Barring "Unknown Unknowns," 2008 Will Be the Year of Customer Valuation

by Graham Hill 

Customer valuation has traditionally been a tantalizing customer management tool—full of untapped promise. This will be the year it comes into its own, I predict.

Of course, making predictions is a lot harder than you might think. It's not the extrapolation of current trends that's so difficult. That's quite easy, No, it's spotting the trends that will suddenly arrive out of nowhere to disrupt my carefully worked-out predictions that's so hard. It's those "unknown unknowns," to quote former U.S. Defense Secretary Donald Rumsfeld (and you see where that got him), that could create a crack in my crystal ball.

With that caveat, I bring you four predictions on how customer valuation will affect your business in the coming year. 

• Wider adoption of basic customer lifetime value
  
  Customer Lifetime Value (CLV) has had a hard ride so far. Although calculating CLV is not so difficult, (it's just the sum total of a customer's future profits over his or her lifetime of being a customer, discounted back to today's value), many companies have had problems working out what an individual customer's profitability is. Much of the problem lies with the product focus that management accounting systems have. But steady progress is being made to reorient them around customers. I predict that many of these problems will be swept away in 2008 as marketers look increasingly to metrics like CLV to justify their budgets and—if the CMO Council is right in its recent Marketing Outlook Report—to justify their very existence. There's nothing like a bit of self-interest to motivate marketers to start crunching CLV numbers.
  
  
• Increasing focus on customer value portfolios
  
  Another trend that looks likely to grow is not in perceiving customers as being of high value or low value but, instead, in viewing them as a portfolio of customers of different risk-adjusted value. The important thing here is the addition of the word, "risk." Risk reduces the value of a customer. It might be risk associated with highly volatile spending patterns; or declining loyalty in more competitive markets or in today's networked world; or simply dissatisfaction triggered by silly mistakes by marketers. Just look what happened to Apple's share price after the debacle of having to reduce the price of its much-touted iPhone after only a few weeks in the market earlier in 2007. By constructing a portfolio of groups of customers with different risk-adjusted value, a company can better manage the value of its entire customer base. I predict that more companies will start to use this approach to manage the total value of their customer base and to report that value to financial markets, too.
  
  
• Incorporating customer word of mouth into CLV
  
  The basic CLV model assumes that customers are solitary figures. But look around yourself when you next go shopping and you will see people out in small or larger groups, shopping together. People are social animals and the power of friends' word-of-mouth (WOM) recommendations in driving purchases is now well established. Some companies are already starting to incorporate the value of customer WOM in their CLV models. For example, Kumar, et. al., in a recent edition of the Harvard Business Review looked at the value of word-of-mouth recommendations for telecommunications companies and financial services customers. Amazingly, they found that a customer's WOM was worth up to four times more than his or her basic CLV. That's a lot of additional value. With the enormous growth in communities and social networks, the breeding grounds for WOM, I predict that more companies will incorporate the value of WOM in their CLV calculations.
  
  
• Valuing customer social networks
  
  One of the most discussed topics in 2007 was the exponential growth of social networks like MySpace, Bebo and Facebook. Now every large corporation wants to buy a slice of the action. Microsoft was the latest to take the bait, beating out Google when it paid $240 million for a 1.6 percent stake in Facebook, effectively valuing Facebook at $15 billion. Lots of other companies have customer social networks of their own: airlines, loyalty programs and telcos, for example.
  
  All of these are starting to look to networks as an additional source of value, not so much as something to sell to a rich corporation like Microsoft but as something that can be harnessed to drive innovation, marketing and customer self-service. For example, analysts like Finnish start-up Xtract are carrying out social network analyses for mobile telcos on their customer-calling networks, to identify those customers who sit at the center of calling networks or who link networks together. Although this is still early days, I predict that these central customers in customer social networks will start to have their network value calculated and will become the subject of very special loyalty programs to keep them and their customer network with the company.

It sure is going to be an exciting time for all you customer value management practitioners out there. We will have to wait until this time next year to see whether my predictions have come true or whether Rumsfeld's unknown unknowns will change everything I know about customer valuation.