THE EMERGING INEQUALITY of CUSTOMER LIFETIME VALUE Nelson D

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THE EMERGING INEQUALITY OF CUSTOMER LIFETIME VALUE Nelson D. Schwartz The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 -

ein walks st As vice chairman of Royal Caribbean, he wants he Caribbean, Royal of As chairman vice

a fine line. a fine consumer life. Whatever the arena—health care, education, work, travel and leisure—on and travel work, education, care, arena—health the Whatever life. consumer everyone, from an elite oasis next door called Coastal Kitchen. There are no crowds at crowds no are Coastal next called There oasis door Kitchen. elite an from everyone, pated and catered to. Red tape is cut, lines are jumped, appointments are secured, secured, are appointments jumped, are tape cut, is Red lines to. catered and pated same time, he needs to make sure ordinary guests don’t feel like second-class travelers second-class travelers guests like ordinary feel sure don’t make to needs he time, same Pinnacle, Royal Caribbean’s version of elite frequent-flier status airlines. the on frequent-flier elite of version Caribbean’s Royal Pinnacle, Royal Caribbean has gone after the one percent because that’s where the growth the is. where because that’s after percent gone one has the Caribbean Royal It’s a job that’s gotten harder in recent years as Royal Caribbean has broadened its offer broadened has Caribbean Royal as years recent in gotten that’s It’s a job harder and doors are opened. opened. are doors and at Windjammer. When jealous refugees from Windjammer work up the courage to open open to courage the up work Windjammer from refugees jealous When at Windjammer. ings to attract more deep-pocketed cruisers. Like many consumer-facing businesses, businesses, consumer-facing attract to many ings cruisers. Like deep-pocketed more the right side of the rope is a friction-free existence where, for a price, needs are antici are needs a price, for a friction-free is rope the where, of existence side right the the frosted glass doors and inquire about a table, they are politely—but firmly—informed politely—but firmly—informed are they a table, about inquire and frosted doors the glass of members or Class Suite Royal guests to Coastalthat open ship’s the only Kitchen is in the cruise ship line’s most elite passengers to have a superior experience—but at the a superior have to passengers most elite line’s ship cruise the Coastal Kitchen and the calm atmosphere inside is a world away from the hectic the from scene away a world is inside Coastal atmosphere calm the Kitchen and when they come aboard his ships. ships. his aboard come they when velvet rope divides passengers who dine at the Windjammer Café, which is open to to open is which Café, Windjammer at the dine who passengers divides rope velvet The split between Windjammer and Coastal Kitchen is a metaphor for contemporary contemporary Coastal for and a metaphor Kitchen is between split The Windjammer

The result is what I call the Velvet Rope Economy. On Royal Caribbean cruises, a virtual cruises, Caribbean On Royal Economy. Rope Velvet the call I what is result The Adam Gold The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

carefully monitored guests for any sign of pushback. Initially, repeat Royal Caribbean Caribbean Royal repeat Initially, pushback. of guests sign any monitored for carefully guests suite for lounges irritated concierge the that were rooms customers regular in companies. Beginning in the late 1990s, Royal Caribbean introduced dedicated concierge concierge dedicated introduced Caribbean Royal 1990s, late the in Beginning companies. example, room service requests from Royal Suite occupants are automatically routed to to routed automatically occupants are service Suite room requests Royal from example, of service reserved for upper-class passengers. “We didn’t go from day to night in terms terms in night to day from go “We passengers. didn’t serviceof reserved upper-class for outside the differentiation no absolutely from “We went said. Goldstein stratification,” of personalized service. personalized special nowadays—a desire companies like Royal Caribbean are happy to indulge. For For indulge. to happy are Caribbean Royal like companies desire nowadays—a special stateroom to some, and slowly but surely the guests who had the resources to do so do to guests the resources the but had surely who slowly and stateroom some, to it.” for pay to willing were they showed board the ship. lounges earmarked for the top tier of frequent cruisers, wherever they were staying on were they cruisers, wherever frequent of tier top the for earmarked lounges lounges for suite occupants. It was a tentative process, Goldstein recalled, and executives and recalled, Goldstein process, occupants. a tentative It was suite for lounges In addition to expecting larger rooms and softer sheets, big spenders also want to feel feel to softer want and also sheets, spenders rooms big expecting to larger addition In a different number than the one available to regular passengers, who get slower, less slower, get who passengers, regular to available one the than a different number a college scholarship, or a doctor’s or appointment. scholarship, a college the contrast between the treatment meted out to ordinary passengers and the level level the and passengers ordinary contrast outthe to meted between treatment the On the other side of the Velvet Rope, frictioncharacteristic, practically is Rope, defining the Velvet the of side other the On for a decent seat on the plane, a place in line with their kids at the amusement park, amusement at the kids with their line in a place plane, the on seat a decent for were off-limits to them. In response, management retrofitted ships to create additional additional create retrofitted to ships management off-limits response, In were them. to with middle- and working-class Americans facing an increasingly Darwinian fight fight Darwinian increasingly an facing working-class Americans and with middle- Since then, Royal Caribbean has steadily become more comfortable with heightening comfortable with more heightening become steadily has Caribbean Royal then, Since The evolution of class distinctions at Royal Caribbean sums up what’s happened at many at many happened what’s up sums Caribbean class distinctions of at Royal evolution The The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

classes, however, and there’s much less incentive to trade up to a more expensive room. room. expensive a more to up trade to less incentive much there’s and classes, however, doesn’t curdle into disappointing them with a present one. one. with a present them disappointing into curdle doesn’t proposition. As new tiers of luxury and service are rolled out, Royal Caribbean is always always is Caribbean out, Royal luxury As of tiers service rolled new and are proposition. said. “We constantly innovate and are running scared at the same time.” That’s among among That’s time.” same scared at the running are and “We constantlysaid. innovate sell experiences, rather than a physical product like a handbag or a car, must master a car, or a handbag product like a physical than rather experiences, sell But essentially telling ordinary passengers “you get what you paid for” is not a simple for” a simple not is paid you what get “you passengers ordinary telling But essentially Indeed, as Goldstein admits, consumer-facing companies like Royal Caribbean that that Caribbean Royal like companies admits, consumer-facing Goldstein as Indeed, If the gap in service grows too wide, and envy tips into resentment, you risk turning off turning risk you resentment, envy into and tips wide, too service in gap If the grows norm in today’s society. This is what people have become habituated to.” to.” habituated become have people what is This society. today’s in norm a large number of customers and losing them forever. Diminish the differences the between Diminish forever. them losing customers of and number a large is practically the definingcharacteristic… the is practically On the other side of the Velvet Rope, friction friction Rope, Velvet the of side other the On about receiving a higher level of services and amenities,” Goldstein said. “They are looking “They are said. Goldstein services of amenities,” and level a higher receiving about a delicate balance. balance. a delicate the reasons Royal Caribbean has always closely studied habits its the of closely guests. always has Caribbean “We have Royal reasons the to be very careful to do it right.” very be itto do right.” to careful for constant validation that they are higher-value customers. That’s now accepted as the the as accepted customers. now That’s higher-value are they that constantfor validation watching to ensure that stoking a customer’s aspiration to splurge on the next the on cruise splurge to aspiration stokingcustomer’s a that ensure to watching “Somehow, people who work here are genetically programmed to be nervous,” Goldstein Goldstein nervous,” be to programmed genetically are here work who people “Somehow, “In our sector and others, people paying higher amounts have become more conscious conscious more become have amounts higher paying sector“In people our others, and The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 - - - off the ship, while retaining cheaper options for price conscious travelers. On cruises On cruises travelers. conscious price for options cheaper retaining while off ship, the on shore. Budget travelers watch orcas from the deck. That said, the system does make system the make does deck. said, the That from orcas watch travelers Budget shore. on guests special resort elite private own Haiti, their get in line’s cruise the at Labadee, call ers guests, they are likely to be disappointed. If guests have a wonderful time, and some and If guests a wonderful time, have disappointed. be to guests, likely are they comfortable with,” he said. “During your whole time at dinner, you are conscious of it.” it.” of conscious are you at dinner, time whole your “During said. he comfortable with,” party boat for $79. It also pitches a private catamaran tour for a family of four for $1,000. $1,000. for four of a family for catamaran tour a private pitches It also party $79. for boat beach club—an enclave within an enclave in the Western Hemisphere’s poorest country. poorest country. Hemisphere’s Western the in enclave an within club—an enclave beach buffet table while suite guests cer buffet suite way the frosted across sit comfortably glass while table behind body else who paid a lot more money for a suite is getting a special amenity, I don’t I don’t getting is amenity, a suite for a special money more a lot paid who body else ride to a glacier or a day trip from the ship in a seaplane for fishing and a salmon bake bake a salmon and fishing for a seaplane in ship the trip from a day or a glacier to ride as special seating for a few swell guests in the same restaurant. “If you have areas within within areas guests restaurant. swell same the have “If a few in for you seating special as less feel visibility we of a level that’s choicest table, the as perceived a restaurant are that to Cozumel, for example, Royal Caribbean offers a four-hour trip to the island on a small a small on island the trip to offers Caribbean a four-hour Royal example, for Cozumel, to tainly sounds “in your face.” But that’s not how passengers perceive it, Goldstein told me. me. it, told Goldstein perceive passengers how not But that’s face.” “in your sounds tainly much as nearly people bother Coastal Café don’t and Kitchen, casethe Windjammer of think it’s a problem.” it’s a problem.” think On trips to Alaska, the luxury options are even more extravagant, including a helicopter helicopter a extravagant, including more even are luxury the options Alaska, to On trips Goldstein explained. “If it’s made too obvious, if they’re actively sacrificing for other activelyother for sacrificing if they’re obvious, “If too it’s made explained. Goldstein for some odd, occasionally uncomfortable juxtapositions. When Caribbean Royal ships Separate restaurants for different classes, even if they are adjacent to one another as in in as another one to adjacent are restaurants if they Separate different classes, even for What does that mean in practice? After all, standing in line to grab a tray at a crowded at a crowded a tray grab to line standing in After practice? all, in mean that does What The cruise line has continued to add more and more high-end experiences for big spend big for experiences high-end more and more add to continued has line cruise The “Where we risk a guest’s discontent is if special services are delivered in people’s faces,” faces,” people’s in services delivered ifis special are “Where a guest’s risk we discontent The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

- can’t have lunch at Coastal Kitchen.” at Coastal lunch Kitchen.” have can’t quent cruisers have priority, or can dine at Coastal Kitchen, and it’s not a secret who gets who a secret it’s at Coastal not and can or Kitchen, dine priority, cruisers have quent socially acceptable for Americans, businesses are more than happy to oblige them. them. oblige to happy than more are businesses Americans, for acceptable socially ship returned to port in Fort Lauderdale, the Schillos were escorted were off the of ahead Schillos the port to returned Fortship in Lauderdale, snorkels. It was all provided.” provided.” all It was snorkels. Royal Caribbean cruise in 2018. “As a suite guest, they had a special section, and there section, there and a special guest, had a suite they “As 2018. in cruise Caribbean Royal Kitchen; Johnny Rockets and Michael’s Genuine Pub are open to all passengers. As passengers. far all to open are Pub Genuine Michael’s and Rockets Johnny Kitchen; right through customs,” he said. “It took less than ten minutes to get off get to and boat minutes the ten “It less than took said. he customs,” through right into a cab. Wham-bam.” reservation and you don’t have to fight for a decent seat. At every show, you’d just show you’d just show every seat. At show, a decent for fight to have don’t you reservation and the and over was cruise Caribbean their When rows.” first the of sit in and up couple as Royal Caribbean is concerned, Goldstein said, “It’s hard to imagine someone would would someone imagine to “It’s hard said, Goldstein concerned, is Caribbean Royal as think they’re prevented from having a diverse culinary experience just because they just because they experience culinary a diverse having from prevented they’re think thousands of non-suite-guest passengers. “When you leave the boat, you are walked walked are boat, you the non-suite-guest of “When passengers. leave thousands you to go and why, perks are transformed into what Goldstein calls “aspirational opportunities.” opportunities.” “aspirational calls Goldstein what transformed perks into are why, and go to On board ship, Schillo said he particularly liked that the best seats at shows were reserved best the that seats were particularly at shows he liked said Schillo ship, On board for travelers in the biggest rooms. “You get spoiled,” he said. “I didn’t have to make a make to have “I didn’t said. he spoiled,” get “You biggest rooms. the in travelers for was a person there to serve you food and whatever toys you wanted like rafts like wanted and you toys whatever serve and to food you there a person was As long as ordinary passengers are politely told that suite passengers and the most the fre and passengers suite that told politely are passengers ordinary As as long As the opportunity to flaunt one’s position has become more widespread and more more and widespread more become has As position opportunity the one’s flaunt to And there are plenty of other restaurants to choose from for lunch besides Coastal besides lunch restaurants plenty for other from are of choose to And there “Companies prey upon people’s need for status,” said Joseph Nunes, chairman of the the of chairman Nunes, Joseph status,” said for need people’s upon prey “Companies “It was prime,” said Bob Schillo, who visited Labadee with his wife, Bobbie, during a during Bobbie, wife, with his Labadee visited who Schillo, Bob said “It prime,” was The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

colleague, Xavier Drèze, wrote in a 2008 paper in the Journal of Consumer Research. Research. Consumer of Journal the in paper a 2008 in wrote Drèze, Xavier colleague, last twenty years examining how that natural human impulse to gain status out in gain to plays impulse human natural that how last twenty examining years Nunes, who has consulted for giants like Nestlé and Southwest Airlines, has spent the the spent has Nestlé Southwest Airlines, and like giants for consulted has who Nunes, marketing department at the USC Marshall School of Business. “People look up to to up look “People Business. of School Marshall department USC at the marketing socially acceptable for Americans, businesses businesses Americans, for socially acceptable them. oblige to than happy are more As the opportunity to flaunt one’s position position one’s flaunt to As opportunity the more and widespread more has become about themselves,” he added, citing what’s known as social comparison theory. theory. comparison social as known what’s citing added, he themselves,” about is pervasive and often occurs whether or not individuals intend to do so,” Nunes and a a and Nunes so,” do to intend individuals pervasive oftenis not or and occurs whether the business world. “Status matters because the need to compare oneself with others “Status oneself matters world. compare to business the need because the figure out where they are in the hierarchy, and they look down in general to feel better feel to general in down look they and hierarchy, the in are they out where figure The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 of status among consumers in the top-most tier. top-most the in tier. statusof consumers among Firms can offset a dilution in perceptions of status as the top tier grows by creating creating by status grows of tier top can the as Firms offset perceptions in a dilution a second elite level just below it. just below level elite a second among consumers in the top tier. tier. top the in consumers among top tier. The fewer people granted elite status, the more superior these people will feel. will people these status, superior elite granted more the people fewer The The second elite tier will elevate perceptions of status among consumers in the the in status of consumers among perceptions elevate will tier elite second The status of perception the greater the group, second-highest the of size the smaller The The presence of additional tiers below the second elite level will not affect not will level perception elite second the below tiers additional of presence The conscious consumers and help companies maximize the envy factor as they refine and envy the and factor refine maximize they as companies help and consumers conscious rules: the Among programs. rewards expand ever-more exclusive classes at the very top of the pyramid, so the envy so the factor remains pyramid, very classes the at the of top exclusive ever-more time. over expand tiers top the as even line, the down constant all platinum levels. United created the Global Services category, choosing the top eighteen eighteen top the Services choosing category, Global the created United levels. platinum needed to develop something more exclusive than the conventional silver, gold, and and gold, silver, conventional the than exclusive more something develop to needed thousand fliers in its 10-million-member MileagePlus program. American responded American responded program. MileagePlus its fliers in thousand 10-million-member Studying existing loyalty programs and using experiments with students experiments and using USC at and loyalty existing programs Studying Wharton, Nunes developed a series of principles outlining how to leverage status- leverage to how outlining principles of series a developed Wharton, Nunes What does this mean for us as consumers? For starters, it forces companies to create starters, create to For companies it forces consumers? as us for mean this does What As more fliers achieved elite status in the late 1990s and early 2000s, airlines knew they they knew 2000s, early airlines and status 1990s elite late the in fliersAs achieved more • • • • • The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 gradations doesn’t threaten the status of the elite at the top, but it does reinforce the the but it reinforce does status the top, at the elite the of threaten doesn’t gradations board groups separate nine envy having effect why explain bottom. at the helps That either one or no elite tiers by prospective members—regardless of whether they are are they whether of prospective members—regardless by tiers elite no or one either Marx it Groucho the Call qualify.” would they tier elite status which for into and eligible down and delight in their superior status, it simultaneously triggers fears of downward downward status, of triggers fears superior it simultaneously their in delight and down perceptions of status will increase as the group size, or number of elites, decreases.” decreases.” elites, of number or size, group the as status of increase will perceptions soft benefits. like entrée into a special restaurant like Coastal Kitchen or taking a special elevator up up elevator Coastal a special taking Kitchen or restaurant like a special into entrée like Fostering envy, in the final analysis, is about more than just offering tangible benefits just offering than tangible more about is analysis, final the in envy, Fostering Lastly, Nunes concluded, “a program with two elite tiers is chosen over programs with programs over with two chosen is tiers program elite “a concluded, Nunes Lastly, Research has also found that even as social comparison theory allows people to look look to people theory allows comparison social as even that found also has Research rule: consumers mostly want to join clubs that won’t have them as members. members. as them have won’t that clubs join mostly to want consumers rule: mobility and the loss of status. According to Nunes, a “second elite tier may appear appear may tier elite a “second Nunes, to status. of loss the mobility and According an American Airlines flight doesn’t have to be bad for business. business. for bad be to have doesn’t flight American Airlines an as a safety net for those at the top.” a safetyas top.” the at those for net actually divide the perks of loyalty programs into two categories: hard benefits two hard and into categories: loyalty perks the of actually programs divide to the lofty heights of the Haven. It is every bit as important to make some passengers passengers some lofty the to It every is important as bit make to Haven. the of heights feel like they are being rewarded more than others. Nunes and other marketing experts marketing other and Nunes others. than more rewarded being are they like feel with ConciergeKey, its own ultra-elite category. As Nunes noted, “we predict that “we its ultra-elite As noted, own category. Nunes with ConciergeKey, Adding new tiers further down on the prestige chain—bronze or below—with additional below—with additional or further tiers prestige chain—bronze the new on down Adding A second elite tier right below the top one can bring other psychological benefits. psychological other can bring one top the below right tier elite A second The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

don’t get priority because of the tags but when I see them it reminds me that I’ve I’ve that me priority get it reminds I seethem don’t tags the but when because of can get all of the above. above. the of can all get same flight or lounge access. Soft benefits are less tangible but can be even more effec access. Soft more lounge but can or even be benefits flight lesssame tangible are marked 1K to passengers who fly at least 100,000 miles a year. “The bags themselves “The themselves bags a year. miles fly who passengers to at least 100,000 1K marked not just how others see you,” said Nunes. “Soft Nunes. said in self the to benefits can a signal be see you,” others justnot how additional gradations doesn’t threaten threaten doesn’t gradations additional Adding new tiers further down on the on down further tiers new Adding prestige chain—bronze below—with or prestige does it but top, the at elite the of status the bottom. at the effect envy the reinforce achieved that status.” status.” that achieved as you board the plane, even before you take your seat or display your ticket. Super-elite Super-elite ticket. your display or seat your take you before even plane, the board you as tive in building brand loyalty. Think of separate check-in counters, special luggage tags luggage special counters, check-in separate of Think loyalty. brand building in tive name by you recognizes crew cabin the when all, status, advertisethat above your and fliers, like those in American’s ConciergeKey program or in Global Services on United, Services United, on Global in or program ConciergeKey American’s in those fliers, like what we call identity formation.” For example, he said, United gives out luggage tags out luggage gives United said, he example, For identity call we formation.” what The former consists of concrete rewards, like twice as many frequent-flier miles for the the for miles frequent-flier twice many as like rewards, consists former The concrete of “Soft benefits are even more important because they help you figure out who you are, are, you out who figure “Soft you important help more because they benefits even are The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 - of truly wealthy people who can’t or won’t travel any other way. But the fastest-growing fastest-growing But the way. other any travel won’t or can’t who people truly wealthy of seats cashed in or premium their for pocket out of paid cohort who passengers are envy them. Premium cabin menus play to these customers, the consultant said. “You’re “You’re said. customers, these consultant to the play menus cabin Premium envy them. cabin, according to one aviation sector consultant, and the airlines are keenly aware aware keenly are sector airlines the and consultant, aviation one to according cabin, segment. each of psychology the of hard-earned frequent-flier miles—and they’re determined to enjoy every minute up front. front. up every minute enjoy to determined they’re miles—and frequent-flier hard-earned had a titled aristocracy or inherited symbols or crests like Europe, Nunes explained. explained. Nunes a titledEurope, crests aristocracy or had symbols inherited or like ” it.’ earned we ‘Well, ourselves, benefits,to say we For airlines and other service industries seeking to entice a well off clientele, it’s also it’s also off a well clientele, service entice to other seeking industries and airlines For But the third group is impressed by offerings like duck, scallops, and shrimp. “It’s what shrimp. and scallops, duck, offerings by like impressed is group third But the never going to impress the true rich people with food or wine,” he said. said. he wine,” with or food true the people rich impress to going never just want to be left alone so we can work or sleep.” The second group, he said, consists said, he group, second The sleep.” or left be can to work just so we want alone tomers themselves are conscious of it. Three types of passengers occupy the premium it. types premium the of Three occupy passengers conscious of are themselves tomers they think rich people eat,” he said. “It’s hard to prepare duck at 36,000 feet so it doesn’t at 36,000 so it feet doesn’t duck prepare to “It’s hard said. he eat,” people rich think they passengers coach give to Meanwhile, fancytaste people.” sounds to but duck so good vital to identify and anticipate what these consumers want, sometimes before the cus the before sometimes want, consumers these what vital identify to anticipate and They might take selfies and put them on Facebook or Instagram so their friends can friends Instagram or so their Facebook on put them and selfies take might They These kinds of status symbols are especially powerful in the United States, which never never which States, United powerful the status in of especially kinds These are symbols “They want to splurge and stay up watching movies and eat everything in sight,” he said. said. he everything eat and sight,” in movies stay and watching up splurge “They to want “Some are corporate road warriors like me,” he said. “We don’t want champagne. We We champagne. want “We don’t said. he me,” like warriors road corporate “Some are “We’re supposed to be a meritocracy, so when we see these 1K tags and other soft other tags and 1K see these we so when a meritocracy, be to supposed “We’re The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

even a decade ago. ago. a decade even broadened, the way companies classify their customers has changed too. too. classify changed customers has their companies way the broadened, been a huge hit,” the consultant confided. confided. consultant the hit,” a huge been leave. When people buy online, it gives you way, way more information and because and information more way way, you it gives online, buy people When leave. Palmatier doesn’t just study this phenomenon—as research director for the university’s the for director research just study doesn’t phenomenon—as this Palmatier In fact, companies can pinpoint and favor the wealthiest customers in ways unimaginable customers ways in wealthiest the favor and fact, canIn pinpoint companies rewards programs. researcher and consultant. a hint of the good life up front, Delta started front, up has life good the of everyone to a hint wine serving free sparkling flights. shit, after but it’s as “It’s cheap plane the takeoff of international back on the in at the University of Washington’s Foster School of Business. “In the past, you couldn’t “In past, the couldn’t Business. of you School Foster Universityat the Washington’s of you’d and buy were, you identify best who know customers. your Grocery stores didn’t at the concierge or goes skiing in February,” said Bjorn Hanson, a lodging industry a lodging Hanson, Bjorn said February,” in skiing goes or concierge at the them know who the elite frequent fliers are on each flight and where they are sitting are they so where and flight each on fliers are frequent elite the who know them attention. personalized more get they Center for Sales and Marketing Strategy, he also helps companies fine-tune their their fine-tune companies helps also he Strategy, Marketing and Sales for Center United Airlines, for example, introduced a new app for flight attendants in 2017 that lets that attendants flight for 2017 in app a new introduced example, for Airlines, United firms have this data they’re more able to target segments.” target to able more data they’re this firms have As the number of tiers has widened and the gap between the top and everyone else has has else everyone between and top gap the the and widened has tiers of As number the “There’s been a confluence of forces,” added Robert Palmatier, a professor of marketing marketing of a professor Robert added Palmatier, forces,” of a confluence been “There’s “At the high end, we can get into real psychographics and know who spends more time time more spends who know and psychographics real can into get we end, high the “At The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 customers while sidestepping malicious envy. day and many other account holders are calling at the same moment. Tempting, but Tempting, moment. same at the calling are holders account other many and day getting dragged off an overbooked flight by airport security in Chicago in 2017. If he’d airport by flight security 2017. getting in off Chicago dragged in overbooked an programs, because collecting all that data ultimately pays off pays best the as data ultimately that customers because collecting are all programs, be determined by your balance. Frequency of travel and spending levels help set help levels spending and travel of Frequency balance. your by determined be had elite status on MileagePlus, the cabin crew would have found someone else to boot boot to else someone found have would crew cabin the status elite had MileagePlus, on It’s tempting to think that when you call the bank or another financial service provider service provider financial another or bank the call you when that think to It’s tempting identified, rewarded with better treatment, and in turn, spend more. Even better, better, Even more. spend with turn, better in and treatment, rewarded identified, wealthiest the can favor companies sophisticated, more become programs these as and you are put on hold for twenty-five minutes, it’s simply because it’s a peak time of of time because it’s twenty-five a peak for it’s simply hold put on minutes, are you and the plane or disembarking first from a cruise ship. For the hapless Dr. Dao, it meant it meant Dao, Dr. hapless the For first ship. a cruise from disembarking or plane the the higher the number, the better the service. At a bank or credit card company, it might it might company, card better credit the or service. a bank the At number, the higher the Canada, for example, had three tiers of customer service in 1992. By 2018, it had eighty, eighty, it had 2018, By service customer of tiers 1992. three in had example, for Canada, from the flight and someone else would have been left bloodied by security left been by bloodied have officers. would else someone and flight the from which are updated monthly and guide all of the bank’s marketing strategies. marketing bank’s the of all guide and monthly updated are which Some firms, he said, are willing to lose boatloads of money when they set up loyalty set up they when money of boatloads lose to willing are said, firms, he Some wrong. In reality, the wait time likely has nothing to do with timing and everything and do to with timing do to nothing has likely time wait the reality, In wrong. value. lifetime customer or CLV, with your And thanks to loyalty programs, status means more than simply getting simply a better than status on more loyalty seat to programs, And thanks means That’s caused an explosion in the number of different service tiers: the Royal Bank of of Bank different of service Royal the tiers: number the in explosion caused an That’s This is a calculation of how much your business is worth to whoever you are calling, and and calling, are you worth is business whoever to your much how of a calculation is This The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 - company, according to Palmatier, the company’s first num stepidentify phone to is company’s the your Palmatier, to according company, seat at the elite restaurant on Royal Caribbean, and a private suite on Emirates. But CLVs But CLVs Emirates. on suite a private and Caribbean, Royal restaurant on elite the at seat rest the economy. metastasize the to of into phenomenon Rope Velvet the allowed have ber and then determine your CLV. CLV. your determine then and ber in customer service, and it’s driven by the profit motive.” motive.” profit the by it’s driven service, customer and in a else—a everyone of ship-within-a-ship, customers exclusion the to wealthiest the on is As the number of tiers has widened and and has widened tiers of As number the everyone and top the between gap the companies way the has broadened, else too. has changed classify customers their their best-performing or most highly trained representatives. We call this heterogeneity heterogeneity this call We representatives. trained best-performing most or highly their Until now we’ve focused on examples of the Velvet Rope Economy where the emphasis emphasis the where Economy Rope Velvet the of examples on focused we’ve now Until your CLV at airlines and hotels. More and more, as soon as you call any consumer-facing consumer-facing any call you as soon as more, and More hotels. and airlines at CLV your “If it’s high,” he explained, “they might take your call more quickly, or direct it to one of direct of or it one to quickly, more call your take might “they explained, he “If it’shigh,” The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 - going to spend over their lifetime,” Palmatier said. said. Palmatier lifetime,” their over spend to going could avoid a call from a pesky customer, just as a doctor could duck a hypochondriacal a hypochondriacal just duck a doctor as could a pesky from a call customer, avoid could programs or by ordering things online, huge amounts of data are created that can that created data are of amounts huge online, things ordering by or programs pinpoint consumer behavior.” patient. But in the last few years, powerful new digital technologies like big data and data and big like technologies digital powerful new years, last the But few in patient. system and link it with their telephone reservations department to take advantage of CLVs. CLVs. of advantage reservations department take to telephone it with their system link and sophisticated algorithms have transformed what was once an individual decision into into decision individual an once was transformed what have sophisticated algorithms Palmatier. to according standard practice biggest companies, the by lower prices for hotel reservations on busy weekends, based on their gaming history gaming their on based reservations busy weekends, on hotel for prices lower Harrah’s, the casino operator, spent millions to upgrade its hotel revenue management management its revenue upgrade to hotel millions spent operator, casino the Harrah’s, Beyond varying levels of customer support, CLVs can also enable what Palmatier terms terms Palmatier what enable can also support, customer of CLVs varying levels Beyond Ever since caller ID was first introduced for landlines in the 1980s, an individual banker banker individual an 1980s, the in landlines for first ID was caller introduced since Ever micro-targeting, rolling out the red carpet for some customers and ignoring others others ignoring customers carpet and some red out the for rolling micro-targeting, recognize the phone number of top customers, enabling operators to present them with them present to operators customers, enabling top of number phone the recognize altogether. “If I have enough data, I can predict how much individual customers are customers are individual much I can data, predict how enough “If I have altogether. much deeper into the wealth pyramid,” Palmatier told me. “I even think the term ‘cus term the think “I even me. told Palmatier pyramid,” wealth the into deeper much and the offers the and past. they’d the in received it’s like you just don’t want to deal with them if it’s low.” if with it’s them low.” deal to want just don’t you it’s like tomer lifetime value’ is very telling. You’re judging a person on their economic value and and value economic their on a person judging You’re very is telling. value’ lifetime tomer When loyalty program members called, the combined system would automatically automatically system would combined the called, members loyaltyWhen program “When you didn’t have data, CLV wasn’t that big of a deal,” Palmatier said. “With said. loyalty Palmatier a deal,” of big that wasn’t CLV data, have “When didn’t you “We discuss very high-end wealth and services but I think this phenomenon is prevalent prevalent is phenomenon services this and “Wevery but discuss think I wealth high-end The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01

consumer behavior, zip code, income, educational level, job type, and age can type, instantly age job and level, educational income, code, zip behavior, consumer answered. is call your which in order the determine on a Saturday night. “If you’re a student of the Old Testament, you know that God said said God that know you Testament, Old a student the of “If you’re night. a Saturday on determine everything from credit card rates to the likelihood of getting of a mortgage. everything likelihood the rates to card credit determine from Loveman, told an audience in a YouTube video. video. a YouTube in audience an told Loveman, Instead, each company calculates its own CLV’s for individual consumers. consumers. individual for its calculates CLV’s own company each Instead, nomic system as more and more information accumulates,” Palmatier said. At this point, point, this At said. Palmatier accumulates,” information more and system more as nomic of the economy. economy. the of CLVs have allowed the Velvet Rope Rope Velvet the allowed have CLVs phenomenon to metastasize into the rest rest the into metastasize to phenomenon all people are created equally,” the former chief operating officer of Harrah’s, Gary officer Harrah’s, operating of chief former the equally,” created are people all On the other hand, rates would be raised for lower-value customers looking for a room room a for customers looking lower-value for raised be rates would hand, other the On CLV’s are not like credit scores, which are set by independent firms like Equifax and and Equifax firms like independent set by are which scores, credit like not are CLV’s What are the factors used to determine CLVs? Besides individual data points reflecting individual Besides factors CLVs? the are What determine to used “We talk about discrimination in other contexts, but people will be left be contexts, other will eco in the but out people of discrimination about “We talk “But she never said that all customers were created equally.” equally.” created customers were all that said “But never she The Emerging Inequality of Customer Lifetime Value Nelson D. Schwartz 186.01 make every day as they navigate the Velvet Rope Economy. Rope as every they navigate themake day Velvet know how much better the treatment meted out to their high CLV peers can be. It’s peers can a be. CLV high their out better to meted much treatment how the know For executives, CLVs offer another benefit: low-CLV customers stuck on hold will never never customers stuck will hold on benefit: low-CLV offer another CLVs executives, For up for sale outright. Optimum, which provides cable and internet service New the internet in and cable provides which outright. Optimum, sale for up world ofworld difference from the decisions Adam Goldstein and other must executives when calling OptimumSupport.” And in a few cases, companies are going beyond the CLV and putting and better treatment CLV the beyond going are cases, companies a few And in York suburbs, promises buyers of its Protection Plan “priority status in the call queue its “priority status of buyers queue call Plan the Protection in promises suburbs, York Info

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