Perhaps you’ve heard that we are in now what is known as the Engagement Economy. Nearly a decade ago, The Institute for the Future, an independent, nonprofit strategic research group, explored what they referred to as the “Burgeoning Economy of Engagement.” The idea has continued to gain traction, and today the basic premise is that every organization needs to create personalized experiences that foster genuine relationships with customers. A fundamental aspect of the Engagement Economy is everyone and everything is always connected, and therefore the focus is on how people interact with us, our brand, and our products across every touch point.
The Engagement Economy requires taking a different approach to measurement. The Engagement Economy is less about lead generation and more about retention and loyalty.
What the Engagement Economy Means to Marketing
It takes a different kind of Marketing organization to succeed in the Engagement Economy – one that is intensely focused on creating customer value. Organizations like this are committed to:
- Reversing the value chain in order to deliver what customers truly value. The customer’s needs, wants, and priorities are the catalysts for developing products and services and selecting channels.
- Creating mutually beneficial relationships designed to maximize the customer’s product and service experiences. The organizations have processes, systems, and tools in place to develop and optimize touch points and channels that create positive customer experiences.
- Formulating a customer strategy focused on creating a state of purchase readiness and long-term loyalty.
The Most Helpful Customer Metrics for the Engagement Economy
The metrics used by Marketing organizations seeking to thrive in the Engagement Economy need to demonstrate how Marketing strategies resonate with customers and tie back to the bottom line. The most common question we’re asked is, “What is the best metric for the engagement economy?” There really isn’t a one-size-fits-all list for every company all of the time, and it’s almost impossible to come up with one metric or a set of metrics that will be in place forever. However, here are three broad customer metrics that have financial implications that can serve as a useful barometer for your Marketing organization.
Share of Wallet
Growth comes from acquiring new customers as well as expanding your footprint with an existing customer. This expansion can be a result of a customer buying more of a product they already purchase to address an increase in volume, buying more of product they already use to utilize in a completely new application, buying additional products they are not currently purchasing from you, or some combination of these situations. The notion of an existing customer buying more falls into what is referred to as “share of wallet.”
The total amount that a customer can spend in a specific product category is known as the customer “wallet.” Share of wallet, then, is how much a customer spends with a particular seller. The simplest way to calculate share of wallet is to measure how much of a customer’s total category spending you own vs. what the customer spends in that category and then compute the resulting ratio.
Using share of wallet as a metric improves your understanding of where added value may exist among your existing portfolio of customers. By understanding the total wallet and the share of wallet, you can identify which customers are the most loyal and which customers have the greatest growth potential. Both the ratio and the actual difference are important: The first tells us the share of wallet, the second the potential value.
Most research supports the claim that acquiring new customers is more expensive than retaining current customers. Some studies suggest that a 2 percent increase in customer retention has the same effect on profits as cutting costs by 10% and that a 5 percent reduction in customer defection rate can increase profits 25 percent-125 percent, depending on the industry. There is solid data that suggests that companies with high retention also grow faster. Therefore, you need to know how “sticky” your customers are.
You can determine your stickiness by measuring and monitoring both your customer churn and your customer retention rate. A simple way to calculate churn is by calculating the number of customers who discontinue a service during a specified time period divided by the average total number of customers over that same period.
Churn Rate = Customer loss during a specific period/total customers at the start of the period
While it is important to understand the rate at which you are losing customers, you will also want to calculate the revenue lost, or churned, as a result.
The customer retention rate calculation is slightly different. Take the number of customers at the end of a specific point in time and subtract any new customers acquired in this same time period. Divide this number by the total number of customers at the start of the time period and multiply by 100.
Retention Rate = [(Number of customers at the end of a time period) – (Number of customers acquired during the time period)/(total number of customers at the start of the time period)] *100
The key is knowing how many are defecting and why, as well as how many are staying and why. The reasons customers leave and why they stay are often different, and a customer doesn’t necessarily leave for the exact opposite of the reason they stay. For example, a customer might stay because switching may be extremely difficult. Or, they might choose to leave because the technical support is poor. It is important to work both sides of the equations.
Customer Lifetime Value
Without customers there is no business. Therefore, customers are a company’s most valuable asset. The longer a customer is a customer, the more valuable that customer is and the more value that customer creates both in terms of real revenue and hopefully referrals. Customer Lifetime Value (CLV) is a measure that reflects the value of the customer over the customer’s life cycle. CLV represents the value of your organization’s relationship with the customer.
Determining which types/profiles of customers produce the highest CLV helps you determine in which existing customers to invest.
There are various approaches for calculating CLV. At its core, CLV is built from the following equation:
CLV = (Frequency of Purchase) X (Duration of Loyalty) X (Gross Profit)
Compared to their colleagues, best-in-class organizations are significantly better at impacting Shift from lead gen to customer loyalty in the engagement economy.
It might take a little work to shift the focus from lead gen to customer loyalty. Often, companies have so many years of experience doing something one way that it’s hard to turn them in another direction. If this sounds familiar, hopefully the above mentioned customer metrics have given you some ideas on how to make a change.
The original version of this article was first published on VisionEdge Marketing.