Okay, let's continue on now to Pete's area, which is customer assets, and
I'm just, again, going to to add a couple little things here in terms of digital
considerations, and additional things we have to think about for execution.
So, as Pete told you I'm sure very, very clearly,
your key goals are to attract, engage, and retain the right kind of customers.
Some customers, as Pete told you, you actually want to get rid of.
Because of the heterogeneity,
one of our favorite buzzwords here at The Wharton School, in the customer base,
some customers are just not worth hanging on to.
So as Pete has told you, you should never,
ever pay more to acquire a customer than you can expect to get back.
So the customer lifetime value of my friend Chris who's renting cars from
Hertz, it should be higher than what Hertz had to pay to get Chris as a customer.
The second thing that's very important though, is the CLV,
the customer lifetime value, when executed in the digital marketing environment,
needs to also consider what I call RLV, that's referral lifetime value.
So let's imagine that I have a beard, actually I don't today.
But if I have a beard and I don't shave, I probably have a very low
customer life time value to harrys.com, the shaving company.
However, If I'm a popular guy and
I tell all of my friends about the harrys.com, I might have a very very high
referral life time value because I'm bringing other people to the party.
So let me give you an example from data based on diapers.com,
one of our case study companies that just shows how powerful this point is.
So a few years ago my colleague John Kay and I,
got all the data from diapers.com and
we looked at the first 100,000 customers that became customers of diapers.com.
And back in those days, if I were a customer of diapers.com,
and I send an email referral to my friend Amy, and then Amy made a purchase
at diapers.com, I would get a $1 credit towards buying more diapers.
Also, what I could do is I could print out physical coupons and put them on all
the cars on Walnut Street in Philadelphia and some stranger might pick them up and
take my code and enter it and then I would get a credit if they became a customer.
So two things were very, very interesting to us about this process.
First of all, about 8,000 of those 100,000 engaged in this
customer-based promotion, or word of mouth, if you will.
That's kind of interesting, about 8% of the people were motivated to go and
try to acquire more customers on behalf of the firm.
Now, of course, again going back to what Pete talked about,
we all know about averages.
It's an important measure.
So, the average number of people that were brought in by
a referring customer was about four.
So, those 8,000 people generated 32,000 new customers for diapers.com.
It's a pretty powerful number.
But again, in the Internet, it's not just the average that's important.
The Internet is the world of extremes.
There's going to be some customers out there that just love you so much,
they may go completely nuts, as it were.
And so, it turned out, when we looked carefully at the data,
the top 100 customers were generating about 15,000 other customers.
So think about that, about 150 each.
So again, when you execute your customer strategies in the digital age,
one of the most important things you can do is you can encourage your
existing customers to refer other customers.
Okay, so let me just summarize that, the digital considerations.
So non-negotiable in the black at the top of the slide is that you must still
attract the right target customer, as Pete has been talking about for
the last few weeks.
However, there are three interesting nuances that come into play here.
First of all, your interaction with customers changes form just a monologue,
you sending out messengers, now into a conversation.
So let me give you a personal example.
Recently, I've been flying from Philadelphia to San Francisco
to our west coast campus.
And where possible, I try to fly on Virgin America.
It's a great airline.
I think they really know what they're doing in terms of marketing.
And when I get on the airline, sometimes I send them a tweet,
I'm happy to be on VX141 looking forward to the sushi and beer.
And sure enough, within a few moments later, Virgin will tweet back to me and
engage me in a conversation.
In fact, on a recent flight, I received a direct message from somebody at Virgin
telling me if I took a screenshot of my status on United Airlines,
that Virgin would match it.
So think about the power of that medium to change from a monologue to a conversation.
So that's going to be an important thing.
How can we use technology to engage in real conversations with our customers?
The second thing that we can do with customers,
is we can amplify activities that go on in the real world out into the virtual world.
So an example that I'll get more into a little bit later on is way back in
September 2011, warbyparker.com, another company that I'll talk about a little bit,
staged an event in the New York Public Library where their friends
went in there and took over a whole floor wearing Warby Parker glasses.
This was of course picked up by the traditional press, and
then there was an amplification from that real-world event
pushed out through the virtual world.
And then finally, the third point is we need to be aware
of this possibility of what I'll call the long tail leverage.
Which the long tail is the idea, the conceptual idea,
that there are some people who are just, sort of extreme, like those customers for
diapers.com that referred 150 customers each, when the average was only 4.
So, how do we use technology to tap into who those people are?
Okay, one final thing I'd like to mention here, guys,
a little bit of a technical term but it's a very, very interesting distinction
that's important for thinking about how to execute
with customers through things like loyalty programs and referral programs and so on.
So I want to distinguish two effects.
The first is what I'll call a selection effect.
And the second is what I call a treatment effect.
And both of these things are very,
very important to companies who want to get customers to acquire new customers.
So, let's start with the selection effect.
So imagine I'm a customer of diapers.com.
And diapers.com is going to give me some cash or
some points if I refer somebody else.
Now, I happen to refer my friend Chris just because I know that he
recently had twins.
Now, the CEO of diapers.com doesn't know that, but I know that, so
I'm better able to find a new customer than the management of the company.
That's the idea of a selection effect.
So the person who's doing the referring is deliberately picking out people
who are going to be very, very appropriate for the the good or service,
that's the selection effect.
And my colleague here at the Wharton School, Christophe Van den Bulte,
has shown that customers who are attracted through word-of-mouth and
through referral have higher customer lifetime values than those who are not
because of the selection effect.
The second effect is what I'll call the treatment effect.
The treatment effects is, well,
how did Chris come to be introduced to diapers.com?
It wasn't through a Google search.
It wasn't through seeing an advertisement.
But he got introduced through me, his trusted friend, and
because that was the way he found out about something,
it's more natural then for him to engage in the same practice.
So when we looked at that diapers.com data, remember I said on average,
there was about an 8 to 10% rate of referral.
Well, if a customer was acquired because of referral,
the chance that they then referre went up to about 15 to 18%.
So that's the different between a treatment effect and a selection effect,
but both of those things are very, very important.
Okay, I'm just going to wrap up now with the third asset.
Remember we're talking about three assets that we have as marketers to execute on.
Number one is the brand, we've just gone through.
Number two is the customer.
And then the third one, that I mentioned at the beginning of this module,
is that marketing expenditure itself also should be thought of as an asset.
And again, the naive way of thinking about marketing is we have top line sales
minus what we spend on marketing or advertising is equal to our profit.
Now, if we make that marketing spend equal to zero,
it's not the case that our profit will go up by the same amount.
Why's that?
Because the marketing, of course, is contributing to the sales and
to the top line growth.
Christian TerwieschAndrew M. Heller Professor at the Wharton School, Senior Fellow Leonard Davis Institute for Health Economics Co-Director, Mack Institute of Innovation Management
