How Customer Lifetime Value Is a About Building a Long-Term Relationship

My 13-year-old daughter is fascinated by money and business. She loves to make a buck and is proud that her sister and brother borrow money from her. In fact, mom and dad even borrow from her occasionally. But Heaven help all of us if we forget to pay her back! She is my budding entrepreneur who recently joined the entrepreneur club at school.

She understands the simple concept of business: the customer is king! This is a simple reality: You do not have an economic transaction unless someone is willing to pay for what you offer. Even my kid, running her baking business, understands that reality.

But there’s another simple reality: A business cannot survive purely by running from one transaction to the next. Real leaders understand this reality and so does my daughter. She is focused on delivering value to her customers, by constantly changing her product, 170016-PB-Blog_05_01_17making various samples to test a new product and, most importantly, intently listening to her customers’ requests and involving them in her process. It is a simple matter of pride for her. As leaders we need to embrace that same pride!

Don’t sell them. Select them.

So what do we do? For starters, we need to move from “selling” to “selecting” customers. This is not about the transaction, it’s about the relationship. Don’t just think about what the relationship means to you today, but what it could mean to you tomorrow — and hopefully forever.

During business school, I took a course called Service Management, where we read a book called The Service Profit Chain, written by James L. Heskett, W. Earl Sasser and Leonard A. Schlesinger. This book was about connections; specifically connections between employees, customers and profits. It explored a concept: creating “Customer Lifetime Value,” which very much intrigued me. I embraced the concept completely. In fact it shaped my philosophy on business.

I practice all the concepts in this book consistently. I believe in them wholeheartedly. They form the cornerstone to the business I run today and we call them “Service Excellence.” I believe in relationships and their value over the long-term. And most importantly, I believe in honesty and transparency.

It’s about the relationship

I want to win. But when I fail (and I do fail) I want to fail because I couldn’t get it done. I don’t want to fail because I didn’t care. I never want to find myself or my team in the middle of a situation that originated because we didn’t care enough to understand the problem or the relationship.

Nor do I want to find myself in a relationship where the other person did not care about me. Business is about relationships/connections and value. My daughter is just starting to become exposed to this reality. For her, it’s limited at this point because her business will end when the course ends, but as leaders we are paid to build longevity into our business practices.

Invest in them, repeatedly

So what is the long-term value that our customer relationships create? I was reminded of this when I read a recent HBR article by Michael Schrage, What Most Companies Miss About Customer Lifetime Value. The article asked you to complete the following sentence:

  • Our customers become much more valuable when….?

How would you answer?

Most people respond immediately with “when we sell more” or “when they buy more stuff.” If you sell your offering based solely on profit, this is a true statement and Customer Lifetime Value can prove that out economically. Incidentally, so can my daughter on her simple Excel spreadsheet.

A leader’s view

But something separates the young entrepreneur from our role as seasoned business leaders. Taking the long view and the ability to see the relationship as an opportunity to co-create value rather than viewing the customer relationship as a value extraction process. The article reminded me of the importance and impact of this.

If we give this some serious consideration, it should change our thinking. It forces us to ask what we can invest in to improve the life and experiences of our customer relationships. It causes us to focus on co-creation and bringing the customers into our strategy discussions, our planning and our product design cycles. It requires a more intimate and open relationships with our customer.

At the end of the day, it’s simple. Our customers need to be sitting next to us not across from us. We need to realize that may not work for everyone. So do the research. Know who you are targeting. Then select your customers wisely and never stop investing in them.