CLV: One key metric that every company must measure

Customer Lifetime ValueIn this digital and customer-centric age, organizations must change their strategy from “product-focus” to “customer-focus” to engage and retain customers. Understanding customers and knowing the Customer Lifetime Value (CLV) has become very important for all companies, especially B2C. But, very few companies truly know their CLV.

Just 42% of companies are able to measure customer lifetime value (Source: eConsultancy)

Other companies have challenges to calculate CLV because there are so many different parameters and demographic and macro influences that will shape the calculation process. It’s time for remaining 58% to catchup.

The importance of calculating CLV is becoming more and more clear, especially as web profitability metrics shift priorities from page views to engagement.

CLV should be one of the measures driving Marketing Strategy …

Customer Lifetime Value (CLV) is projected amount of revenue a customer will generate over their lifetime doing business with your company.

Many start-ups die because they underestimate the cost to acquire new customers and very often cost to acquire new customers > monetization (CLV). Why is this? Startups are so focused on transactional cost of acquiring customers but pay little attention to invest in customer experience and service after the conversion.

Let’s say, you launched and new product and is doing awesome – great sales, great PR, etc. Now, you want to scale up your acquisitions efforts by running marketing campaigns. The question is – how much should the Marketing/Sales dept spend for campaigns? Which customer segments? How much should my Customer Service dept spend on servicing customers? What products should I offer? etc. CLV answers such questions.

All Marketers focus on “Lead Generation”, which is important. But many CMOs have no idea on how much is the lead worth. When you have a definitive CLV and understand your lead-to-customer conversion rate you know exactly how much a lead is worth, and how much you should be willing to spend on new leads – in turn help marketers tweak customer acquisition strategy.

CMOs must ensure that every product has CLV number attached to it

Let’s take an simple example  – Let’s apply this first step to one of the hottest subscription services out there: Dollar Shave Club. A subscription is $9/mo. In return, customers receive 4 replacement cartridges per box. How much should Marketing spend to acquire a new customer? Let’s find out.

  • CLV = (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time). Pls note that this is simplest formula. There are other variables that I have not factored to this calculation.
  • CLV = $9 * 12 months * 5 years  = $540
  • This means that user acquired today would be expected to generate revenue of $540 over next 5 yrs, OR  $180 per year.  If company wants to break-even within a year, company can afford to spend up to $180 on marketing/sales to acquire a user i.e. Customer Acquisition Cost (CAC) = $180

If CAC is known,

  • CLV = average revenue from customer/year * average retention rate – CAC.

Two things to keep in mind – (a) CLV > CAC; and (b) CAC should be recovered in about a year.

CLV for some Fortune 500 companies

Many companies do not release CLV information as this could give competitors advantage to their strategy. So, we can only go by analysts calculations and a few industry reports.

  • Apple: iPhone = $700 to $900; Mac = $600 to $650; iPad = $275 to $300 (Bernstein)
  • eCommerce companies: Best in class = $3600; Other companies = $1300 (RJMetrics)
  • Starbucks, supposedly, has CLV of ~25K. Read on for Starbucks CLV analysis.
  • Netflix = $291.25

Conclusion

Understanding CLV specific to individual/segmented customers can help marketers target specific product/content. Customer’s happiness = success for brand -> more revenue for company.

Do you know you CAC and CLV?

Retire Legacy Applications and invest in Digital Technologies

Legacy-Systems-RetirementAlmost all big firms continue to accumulate systems after systems over decades. Once the systems goes live, there is never a word of retiring and whether the user use the application or not, it continues to run with nobody paying attention to it. Retiring any legacy application is last in priority on any CIOs agenda. Why is it so hard to kill off old systems?

One word: Metrics. Older systems lack measurements and KPIs. Given that there is no quantifiable measure to review the data, it’s hard to kill. Often times it becomes and matter of opinion vs. matter of fact.

I once had made a suggestion to turn off 10 year old Powerbuilder reporting system after initial tech assessment. But several client stakeholders objected saying they use that systems to generate reports on regular basis. With no metrics to prove, I decided to test this. I  asked the developer to include line of code to track who logged when. So, we watched for 2 weeks. Result: Zero logins. Then we turned off the reporting system completely without letting the user know. What was the result after 2 months? Zero logins again! Nobody ever knew it was turned off because they had not used it. So, when we reviewed the findings and results, CIO agreed to decommission the application. What we all learnt is this – users are notoriously inaccurate in deciding these things; perception and reality is different.

Most organizations spend 80% of their IT budgets on “keeping the lights on” (Source: Gartner)

Only 20% for new business and innovation (Source: Gartner)

Cycle needs to be reversed. Don’t you think?

Why is this important?

Three words: Free up $$ for investments in Digital, Innovation and New Business Development.

There are other reasons to move away from legacy – lack of available legacy skills, closed architecture hindering integration and experimentation, old infrastructure risks, high maintenance costs (hardware, software, storage costs +labor+vendor), not useful for customers, and so on.

Companies have to invest in digital to get ahead – and they need dollars for digital investments. So, instead of maintaining old legacy apps that may not provide any business value, CIOs must retire them and free up the budget for digital investments.

Planning and Rationalization should follow a continuous cycle… applications must be evaluated every quarter

Any investment that is approved needs to be planned through end of life cycle. In other words, any product/service that you put out has to provide immense value to customers relative to cost incurred, minimize risk for companies, and has to make financial and technical sense – all the time. When this criteria is not met, it’s time to pull the plug.

Application Rationalization

All applications should measure key KPIs and report these to line managers on regular basis for evaluation. For in-depth approach on how to run Application rationalization efforts for your organization, please see my earlier post.

Conclusion

In this customer-centric age where agility and fast-paced innovation rules coupled with moving to digital, it is very important for CIOs to pay attention on application rationalization strategies and focus investments on flexible, agile disruptive technologies which can advance organizations strategies. Today’s competitive marketplace requires that enterprises modernize their application portfolios – its a business imperative.

What other measures can CIOs take to gain advantage in this digital age? Share your thoughts down below.

What I’d like to see at 2016 Rio Olympics

You might have read that Olympics sponsor VISA is bringing ring based NFC payments to Rio. This is good innovation but I’d like to see if anyone can invent a device to track athletes complete performance. In other words, track athletes 24*7 through Olympics to understand their lifestyle through 16 days.

  • How much calories do they consume? What do they consume? (Iam always curious to know what athletes eat during such peak performance period)
  • How much water do they consume vs. sports drinks?
  • How much calories do they burn daily?
  • How much sleep do they get?
  • How much do they socialize? (do these athletes only practice, practice … or do they socialize/drink, hang outs :-))
  • Vital stats
  • How much do they shop? (do they venture outside of Olympic parks)
  • How much time on devices – watching TV/videos/smartphones?

Wouldn’t you be curious? Imagine the insights we could get from such data. It could offer companies across various industries like sports, retail, financial, CPG, healthcare, entertainment and others a ton of data. A way to make this happen (in lieu of all the privacy and tracking regulations) would be wonderful.

Can “Wearable tech” on athletes’ clothes make this happen?

Great reads to finish off my weekend

  1. Fascinating interview on Digital and what it takes for company to really transform and operationalize – it’s people and leadership! Clara Shish, CEO of Hearsey and Starbucks board member  shares great perspective.
  2. If you wanted to know everything about TWTR and Jack Dorsey, this vanity fair article is brilliant – “Twitter is betting everything on Jack Dorsey
  3. Facebook Messenger possibly disrupting Retail Banking with Messenger Bots. BOA already on bandwagon.
  4. Although old news, I am closely watching on who is eating market share of Uber’s $65B market cap.Apple’s $1B investment in Didi (China’s Uber) is shocking. It’s Uber vs. Didi atleast in China, for now!  Uber is trailing Ola in India. Travis Kalanick worried? China and India are 2 biggest markets that every investor needs to be pay attention too.

 

Business Tools every Management Consultant should know

business toolsEvery organization strives to creating great products/services, innovates, serve customers and create value for shareholders.  How do you accomplish all this in constantly changing business environment?  Organizations needs to build business skills, marketing skills, they need to innovate, build fast, take risks, develop leaderships skills, develop knowledge and resources, build great relationship with customers, partners, suppliers, vendors and the like. All of this calls for business tools and techniques.

Through my consulting career, I have found the following tools to be extremely valuable. Each tool needs to be applied in its own context and situation, and the phase of program/project you are in. A few of them are listed below.

Category Business Tool /Technique Description
Business Strategy SWOT Analysis Strengths, weaknesses, opportunities, and threats. A 2×2 table highlight each area. Can be applied at organization level, department/LOB level, a product or service.

Learn more – SWOT_analysis

  Balanced Scorecard  A forward-looking strategic performance management too, usually along 4 dimensions –

  • Financial
  • Customers
  • Internal Processes
  • Innovation & Learning

Learn more – balanced_scorecard

  Blueocean Strategy (vs. Redocean) Blueocean is creating new markets, new opportunities, tap new customers and make competition irrelevant.

Redocean is playing in existing market space and fighting for larger market share.

Learn more – what-is-blue-ocean-strategy

  Benchmarking Benchmarking is the process of comparing your company metrics to the metrics of your industry competitors.

Common metrics for benchmarking include:

  1. Revenues
  2. Production costs
  3. Employee turnover
  4. Process cycle time

Learn more – BenckmarkingBeyond Benchmarking: Why copy the competition?

  Design Thinking Design thinking is a methodology to solve complex problems, with the eyes of end-user or the customer. Key is customer/business/creative/technology/sales/operations all collaborating and putting a great design.

How do you do it?

  1. Empathize with Customer, focus on customers’ needs
  2. Ideate and design with customer
  3. Develop rapid prototypes
  4. Test to gather feedback from customers
  5. Iterate/Refine

Learn more – Design Thinking

  Growth Share Matrix (aka BCG model)  A model to identify which of your products/investments should be continued.

2 dimensional – Market Share vs. Market growth. Products are classified into –

  • Cash Cows (high market share, moderate growth)
  • Stars (high market share, high market growth
  • Question Marks (low market share, high market growth)
  • Dogs (low market share, low market growth)

Focus on Cash Cows, Stars; evaluate question marks; discontinue dogs;

Learn more – BCG Model

  Porters’ Five Forces The Five Forces model helps businesses determine how well they can compete in the marketplace.

  1. Threat of new entrants
  2. Threat of substitutes
  3. Bargaining power of buyers
  4. Bargaining power of suppliers
  5. Industry rivalry

Learn more – Video explaining Porters’ 5 Forces. More

Marketing Strategy Four P’s of Marketing  The Marketing Mix, also known as the 4 P’s of Marketing, is the combination of product, price, place (distribution), and promotion.

Learn more – marketing-mixrethinking-the-4-ps

Technology Six Sigma  A technique for measuring and improving product quality. The process involves 5 main steps (DMAIC)-

  1. Define
  2. Measure
  3. Analyze
  4. Improve
  5. Control

Learn more – Six_Sigma

  Deming cycle (Plan-Do-Check-Act) 4 step technique to continuously improve product quality.

  1. Plan – planning the work
  2. Do – execute
  3. Check – measure, validate, analyze
  4. Act – make necessary adjustments

Learn more – PDCA

  Total  Quality Management (TQM) TQM is a method in which everyone in organization seeks to improve the quality of products and services through ongoing refinements in response to continuous feedback.

TQM is based on quality management from the customer’s point of view. It is tied to PDCA.

Learn more –  TQM

People Development Johari Window  A technique to help people better understand their relationship with self and others.

Learn more

  Force Field Analysis  A decision-making technique that identifies and reviews conflicting factors when a decision needs to me made.

Can also be equally applied when faced with multiple options needing to pick a winner.

Learn more

I hope these tools will increase your productivity and stimulate your thinking. Now, go create something great!

What are tools do you use in your day-to-day work? Please chime in with your thoughts.

My September reading!

Can’t wait to get my hands on this new book –
The Firm: The Story of McKinsey and Its Secret Influence on American BusinessMckinsey book cover

The 10 Biggest Web News Stories of 2011

ReadWriteWeb has a good collection of TOP 10 web stories of 2011. Worth a read – The 10 Biggest Web News Stories of 2011

Guess who’s number #1?

HTML5: Will this be the beginning of end of iOS, Android and Windows Phone 7?

Mobile apps is one of the hottest technology these days and it seems that any developer with creative idea can build an app, deploy it for iOS, Android or Windows Phone 7, and can monetize on it and be rich overnight. But these mobile apps have a competition now – HTML5!. It is another hottest technology which will revolutionize both the mobile space and desktop applications space. See my prev article on HTML5 Revolution and HTML5 aiding Web Centricity.

A lot of mobile developers believe that Apple, Google and possibly Microsoft will be last players standing in mobile space. It’s only a matter of time before Blackberry, Symbian, Meego will go the way of dinosaurs. With the technology changing rapidly, and as consumer demands and expectations rise, companies cannot afford to write web-app for a particular device and then re-write the same web-app for rising number of other devices. More importantly companies like Apple cannot assert control on what developers can do or cannot do. Developers need write once, deploy anywhere solution (something like Java) for mobile world. Of course, there are several advantages of coding in native platform like for example, apps coded in native run faster, rich in feature, easier to code, huge developer base to rely on, able to monetize etc. HTML5 apps will not replace the mobile web apps in near future, but with advancements in HTML5 it’s
only a matter of time before it catches up with features in mobile web apps/platform.

HTML5 Shortcomings:
Currently HTML5 has a few shortcomings compared to native web apps like:
– no native integration with camera/video access, no contact access, no bluetooth access,
– performance/bandwidth issues,
– viable business model (no monetary gains as such compared to iOS, Android platform) and
– the biggest of all, look-and-feel of HTML5 can’t match with look-and-feel of native apps and few others.
HTML5 is still working to close these gaps and is atleast a few years away!

Who’s gone HTML5 way?

  • Walmart, Amazon, Financial times apps on smart phones/tablets have long gone way of HTML5 because of high Apple markup fees (30% of revenue of apps sold through its store) and severe restrictions on direct marketing inside the apps by Apple
  • Windows 8 platform is fully supporting apps built using HTML5. Quoting Microsoft’s press-release-

    Web-connected and Web-powered apps built using HTML5 and JavaScript that have access to the full power of the PC. …….. Windows 8 apps use the power of HTML5, tapping into the native capabilities of Windows using standard JavaScript and HTML to deliver new kinds of experiences.

  • IE 9, Opera 10, Safari 5 and Chrome 9 now fully support HTML5

HTML5 is too compelling for native to win but time will tell. Developers – are you ready?

What do Executives read?

As part of my continuous Management book reading series, I have picked up “Why Should the Boss Listen to You: The Seven Disciplines of the Trusted Strategic Advisor“. The author, James Lukaszewski, one of the world’s master strategic advisers to CEOs, states that some professionals enjoy long and prosperous careers in business because they’ve achieved the most valuable role possible in their field – KEY TRUSTED ADVISOR TO LEADERS.

I am always curious to know how the Management thinks and makes decisions, what they read, how and what they communicate etc. What I learned from this book is that C-level executives routinely read the following publications:

Harvard Business Review
Forbes
Sloan Management Review
Fortune
Barron’s
WSJ
Jack Welch’s writings/books
Berkshire Hathway’s Annual report (surprise! Buffett is on everyone’s mind!)
Directors and Boards
Boardroom
Executive books

Also, most leaders admire and read about other leaders like Peter Drucker, Tom Peters, Stephen Covey, Warren Bennis and others. If you have to speak Leaders’ language, you have to know their language, their thinking and where-abouts about their ideas etc. That way, it is much easier to connect with management executives and be one of their trusted advisors.

Eye-opener for me. I have a long long way to go!

How many of these are on your list?