Connecting Customer Lifetime Value with Social Media

By Bruce Weinberg and Paul Berger, Professors at Bentley University

Let us express upfront our sincerest apologies for using a somewhat academic voice in this blog post!

“Customer lifetime value” (CLV) is a very important relationship marketing concept. It is the present value of the net cash flows (from all purchases) that an organization expects to receive from a customer over his/her “lifetime.” While the definition is straightforward, the mathematics used in computing it can sometimes get messy and involved (don’t worry, we have PhDs from MIT). Marketers use it to think about customer acquisition and retention (i.e., long lasting relationships), rather than focusing solely on the initial transaction. Indeed, when used effectively, CLV can lead to improved marketing decision making and increased profitability.

We believe that CLV is a mathematical kindred spirit with social media, in that they both can be important mechanisms in relationship marketing. Further, we believe that CLV can work hand-in-hand with social media to satisfy senior management’s thirst for quantitative accountability from social media. With all due respect to Cuba Gooding, Jr., “show me the ROI” has always been the mantra for proof of performance. CLV can absolutely play an important role in not only identifying the value of social media but also in effectively leveraging the value of social media (i.e., helping organizations use it more effectively).

In order to do this, we extend the notion of CLV to incorporate/consider social media and propose the concept of “connected customer lifetime value” (CCLV). CCLV includes not only the present value of the net cash flows from a customer’s purchases over time, but also the present value of the net cash flows from others’ purchases who were influenced (to purchase) by that customer through social media. Just to be clear, we are saying that there are two important components: CCLV = purchases by a customer + purchases by others who were influenced (to purchase) by that customer through social media.

Using CCLV can change dramatically whom marketers value as customers! When using CLV, marketers would target customers based on their expected purchases. Customers who are expected to purchase relatively little over time have relatively little value. However, when using CCLV, these very same customers could have relatively high value to a marketer if—this is the cool part—their influence on others’ purchasing decisions was great (and positive), resulting in substantial volume of purchases (by others). It is conceivable that a customer who makes relatively few purchases could be the most valuable customer to an organization, courtesy of social media and the influence it enables!

We are not saying that this is necessarily typical; although, we know that consumers typically search online for consumer opinions/conversations before making a purchase. The important messages here are that a customer’s economic worth can be based on his/her purchases and on influence through social media, that CCLV can quantitatively show the value of social media, and that CCLV can be used by marketers to leverage social media in making decisions.

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