This past Friday, April 26, West Monroe Partners co-sponsored an event with the Chicago Chapter of the American Statistical Association on Customer Analytics. This event featured Peter S. Fader, Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of Business at the University of Pennsylvania, Co-Director of the Wharton Customer Analytics Initiative, and author of Customer Centricity: Focus on the Right Customers for Strategic Advantage.
Dr. Fader believes that despite what the old adage says, the customer is not always right. Not all customers deserve a firm’s upmost efforts. In the world of customer centricity, there are good customers and then there are basically all the others. A business should not ignore customers, ‘fire’ them, or treat them badly. Businesses should, however, treat some customers better than others. Nevertheless, businesses should be really careful about whom they choose to treat that way and what that treatment means.
In order to differentiate customers based upon ‘value’ and provide differentiated treatments, a good first step is customer base analysis. Such an analysis determines: which customers are most likely to be active in the future, the level of transactions a firm could expect in the future from a customer, and individual customer lifetime value (CLV). In addition, such an analysis should be forward-looking and predictive versus a descriptive, ‘rear-view mirror’ approach.
Customer lifetime value is defined as the present value of the future cash flow associated with the customer. It is a forward-looking concept, not to be confused with an historic view of customer profitability. In performing customer lifetime value analyses there are two key questions: how long will the customer remain “alive” (i.e. actively purchasing) and what is the net cash flow per period while ‘alive’? Dr. Fader also notes that it is important to distinguish between contractual and non-contractual settings when calculating CLV. For contractual customers, CLV incorporates the time at which a customer is ending their relationship with the firm. For non-contractual customers, the time at which a customer “dies” is unobserved (i.e. defection is latent).
West Monroe Partners has extensive experience in customer base analysis, customer lifetime value modeling and customer value segmentation, and developing and operationalizing predictive ‘defector detector’ analytic models. Developing these and other customer insights via advanced analytics can help firms gain competitive advantage and solve their most complex challenges so they can adapt, shift gears and thrive.
Dave Nash – Director, Customer Insights
Joe DeCosmo – Director, Advanced Analytics