Why use WOM in a CLV calculation?

 

Should word-of-mouth benefits be used to help calculate customer lifetime value?

In today’s media environment, with consumers having greater engagement with social media and their willingness to add comments and information on comparison and review websites, the potential benefit from word-of-mouth has grown significantly. Today most large companies have dedicated staff who are primarily engaged in leveraging word-of-mouth and customer referrals via online and social media methods.

Word-of-mouth via social and online media has the potential to generate many new customers through supporters of the brand. Consider, for a moment, successful social media campaigns that have been able to generate significant new business for a brand with a minimal budget.

Therefore word-of-mouth leverage is a marketing tactic that allows the marketer to maximize the profitability of a customer base (and CLV). As a result, it should be included in customer lifetime value calculation – particularly in a firm/product where customer endorsements and word-of-mouth referrals are common.

WOM and Customer Segmentation

The inclusion of WOM into a CLV calculation is generally more insightful when analyzing customer lifetime value on a per customer segment basis. This is because the addition of the word-of-mouth benefits will highlight the importance of key influencers and consumer advocates on per customer profitability.

It is true, that in most cases, strong supporters and advocates of the brand are more likely to be heavy users of the brand anyway, and would be quite profitable in their own right. However, it can be possible that some low value customers are also strong supporters of the brand.

As an example, consider a retired person with limited income and therefore low value to a bank. But this customer might be so impressed with the customer service that he receives that he often refers his extended family and friends to open an account at the bank. Each year he might be responsible for introducing five new customers!

Obviously this customer is quite valuable to the bank and should be retained. But if the bank was to look at this customer on a pure accounting basis of funds in his account, then he would be classified as a low or negative profit customer.

Therefore, the role of WOM (and acquisition cost savings) in the customer lifetime value calculation is to ensure a more accurate view of the customer lifetime value based upon the customer’s full contribution.

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