Measuring the Social Customer

Updated: June 01, 2010

Customer Lifetime Value

The traditional measurement for customer value has been Customer Lifetime Value (CLV) Customer lifetime value is a measure that identifies the direct contribution a customer makes over a period of time toward a company's profitability. The most common definition is that this is the "net present value of future profit from the customer." It is a progressive (forward-looking) metric that uses expense, revenue derived, profit derived, and customer behavior to determine what the value of the particular customer is over time.

Its easy value is that it can identify on a curve what the growth of profitability is going to be for an individual customer. That means how you allocate resources to that customer is based on how profitable a customer is at either any given point or over the lifespan of his or her relationship to you. It allows you to determine what kind of customer strategy makes sense to increase customer equity on the one hand and, on the other, what management can do to optimize the individual customer experience based on an expected return.

I prefer to measure (though I'm not sure what it would entail) the CLV of households. This would incorporate the head of the household's future profitability, but also, for example, his direct relatives such as his wife, children, and sons-in-laws, and perhaps those he immediately affects, such as best friends or housekeeper. But is even the more robust CLV I'm proposing or the traditional CLV that's normally administered sufficient?

It isn't, because of the additional opportunities the social customer brings to the table.

NPS Precedes the Social Customer

When Fred Reichheld wrote The Ultimate Question" Driving Profits and True Growth in 2006, I doubt he knew what impact his measurement, Net Promoter Score (NPS), was going to have. Since that time, NPS has been the de facto measure for determining the level of advocacy of your customer base - the higher score the better. He had developed NPS with Bain & Company and Satmetrix back in 2003 and was first posited in the Harvard Business Review in an article titled "The One Number You Need to Grow," shortly thereafter.

The idea is incredibly simple. You ask a single question: "How likely is it that you would recommend our company to a friend or colleague?" The key is not just would you recommend, but would you do that to someone you have a relationship with — meaning, because of their tight ties to you, they are going to trust what you say, and that is an increased emotional burden and factor in the willingness.

The "how likely" solo question is rated by the respondents on a scale of 0 to 10. Based on the answer, the respondents are grouped into one of three categories: detractors (0-6), passives (7-8), and promoters (9-10). The percentage of detractors is subtracted from the percentage of promoters. With the resultant numbers in hand, the next step is to contact the respondents and see why they rated themselves as detractors or promoters, most typically. Dig in and get feedback.

A lot of companies have adopted NPS as a way of measuring their ability to create advocates or if you're somewhere where advocates are lawyers, evangelists.

There is value in figuring out your corporate NPS. But if you're thinking, "man, this is too simple," you're pretty much right.

Studies debunk at the least the underlying research assumptions as "biased." Notable in that regard is a study that came out in July 2007, entitled obtusely "A Longitudinal Examination of Net Promoter and Firm Revenue Growth," which claims that there is zero correlation between NPS and revenue growth. That would be 0.0 correlation.

However, it's possible to find companies that have used it to benefit their top and bottom line growth. For example, by 2004, Schwab and Company was bleeding money. Their compound revenue had been dropping 5 percent per year starting in 2000. The company's Net Promoter Score at by 2004 was negative 35 percent!

To deal with this alarming problem, Schwab set monthly NPS KPIs for each branch and held the branch manager accountable. They began interviewing the detractors to find out what made them so angry. Certain types of account fees turned out to be among the reasons, so 24 months later those particular account fees were gone. This conscientious approach to NPS seemed to reap some real dividends. By summer 2007, the Schwab NPS had jumped to a plus 23 percent. The stock price jumped too, and the company moved back into positive growth.

Clearly there is some benefit to NPS, but there is a long way to go in terms of the development of reliable advocacy metrics for the social customer. How does the advocate benefit the company as an individual? This kind of thinking is far outside the scope of NPS, which figures out a ratio of great guys to bad guys all in all. Its value lies in the reasons why people chose the number from 0 to 10.

So what moves the needle forward if you need to measure the impact of the social customer who has mastered communicating via the social web, trusts peers and all in all is a person who can directly and indirectly your company and its various lines -top and, particularly, bottom?

Introducing Managing Customers for Profit and CLV, CBV, CRV

There is a remarkable group of minds led by Dr. V. Kumar, distinguished professor at Georgia State University and the executive director of the Center for Excellence in Brand and Customer Management, who are working on the more advanced views of CLV, as well as developing the benchmarks, metrics, equations, and answers to how the social customer gets measured beyond their future purchase history.

In his seminal 2008 work, Managing Customers for Profit: Strategies to Increase Profits and Build Loyalty, Dr. Kumar introduces a number of new equations and approaches to customer value. Chief among them is the extension of CLV through the addition of both customer brand value (CBV) and, for my purposes, most important, customer referral value (CRV). Coupled with CLV, these provide a well-rounded forecast of future customer behaviors and a quantifiable way of identifying real social value, not just their potential profitability—though that too.

What makes his value proposition even more interesting is that it begins to address the fundamental issues of creating or at least identifying true not claimed advocates—something that NPS, despite its good intentions, doesn't do. I'm going to briefly discuss brand value but the core of the new measurement is customer referral value, which will get the bulk of the attention here.

Individual Brand Value (IBV) and CLV

Brand value has often been seen as something apart from the value that the customer brings. But brand loyalty, which is the customer's pattern of repurchasing from the same company, if not the same products, and brand advocacy, the customer's willingness to put the company forward to their friends, are part of the customer equity portfolio that is needed to know the 21st century customer.

To reiterate, the reputation of the company is the brand. Trust is the driver of that reputation. Thus attitudinal (long term) and behavioral (short term) commitment are part of the equation when it comes to determining the brand loyalty of the customer to the company. The company's establishment as a trusted resource to the customer is key to this determination. As Dr. Kumar rightfully puts it, "Hence, when evaluating a brand, it is not only the financial value generated by the brand that should be considered, but how the customers perceive the brand."

Perception of the brand stems from the brand knowledge, attitude, and behavior. Obviously, the more you trust a brand you are very familiar with, the more likely you're willing to spend the extra dollars on the brand that you trust. Harley-Davidson, because of those tattoos, owns 63 percent of the motorcycle market. The owners trust the brand and see its ubiquity, which gives them a sense of long-term awareness and comfort, which makes them say, I'll spend the few extra dollars for the Harley because it's going to be here for a while and they make great machines and they are really cool and they have a Harley Owners Group (HOG) that I can join for an experience of community. This factors into the CLV of the individual motorcycle owner.

But that still isn't Dr. Kumar's measurement of the social customer. How does his CLV on steroids supersede Net Promoter Score? Why is it an appropriate metric for this era?

Customer Referral Value (CRV)

Forgive me if I'm oversimplifying, but this particular extension of CLV is the key differentiator as a measure and equation. This is where the value of the social customer over a fixed time period transcends the historic CLV metrics.

Dr. Kumar defines CRV as the ability of managers "to measure and manage each customer based on his ability to generate indirect profit to the firm." The impact comes from the recruitment of new customers by the referrers—the advocates, really—which reduces customer acquisition costs to nothing or nearly so. As community retailing companies like Karmaloop make it easy to see, it also increases the number of new customers and purchases by those customers due to the referral activity of the advocates.

What makes this part of Dr. Kumar's work particularly important is that while he goes as far as Reichheld in correlating the willingness to make a referral with the growth of a company's profit, he stops there and asks the most important question: Does the willingness to refer this company to someone you know mean that you actually make the referral?

Aha! Having the desire and carrying out that desire are two different things. We all know what the road to hell is paved with.

Kidding. The questions:

1. Do you intend to recommend this product or company to someone you know? (Financial Services 68% yes; Telco 81%)
2. Did you actually refer this product or company? (Financial Services 33% yes; Telco 30%)
3. Of those you referred, what percent became customers? (Financial Services 14% yes: Telco 12%)
4. Of those new customers, how many were profitable customers? (Financial Services 11% yes; Telco 8%)

These numbers are startling. In fact, they are both an epiphany and a "duh" moment simultaneously. If we are viewing just intent to refer, which is what the NPS is, we are actually misidentifying actual customer value. The correlation at that level is not very strong. What starts to truly distinguish CRV from NPS is that it asks question 2. Not "would you refer" but after that "did you refer." That's what I mean. An epiphany when intent is superseded by actions. A "duh" with "why didn't I think of that? Its so obvious." The gap between intent and action is quite apparent when you look at the numbers in Dr. Kumar's extensive study - in financial services 68% would, 34% did and worse in telco (why am I not surprised?) 81% would, 30% did.

What this number reflects when it comes to measuring a true lifetime customer value is that not only does the social customer have what's been called "the power of the purse" but also he has the ability to influence his friends and people like him (those who trust him) to purchase - thus having a direct and indirect impact on revenue and profitability. This makes powerful combination in determining what kind of customer equity you have as a company and what kind of value your individual customers are capable of providing. That gives you a much better, but more complex and decidedly trickier, capability in determining what kind of investment you're going to make in your customer over time and what kind of offers you are going to provide.