Why Measuring Customer Lifetime Value Matters for Lead Generation

Post is featured on MarketingProfs.com

This month BtoB magazine published the Lead Generation Guide 2011.   The special issue is filled with articles focused on all facets of lead generation written by marketing experts and journalist over the last two years.

The final section titled, “Data” contains charts with assorted research findings.  One of the most interesting is a slide from a Benchmark report produced by ITSMA.    The graph show the metrics regularly used to measure the success of lead-generation activities. 

The top responses are what one would expect; Number of Qualified Leads (68%), Number of Closed Deals (63%), Revenue Growth (54%).  The metrics that ranked lowest are far more interesting: Cost per Customer Acquired (15%) and Lifetime Value of Customers Acquired (19%).  

If you are a tactical marketer, I can understand why those metrics ranked the lowest since the data is hard for marketing to track, it may not be marketing’s responsibility, and/or the calculation is too complicated. However, if you are a strategic marketer, capturing and tracking these metrics is very important.  

Years ago, I consulted for a research division within a professional services firm.  The company sold primary research and custom reports that typically cost between $80,000 – $150,000 Acquiring new customers was largely a transactional effort. As a result, it relied heavily on marketing and new business activities to fill the pipeline.  Increased revenue targets meant that it required increased marketing budgets to meet corporate goals.

I was tasked to find a solution since the model was unsustainable.   The key to unlocking the answer came from calculating their Customer Lifetime Value (CLV).   Almost immediately the analysis pointed to issues with their average price point, YOY churn rate (retention) and average account size.   Not surprisingly, the company had a negative CLV, but no one was measuring it or analyzing it.

Even though the symptom of the problem manifested itself as marketing, this was not only a marketing issue.  The challenges reached across the organization and into the product and sales groups as well.  Of course, understanding the cost envelop for acquiring customers helped guide future marketing investments and activities, but fixing this problem was not only about cutting or right sizing the marketing budget.

As a result of the analysis, the firm set on a course to build and implement other areas of improvement:

• An upsell and cross sell program. 
• Complimentary products that could be sold as follow on/add on 
• Enhanced products to drive a higher initial (01) price points
• An account management and retention program
• Account managers

By implementing the aforementioned items, the company was able to correct the problem and generate a profitable CLV, which became a key performance indicator (KPI).

While it is not commonly used, CLV is one of my favorite metrics to track because it is a “process” metric.  It can help guide sales and marketing performance by ensuring that profitability, acquisition cost, and retention rates are being properly measured.  Marketers tracking CLV have an early warning system that can indicate:

• Targeting the wrong audience  - too small, short term focused, etc.  
• Creating the wrong type of leads – clients may only be interested in the initial offer and are not interested in a longer term relationship (see the next point for more).  The value of the lead is not worth the cost.
• Promoting the wrong offer – the offer may be incenting the wrong behaviors - this especially true with discounts associated with individual purchases such as retail store cards that offer 10% off the first purchase if a customer opens an account.
• Setting the wrong price point – the true cost of sale may not have been considered or known.
• Having a retention and/or account management issue – this will show up quickly (the “leaky bucket”).

Marketers that ignore this important metric are in danger of missing out on an early indicator of top line performance measures.  While CLV may not be included in the performance report, it is important to track and understand the CLV goal or baseline.  

As illustrated in the case study, the symptom may show up in marketing, however these issues will cut across the organization. Budget cutting will not fix the problem. Marketers need to be able to point to other parts of the equation that are contributing to the issues, which is good for the other CLV: Career Lifetime Value. 

The World's Most Famous Press Release

Post was featured on Forbes.com on July 4th. 
It was written over 230 years ago, 200-300 copies were printed for towns up and down the east coast, and a few made their way to Europe. Contrary to popular belief it contained no signatures and what it promoted was completely unique, new, and flawed.

The Declaration of Independence is arguably the “world’s most famous press release”, according the curator at Independence Hall in Philadelphia, where it was written and approved in its final form (unsigned) on July 4^th, 1776.  The signed copy we are familiar with was created in August for ceremonial purposes.  

I found it interesting to hear one of the world’s most famous and important documents being referred to as a “press release” during a class field trip with my son.  The curator used the analogy because he said that there is confusion regarding the purpose of the Declaration; “...the goal of the document was to only articulate “What” and “Why,” not “How.”

As a marketing guy in the audience, I found this history lesson to be an interesting “best practice” from the founding fathers; focus on effectively communicating ONLY “what “and “why.”  How many times have you written and/or read a press release that tried to say too much, and/or lacked clarity on its intended objective?

Another interesting point gathered during our visit was the struggle to form a new federal government (the “How”) under the Articles of Confederation.  At the time, the new federal government had no revenue source (taxation), and no real authority over the states.  

The states operated as their own “countries” deciding on their own currency, religion, and diplomacy with other countries.  Again the marketer in me saw the similarity to the power struggle between corporate marketing and other sales/marketing organizations (Product, Field, Region, etc.).  Would history provide another lesson for marketers?

Congress struggled with governing under the Articles.  Instead of revising the existing document, the Federal Convention decided to draft an entirely new frame of government.  According to the curator, three key issues hung up the approval of the Articles; 

1. Religion
2. Slavery  
3. The power given to the federal government, which many saw coming at the expense of the states. 

Addressing the religious issue was easy; they left it out of the U.S. Constitution.  It was later covered under the Bill of Rights.  On slavery, they reached a compromise by outlawing slave trade in 1808, twenty years in the future.  But the single most important change was the shift from states to the individual in granting the federal government its power.

“We the people…do ordain and establish the Constitution of the United States.”  The federal government now answered to citizens and not the states.  State representatives and congressman now represented the views and best interests of the people within their districts.  By putting citizens first, the founding fathers established a focal point that transcended state interest.  

Could this be the time for a B2B marketing revolution?  With the rise in social media adoption, marketers can now better gauge the needs and desires of their customers.  Customers for their part are showing a willingness to engage like never before.  

As a result, marketers are now presented with an opportunity to shift focus from solely addressing and satisfying internal “states” needs to anticipating, engaging, and serving the needs of customers.

Although I'm a proud Virginian, I'm no Patrick Henry but I say marketers, it's time for our own declaration...marketing by the people, for the people! 

How Many Channels Does it Take to Sell a Phone?

My daughter’s phone stopped working (at least that’s what she told us) and we decided to get her a new smartphone for her birthday.  The problem was that the contract ran until August, which meant we would have to pay full price for the handset.    

According to the customer service agent, since my daughter’s phone is on my wife’s plan – and my wife was eligible for an upgrade – we could apply the upgrade to my daughter’s account. In order to avoid a $20 charge to transfer the upgrade, I needed to complete the transaction online by first registering the account.

A relatively simple task of inputting basic account information became a complex headache.  The information I was inputting didn’t match existing information that the wireless providers had on file and the customer service rep couldn’t tell me what was incorrect.  Frustrated and irritated by what should have been a quick transaction, I was now headed for a local retail location (sales channel #3 if you’re keeping track). 

I explained my situation to the store associate who said I could only get the upgrade by going online, so off to the in-store kiosk we went.  She figured out the registration issue, but then ran into another problem trying to use the upgrade promotion.  That prompted a call to telesales and another in-store sales associate who overheard the conversation to join in. 

All three sales channels were now all involved with an existing customer’s “rebuy” transaction; a textbook example of “channel stacking.”  Two retail reps, a telesales rep, and the web working on converting an “upgrade” that was intended to be a web transaction completed by the customer. 

Don’t get me wrong, I appreciate the fact that they are putting the customer first and saved me the $20 fee, plus another $50 rebate on the phone (which was another promotion that complicated the deal), but this is the kind of situation that makes a CFO’s head spin.  

A multi-channel sales model is essential in today’s environment, both for businesses and consumers.  The problem in this situation was that the offer did not fit the channel.  And this is a critical point for effectively and efficiently managing a multi-channel approach.  

The promotion upgrade, phone rebate and price were available only as online offers.  And that’s fine, unique offers aligned to single channels entice customers to use them.  The offers on there own were simple but when combined they became too complex for the channel that carried them.  When that happens customers will cross channels when given the opportunity.   

To effectively use a multi-channel sales model you must:

• Align the product, offer and/or both to fit the channel - In the case of the web that means simplifying them.  The web is intended to be a self-directed user channel.  If you can’t simplify the product or offer, then it’s the wrong channel.  
• Map the customer buying process – learn, shop, buy and support. This will help define the user experience, which will be helpful for the next step. 
• Anticipate user issues -  add coaching points and/or use existing customer information to auto-populate fields.  This will require testing...it's worth it.

The phone arrives today.  Remember I couldn’t get it at the store because it was an online promotion.   It will add $20 per month to our monthly bill.  The contract is for 24 months.  The total value of the transaction is $580  --  $480 in fees, plus the $100 for the phone.  Total cost of the transaction to the service provider…they don’t want to know; it’s not good for the CFO’s health.

The Rise of New Competition

Clayton Christensen, in his best selling book “The Innovators Dilemma” explains why companies - despite having leading edge technologies and market share - fail over time.  He states “It was as if the leading firms were held captive by their customers, enabling attacking entrant firms to topple the incumbent industry leaders each time a disruptive technology emerged.”

 

Christensen uses the disk drive industry as an example and explains: “When the best firms subsequently failed, it was for the same reasons--they listened responsively to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. This is one of the innovator's dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake.”

The pursuit of ever increasing profits causes companies to increase their prices and innovate to bigger and better.  As a result, they alienate and/or under-serve smaller customers along the way, opening the door to new competitors who serve those neglected customers with simple and inexpensive technologies. After winning the customer’s loyalty, the new entrants innovate their way up to larger customer segments along the way taking market share.

Last year US companies reported record earnings, up 37% in the fourth quarter.   Most of those gains have been made through productivity improvements as a result of the “jobless recovery.”  First quarter earnings for 2011 were a modest 11% because of inflationary pressure coming from oil, commodities and transportation. 

Similar to the disk drive manufacturers highlighted in Clayton’s book, big companies who performed extremely well last year will be under pressure this year to maintain profits.   The challenge this year is that cost are rising and companies have little room to absorb it.  As a result, they are passing these costs to customers, which we have already begun to see.   

Although confidence is slowly improving, consumers haven’t recovered fully from the recession.  Wages have not kept pace with inflation.  And according to a study by McKinsey, consumers have also learned to appreciate and enjoy lower cost products.  When taking all this into consideration, we have a perfect storm gathering for new competition to enter at the low-end of the market. 

What industries and companies are most likely to be squeezed?   Let’s first start with who probably won’t: Industries with very little transportation and manufacturing needs; like the service sector; and media.  Retail banking, financial information and professional services also come off the list.  Business in industries that are somewhat shielded from inflation pressure, and/or can easily pass it along to consumers, like Healthcare and Utilities, also are likely to not feel the pressure.  

Using that same logic companies in industries that rely heavily on transportation and commodities are top targets.  Airlines, grocery chains, and manufacturing expect to see new low cost competitors with unique business models.  Companies with high gross margins will also be especially rip for picking.

Where will the competition come from?  Hopefully, new, innovative US companies but the best bet is probably China.  They’ll use their low cost producer advantage, along with the fact that China controls more than 90% of the rare earth elements.  Those minerals are used in your IPAD, IPhone and electric motors...given that fact, let’s add hi-tech to the list. 

The good news is that time is right for disruptive innovation.  New companies should mean job growth, as long as the credit markets continue to improve.   And if you’re in an industry mentioned above, hopefully, innovation is top of the list of company priorities. 

Coming out of the recession we are, most likely, very attuned to our biggest customers.  But as Christensen warns us, to stay competitive we need to avoid being held “captive” by them.  Perhaps while we are on the look out for new competitors, we might also want to keep an eye out for new customers.  

Using Content Curation Tools for B2B Thought Leadership

Years ago, I ran marketing for a professional services firm.   As with most consulting firms, our demand generation efforts were based on thought leadership.  Getting the content for those programs was a long and painful process, worse than pulling teeth because, most of the time we had to fabricate the teeth and then pull them out. 

One would think that with the rise of social media and the focus at the corporate level on blogging, that content creation would not be a problem. However, according to a recent HiveFire research poll, the challenges I encountered ten years ago still exist today; finding, developing and producing high quality content.  Could the latest content curation tools be the answer?  

Content Curation tools like Scoop.it, and Storify, are the next generation digital content tools having evolved from content aggregation (gathering links, like Google News) and social bookmarketing tools (like Delicious and Digg). The key difference in this evolution being the human “curator.”  To this point, those tools have been aimed at consumers to help them manage and sort through the vast spaces of web content.  

The latest version of these tools, Curata (a HiveFire company, the sponsor of the research) and Curation Station are aimed at B2B.  With a value proposition focused on their ability to drive awareness by improving organic search, and providing organizations with an opportunity to build thought leadership.  

The curator is an editor who sorts through the content to find the information relevant to them and/or their audience.   They are not content creators.  And this is where I think the challenge lies in using the tools for thought leadership.

First, creating a content farm on a “hot” topic will not improve a company’s organic search results (Google has already figured this out).  It also will not establish an organization “thought leadership” in a area on its own.  

As the survey referenced, Marketers stated that “Creating Original Content” was the number one challenge; companies must establish a point of view, not just aggregated content on a particular subject.  So what value do these new tools offer?

To understand that it's helpful to first understand how thought leadership content is developed.  For example, the process I used in the past involved five steps:

1. Deciding on a issues set
2. Developing a point of view
3. Conducting research to validate the POV
4. Summarizing the research and drawing out insights
5. Writing and publishing a content piece  

Challenges related to this process involved:

• Limited time and/or resources…often both
• Limited view on the issue – often our only perspective was through our existing clients lenses
• Drawing out insights – sometimes the research didn’t reveal anything new and/or enlightening
• Distributing content – after all the effort the distribution of the content often fell short of expectations
• Maintaining the program – continuing to create content beyond the initial launch

By taking these opportunities and challenges into light, we can begin to see where the tools provide value.  Using this as a framework, the tools can add value by:

• Reducing the time required to collect research for developing the issue set
• Providing a real-time, broad view into top issues and/or hotpoints on a subject area
• Integrating multiple content formats (tweets, video, etc.)
• Creating leverage for staff on content creation and management
• Being a ready made vehicle for distributing and measuring content

Content curation tools are enablers, not end solutions. To fully realize their potential, they will need the human elements of curation and creation.   It will require staff (#4 on the challenge list), and time (#2 on the list).  The good news is with these tools it will require less of it to be successful.

Keep in mind, thought leadership must be established.  It’s not a campaign...it is a program.  It’s also not something you say you have, but rather something others recognize that you provide.  

For more information on the subject, Susan McKittrick has written an excellent white paper on the subject.