Is Customer Lifetime Value the Real Key to Beating Amazon?

Beth Perry, Content Marketing Editor

Commerce marketers are always asking themselves this question: How can I compete with Amazon? Many believe the secret to success is in the ability to deliver a superior customer experience – but that may not necessarily be true.

Turns out, the key to competing with the Seattle-based behemoth isn’t from beating it at its own game or by implementing the most elaborate customer experience campaigns ever devised. Instead, it’s about maximizing customer lifetime value (CLV). At least, that’s what Peter Fader, professor of marketing at the Wharton School of the University of Pennsylvania, believes.

What’s It All Worth?

I recently attended Professor Fader’s presentation at Shoptalk and was fascinated by his controversial views. He argues that the emphasis on customer service as a way to draw in or win back customers from Amazon is the wrong tactic.

He spoke hypothetically about businesses going to various lengths to wow customers and woo them away. Fader says that while offering free trips, for example, or complimentary refreshments are nice – referring to these as “surprise and delight moments” – ultimately, they are meaningless unless businesses know the value these experiences bring to the company.

As he explained during his presentation, “You can’t find the value unless you know how to measure it.” And that, according to Fader, means not just collecting data about your customers but assigning value to it.

Fader explained that companies who focus primarily on customer service as their core means of customer acquisition and retention often do so to avoid implementing customer valuation and dealing with “all those pesky numbers.” But they shouldn’t build their business around what they believe to be the right types of customers but rather those that will be the most valuable.

He highlighted the recent changes from Starbucks, whom he dubbed a former “paragon of product centricity.” As it’s becoming more difficult to innovate and stay ahead – anyone can come up with the next great roast or customer experience – Starbucks reevaluated its loyalty program, no longer rewarding customers based on the number of transactions they make but the dollar value instead. The program is now more aligned with the way the company see its customers from a dollars and cents perspective.

As Starbucks continues to run campaigns, the data it collects alerts its marketers to which customers are responding to specific campaigns and their overall lifetime value. This allows Starbucks to measure the success of its campaigns more accurately and helps better inform future campaigns in the process.

Who’s on the Right Track?

Fader praised video game publisher Electronic Arts (EA), famed for its perennial FIFA soccer franchise, as an example of a company that’s driving success and informing its business strategies with the help of CLV.

He spoke about how EA used to be all about developing the next big thing but that in doing so, the publisher was only as good as its next blockbuster product. Naturally, results plateaued, causing it to reevaluate its approach.

Now, Fader says, EA takes a more disciplined approach to CLV, considering not just units sold, which Fader says is the wrong way to go, but how long gamers are playing, who they’re playing with and whether they’re spending any additional money inside the game. Put simply, EA is trying to accurately establish CLV and understand its customers’ behavior and what they are likely to spend in the future.

By gathering all that data, EA not only drives revenue and greater ROI, it gains greater insight into the value of each customer. And it can channel its resources toward developing products it knows will enhance the ongoing value of those existing customers, rather than simply developing a new product that will appeal to customers who’ll buy once and never again.

Ultimately, according to Fader, it’s not just about developing a new product and selling as much of it as possible that will make companies successful but rather the ability to determine CLV and take a more strategic approach based on that data.

“You don’t necessarily want to sell your product and services just because there are a lot of customers out there,” Fader says. “You want to sell them because there are a lot of valuable customers out there.”