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Customer Lifetime Value As the 21St Century Marketing Strategy Approach CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS VOLUME 3, NUMBER 2, JUNE 2014 CUSTOMER LIFETIME VALUE AS THE 21ST CENTURY MARKETING STRATEGY APPROACH Rožek, J., Karlíček, M. Many studies show that marketing has recently lost its strategic position within companies. Customer Lifetime Value represents a relatively new approach to reestablishing marketing´s position as the core management instrument in market driven companies. The main goal of this paper is to summarize the current development and basic principles of the Customer Lifetime Value conceptual model, which sets customers back into the position of key company assets. The paper presents ¿ ndings that prove the need for a marketing focus change in order to be able to properly manage customer relationships and secure a company’s long-term sustainable development. JEL classi¿ cation: M31 Keywords: Customer Lifetime Value; Customer Equity; Customer Relationship; Customer Lifecycle 1. Introduction function marginalization (Schlosser & Mcnaughton, In market driven companies, a customer and his needs are 2007); shifting of marketing responsibilities to other viewed as the basic target of all the company´s activities functional specialists (Webster Jr., Malter, & Ganesan, (Webster Jr., 2005; Kotler & Keller, 2011). As mentioned 2005); insensitivity to environmental changes with and proven in many studies, market orientation fosters a focus on short-term goals (Kotler, Interview: Philip the competitive position of the companies and creates Kotler, 2004); lack of business analytical and accounting a signi¿ cant competitive advantage (Slater & Narver, skills (Cassidy, Freeling, & Kiewell, 2005). These issues 2000; Jaworski & Kohli, 1993; Kotler & Keller, 2011; lead to the failure of marketing to create, deliver and Webster Jr., 2005; Sheth & Sisodia, 2007). Marketing communicate the added value of its activities within the should therefore act as a think tank and the leader of the organization. From the external point of view, the core company´s strategy. issue can be found in the fact that marketing strategies Nevertheless, today´s reality shows a different situation. are focused on responses to competition rather than on More than on strategy, marketing focuses its activity on the customer or the company’s strategic market position tactical and operational business tasks (Sheth & Sisodia, (Economist Inteligence Unit, 2006). 2006). A recent study among 227 Czech marketing More than other departments, marketing has an intensive managers proved that the most powerful department in cross-functional position through which the internal constituting the overall corporate strategy is, in 54.9% of activities are translated and formulated into direct cases, not marketing but the sales department. Marketing contact with the customer. Unfortunately, the relationship represented the leading role only in 14% of cases between marketing and other departments (mainly sales) (Karlíþ ek & Drábik, 2012). There are many reasons why is often problematic. This lack of cooperation negatively marketing has lost its strategic inÀ uence and according affects interfunctional performance within the ¿ rm to Brown (1995), marketing has entered a mid-life and therefore the overall performance of the company crisis of representation. Some of the main attributes (Dewsnap & Jobber, 2000). The main issues in cross of this marketing crisis can be summarized into ¿ ve functional cooperation that decrease the effectiveness main points, which have been identi¿ ed by different of marketing are different skills and means of marketing researchers: narrow typecasting of marketing functions activities, different objectives and accountabilities and and accountabilities (Davies & Ardley, 2011); marketing different evaluation process of marketing representatives 28 CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS VOLUME 3, NUMBER 2, JUNE 2014 in comparison to colleagues from other functional personalized offerings (Peppers & Rogers, 1997). Rust departments (Matthyssens & Johnston, 2006). All these et al. (2004) add another crucial de¿ nition that describes variations lead to a misunderstanding of the marketing the core values of the CLV. Based on this research, role within the company. In other words, non-marketing CLV shifts marketing from the transactional customer departments view their marketing representatives as business view to the long-term relationship marketing risk-taking colleagues with low analytical skills and approach. accountability (McGovern, Court, Quelch, & Crawford, Transactional marketing can be de¿ ned by short-term 2004). For example, an international study conducted relationships with unspeci¿ ed customers and main focus among 1 700 CMOs showed that one of the main on product management. In other words, customers drawbacks of marketing today is the view of its inability are viewed simply as consumers of companies’ push to manage and report marketing outcomes. One of the marketing communication methods and mass products. main reasons behind this situation is the lack of ¿ nancial In contrast to the transactional marketing approach, knowledge and insuf¿ cient technical skills of marketing relationship marketing focuses on long-term relationships representatives (IBM Global Business, 2011). Similarly, with clearly speci¿ ed and described customers. The a study conducted by The Economist Intelligence Unit product offered to the customer in relationship marketing (2006) showed that top management is dissatis¿ ed does not need to be clearly personalized but it should with the abilities of marketing representatives to respond in its basis to the real customer’s needs according measure the results of marketing campaigns. There is to his or her current situation. signi¿ cant pressure on the marketing department for The CLV approach is nothing particularly new. Traders higher accountability. There is no doubt that marketing from the beginning of the 20th century can be mentioned needs a radical change in terms of its position within the as an example of the customer business orientation. strategic decision-making process of the company. These salesmen tried to build relationships with their The goal of this paper is to summarize the current customers through personalized offerings and knowledge development and basic principles of the Customer of customers’ needs and wants. There was no direct Lifetime Value model and its relation to the pitfalls of intention behind these activities. The salesmen were today’s marketing. First of all, the Customer Lifetime just a part of the local community which helped them to Value (CLV) concept is de¿ ned. Then we focus on how know the necessary information about their customers CLV is calculated. Last but not least, we analyze its main and to react appropriately. elements. Today, business has become more complex and the company has to deal with a much broader customer base. 1. CLV as an answer to today´s business calls Till the 1990s, it was impossible to collect, manage and As was mentioned in the previous text, marketing has work with customer data regarding customer transaction lost its strategic position within the ¿ rm’s hierarchy history, customer behavior, customer contact with the partly because of the focus on operational issues and company, etc. The data is gained from different sources partly because of inter-organization dif¿ culties. Another with different focus and aim, which made it hard to drawback of marketing activities is mentioned as the interconnect this information into one useful output. unclear and not fully measurable outcomes of the However, nowadays, thanks to modern informational marketing investments (Sheth & Sisodia, 2006). technologies, the different sources can be interlinked The answer to the call for marketing accountability in order to connect the information about customers. should not only be about a cosmetic change in the Thanks to different bi-directional communication marketing controlling mechanisms. It will require a total methods, customers can be effectively and personally change in the way marketing is managed and on which addressed. outcomes it is focused. This change may be represented From the inter-organizational point of view, the main by the CLV. The main bene¿ t of this approach lies in change that the CLV model brings into marketing the way marketing perceives and works with customers management is the view of the customer as a real and customer relationships (Rust, Zeithaml, & Lemon, business partner. CLV changes the customer from 2000). a passive consumer of the company´s products and mar- The basic principle of the CLV approach lies in redi- keting communication activities to a core and strategic rection of marketing focus from the mass product company asset (Blattberg & Deighton, 1996). This new with one-way marketing communication back to the view totally changes the way customers are treated and customer, customized bi-directional communication and understood. 29 CENTRAL EUROPEAN BUSINESS REVIEW RESEARCH PAPERS VOLUME 3, NUMBER 2, JUNE 2014 If the customer is viewed as a long-term asset of strategy in the direction of the customer and on the other the company, then the activities related to this asset side it moderates customer relationship importance should be managed according to the general asset through all internal teams. management practice. Assets are taken as the basic pillar of each company’s value, through which added value 2. CLV & CE Calculation of the ¿ rm is created and further translated into pro¿
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