hours of operation from 5AM to 9PM across the board. However, a substantial number of our locations are unique in that they are within walking distance from their local college campuses. If we had the means to collect the proper customer intelligence, we might discover that a large proportion of our customer base consists of students who would love to have a coffee shop that is open late enough to accommodate their late-night study sessions. Thus, if we set the operating hours for said locations from 5AM to midnight or later, we may stand to substantially increase our company's earnings.
Furthermore, suppose that the only food items we offer are basic pastries such as bagels, muffins, and cookies. Suppose that, if we had a better understanding of our customers, we would also know that many of our customers would purchase far more frequently and with greater purchase amounts if we expanded our food offering assortment to include more substantial items such as sandwiches and salads, or even additional beverages such as beer or wine in the evening. Suppose that we also brew and offer our own kombucha for sale, but the reason sales on this item are so low is simply because the vast majority of our customers don’t even know we carry it. If we only had the customer intelligence to be aware of this, we could alter our marketing strategy, improve our signage and displays, and/or update our employee training in order to spread the word about this product and increase sales.
If only we had these few pieces of customer intelligence, we might be capable of doubling our yearly revenue or more. Although these examples with our hypothetical Buckstar's Coffee illustrate the immense significance of customer intelligence, they are far from being comprehensive enough to capture the full value of such intelligence. In a real-world scenario, there would almost certainly be far more that we could do to reduce customer attrition and far more opportunities that we could discover to stimulate greater customer spending and revenue. Additionally, customers are more likely to deepen their loyalty to a business if they feel that their feedback and concerns are genuinely valued. And there is perhaps no way that more explicitly shows your customers that their feedback matters than to ask them for it, reward them for it, and to ultimately act on that feedback by implementing solutions to their concerns and updates to your offerings and operations to satisfy their additional shopping demand. In fact, 97% of customers are likely to increase how much they spend at a business if they simply feel that their provided feedback genuinely matters35.
Putting It All Together
95% of people believe that friends and family are the most credible source of commercial information13
90% of consumers report that word-of-mouth is the leading influence on their purchasing decisions9
Influencer marketing has 11x higher ROI than all other forms of digital marketing8
People are 16 times more likely read and digest content created by friends and family as compared to content created by a business or organization14
Micro-influencers have been shown to generate 7x the engagement rate21 with a cost-efficiency that is 10x higher than that delivered by macro-influencers22
90% of potential customers make their purchasing decisions by first consulting online reviews10
70% of customers consult social media before making buying decisions36
It takes 10-12 positive posts in your brand's digital footprint just to make up for the impact of a single negative one12
99% of a business’s customers don’t provide any kind of feedback whatsoever to the business29
96% of dissatisfied customers don’t provide any feedback to the business, but will tell an average of 15 friends30
91% of these customers leave without returning30
97% of customers are likely to increase how much they spend at a business if they feel their feedback is utilized35
59% of customers will not do business again with a company after a single negative customer service experience33
Customers are 4x more likely to defect to a competitor if their dissatisfaction is service-related as opposed to product- or price-related32
For every one customer who complains, there are 26 other unhappy customers who simply didn’t say anything34
Reducing customer churn by 5% can lead to a 95% profit increase37
While the Customer Value Trinity is certainly not meant to be the be-all-end-all paradigm for understanding customer value, it does form a reasonable basis for recognizing that the modern customer is capable of contributing far more value than can be understood by looking exclusively at their purchasing habits. Recall from part 1 that a formal definition for customer lifetime value is “a prediction of the net profit attributed to the entire future relationship with a customer.” Also recall the importance of being able to comprehend the said value of a customer, as this understanding enables for informed decisions in growth strategies and associated expenditures. An antiquated or incomplete understanding of customer value, however, leads to suboptimal growth strategies and erroneous decision-making with unintended consequences. Failing to account for the value that customers can contribute through their social influence and insight can not only lead to hindered growth potential, it can also be potentially disastrous1,2.
The CVT offers a new way of thinking about your customers that is consistent with our modern era of smartphones, mobile internet, and social media. The modern consumer is always “on”, constantly connected to others in a way that wasn’t even fathomable just a decade ago. The reality of this interconnectedness not only forms the basis for the CVT, it also presents an omnipresent opportunity for consumer mindshare and engagement that still remains largely untapped. This opportunity for customer engagement and mindshare now exists all throughout the day even when customers are not in the process of shopping at your business in any capacity. All day long, whether sitting at a bus stop or eating dinner at home, consumers are now always “plugged in” and available for engagement, with their opinions, behaviors, and shopping habits constantly subject to mobile media influence. This is precisely how an understanding of the CVT can be used to formulate unprecedented growth strategies that utilize the reality of modern consumer lifestyles to tremendous advantage, accounting for the multi-faceted ways in which the modern consumer can be engaged with and ultimately contribute much greater value to the brands they support.
Stay tuned for Part 3 of this series which will delve into tactical application of the CVT, involving the scalable use of customers themselves as a rocket-fuel engine for generating business growth