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Effective marketing should lead to a steady stream of profits and it is to be expected that marketing departments spend enormous amounts of time planning their future activities. In the same vein, brand equity (by any definition) is all about future cash flows and it seems obvious that marketing should seriously look at and learn from how financial institutions value companies based on future cash flows, such as shareholder value analysis (SVA). But while this is the unquestioned wisdom, our view of the future is still primarily influenced by the past.
In fact most of marketing's tools are based on the past. Market research is based on finding out about the past or asking, based on past experience, how people will act in the future. Brands are defined in people's minds by how they performed and acted in the past (1) or even just by the last experience (2). Meanwhile the newer tools, such as customer relationship management (CRM) attempt to use past behaviour to predict future behaviour. One thing marketing is very good at is looking at the past!
Unfortunately, the future is even murkier than the past (which can be misremembered or misinterpreted). This statement is so self-evident that we should wonder why we feel so confident to plan well into the future. Perhaps, all we do know about the future is that it will be different to the past and most predictions about it will be wrong. Yet, we continue to suggest that the past will predict the future and, even worse, we suggest this at the individual level, using techniques such as customer lifetime value (CLV).
The dot-com disaster should have showed us how wrong predictions of the future often are. The technological futures so confidently predicted seem to be inevitably overestimated. Whatever happened to the paperless office, the world of video phones, people buying the cheapest no-name product on the Internet, auctions being widely used in all product categories, and ordering pizza through your TV handset? All of these predictions should be everyday realities according to the predictors, but they are not.
What we can say is that the future is messy and making long-term predictions (even just 5 years) is doomed to fail. This reality has not escaped many of the futurists, who these days could better be described as social commentators than real futurists. Popular futurists, such as Gary Hamel and John Naisbitt, spend most of their time addressing the present and the potential for incremental changes in the near term. They tend not to make long-term predictions because the pace of change is too fast.
Yet, as any manager will attest, the 5-year plan is far from dead. This is primarily because current and potential shareholders want to know what will happen in the future, even if no-one can really tell them.
This has led to the development of a host of techniques to justify marketing investments for future returns.
Customer lifetime value
None is more common than CLV and its rationale is compelling, because having customers return again and again should be more profitable than having to find a new one each time. But in this simple argument lie a host of complex issues.
The first is that loyal customers are not always more profitable than transactional customers. They can be in some sectors, such as insurance and auto purchases, as demonstrated in the original studies by Reichheld on customer loyalty, but others are not, such as mail order customers (3). Loyal customers may be more expensive to service than occasional customers because they have higher expectations (4). Loyalty can also be confused with tenure. Reichheld uses the definition of loyalty as when someone values the relationship with a company enough to make it their preferred supplier, so tenure is only a partial indication of customer loyalty (5).
Second, getting rid of customers who appear unprofitable can also jeopardise business with other customers who are connected with these unprofitable customers, because they tell family and friends. It also fails to recognise that people can become profitable or unprofitable when their personal circumstances change. How people behave may have little to do with the service they are using, and more to do with what is happening in their personal lives. Third, it is impossible to predict how a customer …