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Customer Lifetime Value: Should You Discriminate Between Your Customers?

High-value versus low-value; at-risk versus loyal

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Kindra Cooper

Customer lifetime value

Teachers, parents and bosses play favorites; so do businesses. They weed out which of their customers deserve perks, discounts and freebies, which callers to put on hold and which to immediately route to an exceptional agent, and whether or not to honor a refund request based on your predilection for shopping indecisively.

By rating customers on their lifetime value, businesses can best allocate marketing dollars to acquiring and retaining customers that are likely to spend more money with the brand, make a repeat purchase, and refer their friends.

Retailers are the most hawkish when it comes to monitoring shopper behavior. By offering liberal return policies, discounts and flash sales, they are assuming a financial risk in the event that a customer abuses the return policy or simply never buys from the brand again.

“Two customers may have the exact same issue, but if they shop differently, the business needs to handle them differently,” said Sue Martin, global VP of customer service at Newegg.

According to a recent article in the Wall Street Journal, major retailers like Best Buy, JC Penney and Home Depot hire analytics companies like Retail Equation to score customer’s shopping behavior and flag those who return a high volume of merchandise.

If you chronically buy and wear clothes with the tags still on, only to return them a week later, your next refund request might be denied - and it doesn’t take much to get on a retailer’s blacklist. It happened to one consumer who tried to return three cell phone cases at a Best Buy in Mission Viejo, CA, collectively worth $87.43.

A salesperson told him he would be banned from making returns and exchanges for a year. When the customer requested his “return activity report” from Retail Equation it showed only three items - the cell phone cases he wanted returned, the Wall Street Journal reported.

The customer hit back with the following Tweet:

Those who buy at deep discounts, return merchandise excessively or shop rarely have a lower lifetime value than frequent big spenders. Some analytics firms examine hundreds of touch points to generate a “risk score” or lifetime value score such as transaction records, website interactions, customer service conversations, and even third party brokers that sell information on things like the type of credit card someone carries or the number of bedrooms in their home.

Bleak though it sounds, lifetime value doesn’t have to be a statistical justification to distrust certain customers or withhold good service. From a customer-centric standpoint, customer lifetime value “declares the importance of looking at the entire customer journey rather than the mere point of purchase,” Brian Cantor, principal analyst at CCW Digital, wrote in a recent Special Report titled ‘The Retail CX.’

In fact, customer experience expert John DiJulius, founder of CX consultancy The DiJulius Group, thinks the practice of openly discerning between high and low-value customers can encourage customer loyalty. “I’m OK with playing favorites and one of my biggest pet peeves is when businesses say: ‘oh no, we treat everyone like a VIP.’ Bull!”

DiJulius founded a chain of upscale salons in Cleveland, the John Roberts Spa, where he practices the “white cape” philosophy of treating customers differently according to their position in the customer journey.

A “white cape” customer might be a new walk-in who needs a more thorough explanation of the salon’s services than a “black cape” patron who’s visited regularly over the past six months. There’s also a quality assurance element to it that ensures the customer is treated consistent with their status on every visit.

“When you’re black cape you’re an old friend. Gold cape you are VIP,” Dijulius says. “There’s certain things that gold cape gets that everybody else shouldn’t get.”

For example, his VIP status customers (measured by their annual spend) can simply walk out of the salon without checking out and their credit card will be automatically charged and their haircare products shipped for free.

When it’s his turn to be the customer, DiJulius appreciates when companies reward him for his loyalty. “One thing American Express has always done as long as I’ve used them is before they hang up they say: “We just want to thank you for being a Platinum member since 2004. I love that.”

While companies may be reluctant to admit favoritism, they have numerous ways of showing you your true worth.

Ever been barraged with marketing emails from a particular retailer offering discounts and other perks right after you make a purchase, only for the emails to peter out after you ignore them for long enough? Your CLV just plummeted, and the marketer has decided you aren’t worth the trouble. It costs nothing to send an additional email, but offering discounts eats into profit margins, so they should be used sparingly. On the flipside, some retailers withhold discounts from high value customers “because they’ll buy anyway,” unless they’re at risk of losing them.

If you’re in the market for a car, beware that dealers will size up your previous car purchases, whether your household has a teenager and even your zip code as a proxy for income. And if you’re in the habit of buying airline tickets at bottom-tier prices, airlines will earmark you for bumping in the event that your flight is overbooked.

Meanwhile, frequent fliers are rewarded with seat upgrades and markedly superior service at every phase, from booking to boarding. In keeping with the proverb that complaining rarely begets sympathy, airlines even track the number of times a person calls to complain over the prior 90 days, which is negatively correlated with their CLV.

Unfortunately, companies can be prone to taking customer lifetime value to the extreme, especially those offering products at price points ranging from low- to high-end. Brad Birnbaum, CEO and founder of Kustomer, a platform providing omnichannel CX, warns that businesses should be wary of overusing CLV to the detriment of quality control.

“Delivering a better experience for all is more important than delivering a just-good-enough experience to customers you’ve identified as the most valuable,” Birnbaum said in the Special Report on Retail CX. “Even if they might not buy as much as another customer, someone who has a bad experience might dissuade any number of high-value customers with their testimony.”