Print-friendlyProblems with Customer Value Formulas
Increasingly, marketers are relying on databases, histories, internal and external data, and information from a variety of sources in an effort to improve their marketing communications effectiveness. On such method being used is that of customer valuation formulas, which work to measure a consumer’s worth to an organization.
While many of these formulas are applicable in a range of circumstances, they are also problematic. This discussion outlines several areas in which Targetbase’s Customer Brand Value formula can be limited in offering a clear view of a consumer’s value.
The Customer Brand Value (CBV) formula by Targetbase seeks to measure the value of customer or customer group to a brand by combining four key factors. These include penetration, category-buying rate, share-of-purchases and contribution margin. As noted by Schultz in IMC: The Next Generation, this type of valuation method allows marcom managers ‘to build a basic platform for their marcom programs that encompasses what the program should be designed to achieve, how much they would or could be willing to invest, how returns could be measured, and – most importantly – how the firm should or could invest its finite financial resource among marketing communications target customers and communications alternatives’ (pg 114-115).
The first issue with this formula centers on the concept of context. Assuming for the moment that each of its elements can be trusted to be fairly accurate measures, all rely on historical measurements. This fails to take into account environmental changes. A core issue with current marketing communications practices is the nature of today’s marketplace and the opportunities it affords customers. Change today is a given, and as such, long-term anticipation of consumer habits nearly impossible to gauge. Due to the rapid development in technology – especially the Internet – this formula may overlook key threats or adaptations in the marketplace. While in certain instances (like consumer goods), this may be less of an issue, but in many commodity-based markets, democratization of buying and distribution channels needs to be considered. These changes can lead to quick buying behavior changes based on factors like convenience, cost and/or personalization. The formula anchors on the assumption of consistent, long-term buying and consumption behaviors that can change in an instant.
Somewhat related to overall context and seemingly imbedding into the equation is the concept of ‘corporate relevance’. This is the theory that the organization and its brand continue to maintain relevance in the eyes of the consumer and extrapolate this into quantifiable actions. Nowadays, relevance is especially challenging to maintain and cultivate long-term. Even the most established brands have periods where their relevance fluctuates. While it may be difficult to admit, it must be accounted for because it can have drastic effects on the behavior and consumption patterns of customers. If a brand loses luster or falls in this factor, it will certainly effect other factors. On the negative, drivers can be external (new advances, cost cutting), related to consumer shifts or even internal issues. On the positive side, if the organization is effective in addressing consumer desires and are able to increase their relevance, history becomes the baseline – not the true value.
These problems do not even consider the accuracy of the underlying data. While the formula’s ‘Contribution Margin’ can be seen as the most empirical, other measures like ‘Share of Purchases’, ‘Penetration’ and ‘Buying Rate’ are all somewhat subjective. Penetration assumes a symmetrical, easily identifiable marketplace. It might fail to quantify factors like complimentary products or the global marketplace. Share-of-Purchases and Buying Rate assumes an extremely in-depth knowledge of a customer segment – even in an age where it’s hard to even get someone’s email address. The point with all of these is simply: how accurate are these measures?
Another issue with this valuation method is it doesn’t address how the brand and its organization grows and adapts. As the company develops and introduced new products or services, consumers already participating with the brand may alter their behaviors in positive ways or negative ways. This can have effects on the entire brand family and their value. A perfect example would be the much-talked-about ‘halo’ effect that Apple is experiencing as a result of their iPod. More people are buying Macs, and more Mac loyalists have become re-invigorated with the brand. On the flip side, how many Ford buyers looking for a new car will buy Ford again? In both cases, contemporary developments at each brand effect a consumer’s brand value.
A final issue with this valuation method is that it fails to consider non-quantifiable factors of consumers in influencing those around them. There is an old saying that a happy customer tells no-one (not really true) and a dissatisfied one tells twenty. The point is that these behaviors – good and bad – aren’t measured in the formula. Goodwill and ‘badwill’ are huge. People influence other people; social networking and its derivatives are increasingly being valued today. The formula fails to take into account these ‘softer’ factors and only assumes that consumer behavior (in the form of purchases) contribute to value.
There are a number of ways for a brand to place a value on a consumer. Most rely on subjective ‘facts’ and measures in an effort to quantify behavior and map it to ROI. While this will continue to be a challenge regardless of the amount or quality of its underlying data, measures that factor in additional aspects can also be helpful.
