The 10-Year Customer

Feb 01, 2007 1:41 AM  By

Lifetime value-based decision making has captured the spotlight recently with the launch of uTango, which promises up to $1 million to couples who meet spending targets over the long term. Such a lengthy time horizon has been used in the past, but only rarely. I more often see companies use three years or fewer when calculating lifetime value (LTV). I wonder, How would consumer marketing be different if companies thought in terms of 10-year time horizons?

Consider the typical consumer marketer and what he would do differently with a 10-year time horizon. Suddenly retention efforts become far more important. And if the return on investment from retention efforts becomes much higher, the allocation of marketing resources definitely changes.

Now consider the current case of The Gap, which shifted its marketing emphasis away from “ageless” value-oriented customers with the potential for 10- to 20-year relationships to 18- to 25-year-olds, who are notorious for fickle tastes and rejection of anything “old.” We’re witnessing now how short-term customers affect a brand in the long term.

Calculation and sensitivity of lifetime value
As most marketers know, LTV is the net present value of the future revenue stream of a customer. Two factors improve LTV when considering a longer horizon. The most obvious is the increase in retention rate, which compounds over the entire time horizon. Looking at company with a 60% retention rate and an 8% discount rate, a 1% improvement in retention increases LTV 3.7% with a 10-year horizon, vs. 2.7% with a three-year horizon.

The second factor is the increase in spend per customer as customers stay longer with the company. A 1% increase in real spending per year among remaining customers increases LTV 2.2% in a 10-year horizon vs. 1.6% in a three-year horizon. Combined, the LTV increase is 38% higher in the 10-year scenario. More-sophisticated models can be extended to include lower marketing costs, referrals, and other metrics. In retail, where fighting for basis points here and there is crucial, thinking along the 10-year horizon sets the company up for higher comp-store growth for years to come.

Emphasis on life-stage marketing
A lengthier time horizon could also lead to a much more nuanced approach to life-stage marketing, with higher sensitivity to the beginning, middle, end, and postevent timeframes of such life events as weddings, home purchases, and births. Life-stage events can influence choice of brand dramatically and can easily affect spending for two years or more. Building assortments and experiences that speak to these events, plus to the most common and predictable behaviors typically following these events, can be a lucrative way to retain customers over long periods of time.

Longer payoff horizons for loyalty programs
Another component likely to change substantially is loyalty program design. Many retail programs are frequency programs, designed to generate incremental visits. When retention becomes a larger factor in program ROI, the structure of the program would change. A customer might get points that take a very long time to expire, if they expire at all, such as what they receive in American Express’s program. New rewards with very high redemption values would be added, ones that might take many years of loyalty to eventually reach. That Air Combat Dogfight for 120,000 points might take me a few years to get to, but I can shoot for it through Amex. Neiman Marcus, which does the best job with experiential rewards, might find their customers even more loyal when they can take a few years to reach the Volcanoes Safaris Five-Day Adventure instead of just one.

More emphasis on the tribe, not the individual
With a longer relationship timeframe, companies would become much more attenuated to the circle of friends and family and their influence on the customer. That could mean bringing the whole group in as customers (uTango lets individuals get credit for their friends’ purchases, primarily targeted at weddings) or letting groups focus their efforts on a cause (uPromise, which lets consumers donate their points to educational programs or save money for their kids’ college education). This is an area that the consumer-marketing world is just waking up to, despite the difficulty of managing privacy. Watch how this develops over the next few years, with advanced refer-a-friend and group buying efforts taking off.

Some companies are already there
Some interesting companies already think and act this way. Apparel and home goods cataloger/retailer Anthropologie has a laser-sharp focus on its customer base, eschewing most marketing efforts other than catalogs. Its singular emphasis on the store experience keeps its customers engaged on each and every visit, with enough change to make the experience fresh each time they come in. Walk into an Anthropologie stores and you can see 25-year-olds shopping the same rack as 45-year-olds, and neither group is conscious of the age gap. Anthropologie takes a role in its customers’ lives, intending on staying there for the long term.

Pottery Barn has always been my favorite example of a company that could be shopped over time without fear of earlier purchases no longer working with current items. Glassware bought three years ago from Pottery Barn works just fine with dinnerware bought last week. Throw pillows in current colors look great on its five-year-old sofas. I’ve referred to Pottery Barn as “Garanimals for adults,” since even its more extreme decorative choices seem to work with everything it has sold for the past five years.

In fact, when you look around at the most successful consumer marketers, it is those with the long view that appear to be the strongest over the long term. Their customers will forgive the occasional misstep. Customers shop there for decades, not months. While a long time horizon may not be explicitly part of their corporate strategy, strong consumer marketers treat their customer as someone they want still shopping from them a decade from now.

Michael Greenberg is vice president of marketing for Loyalty Lab, a San Francisco-based developer of customer loyalty programs for the retail industry, and writes a monthly column for ”Chief Marketer Report,” a sister e-newsletter to MULTICHANNEL MERCHANT.

Other articles by Michael Greenberg:

Recency: The Underrated Metric

Empowering the Lonely Loyalty Champion

Microsegmentation for Macro Returns

Balancing Visible and Hidden Relationship Programs

Evolving Loyalty: How to Stay Current

The Best Marketing Investment You Can Make

The Case for Simultaneous Concept Testing

Planning for the Coming Online Standard

Objectives Are Everything

Why Do You Have High-Value Customers?

Build a Fence Around Your Customers