INTERVIEW
Customer Lifetime Value and the Future of CX
With Don Peppers – Founder, Peppers and Rogers Group, and CX Speakers
Don reveals the key to reframing the CX conversation in a way that resonates with financial decision-makers.
Don highlights the fundamental challenge that many customer experience (CX) professionals face in trying to convey the importance of customer behavior and lifetime value to business leaders and financial decision-makers. While companies are increasingly recognizing that the primary asset value lies in the goodwill and future potential of their customer base rather than just physical assets, translating this into tangible metrics and business strategies remains elusive.
Don suggests that the key is to reframe the conversation around CLV in terms that resonate with financial stakeholders – namely, discussing appropriate target lifetime value thresholds and the operational levers that can be pulled to maximize this metric. This requires a shift in mindset from viewing customers transactionally to seeing them as long-term assets whose value is directly tied to the organization’s ability to build trust, deliver exceptional experiences, and foster loyalty. Ultimately, aligning the company’s mission, culture, and performance metrics around this customer-centric, future-oriented perspective may be the most effective way to overcome the short-term thinking that often hampers CX investments.
Richard
We were just talking in the sort of of preamble about a topic which in some ways might get right to the heart of where things are today when people think about customers and customer centric companies and behavior. And it’s this anxiety that we are struggling to break through to the business units and the business leaders, the chief financial officers, in a language that makes sense and you’ve been in this industry a long time. What’s the challenge that we’re all still running into and sort of getting the importance of customer behavior across?
Don
Good question. And it’s, I think, the biggest challenge that faces CX professionals around the world. And that is that we can measure to the penny the costs of improving a customer experience. You improve it today. But you can only guess at and hopefully predict the revenue impact as the customer comes back for more, recommends others, buys a new product, right? The longer the customer is retained, the more valuable they are. Now we have a concept for that, which is called the customer lifetime value. And I define it very quickly as the sum total of contributions a customer will make over the lifetime of their patronage, right? But we can’t know what that is. We can only guess at it.
We predict it with mechanics and statistics. We say that we had 15,000 other customers with this rough profile and this is what they did. So we know how to do that kind of thing. But if you think about it, it’s very much like a stock price. When you buy a stock, you have no idea what that stock is worth because the stock’s value is the discounted net present value of future financial cashflow that that stock will generate. Now in the stock market, we have a market where people argue about what the stock price is and we settle on a price that enough… about the same number of people think it’s too low as think it’s too high. Okay. That’s really the price. But,
Myron Scholes, the Black Scholes team, Myron Scholes said, Myron Scholes and Fisher Black created the algorithm that helps to value stock option prices. And so one of those guys said that they would consider a stock market to be efficient if at any given time a stock price was no more than about twice what its actual value was and the price was no less than about half of what its actual value was, that would be a relatively efficient market. We have to think of lifetime values like that. Okay? You can’t know what the lifetime value is. No one can.
But we know it’s a real number because 20 years from now, we can go back and tell you what it was. We just can’t know it now. So my argument with CFOs and financial types is let’s have a discussion about what you think an appropriate level of lifetime value is and what you think the levers are that might improve that lifetime value or not. And I think the lifetime values of customers like this with this kind of profile is $800 or $900. And if the CFO says, no, no, no, I say, well, what do you think it is? It’s surely something. We know it’s real. So we have those kinds of discussions. Go ahead.
Richard
So just getting people to have a conversation about the quantification of future value of customers would be a step forward. And it strikes me as odd that, as you said, we’re very comfortable with the idea that stock prices are a reflection of discounted future values. So if you’re a chief financial officer for any company, you live in this universe. You’re used to going to investors and making the argument that.
Don
Exactly. With those.
Richard
Future growth prospects, which are highly uncertain fundamentally, are nevertheless something on which you should base the valuation of a company. And maybe it’s oversimplified because we just look at multiples because we can’t figure out the math. But that’s a very comfortable conversation. But when it comes to translating that into the operations of the company, that becomes a lot more challenging for people. And they tend to revert back to current financial performance. Is it fundamentally that leaders in business have trouble connecting the operations of the business, what they choose to do, with potential customer outcomes? So in some ways, they struggle to make the connection between investments they make and good outcomes. And that puts them off. It seems too difficult to make that connection.
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Don
It’s partly that, but it’s also the fact that increasingly the value of a going enterprise is measured in the future goodwill of its customers, not in the value of its assets or productive equipment. In 1980, 95 % of the S &P 500’s stock market value could be explained by tangible assets, physical things you can see and count, right? And today, over 90 % of the value of the standard of the S &P 500 is in intangible assets. The primary asset like that is with basically the value of customers. It’s the value, it’s goodwill that you put into an acquisition effort to cover the, because you’re paying $50 million for a company that only has, you know, $5 million with the ping pong tables and TV screens in their office building, right? So it’s a conundrum, but it’s one that we’re familiar with. And all we need to do is approach the financial people on terms that they understand.
Richard
I wonder whether or not in some ways, to your last point you made about approaching people in language they understand, I feel like now looking back, and we’ve both been in this industry for a long time, there’s been a tendency to talk in terms of…
How can I put it? Very emotional language, very empathetic language. We want to do what’s right for customers, we want to love our customers. There’s a tendency to see this as a very mission-driven philosophy and quantification and financials, not the natural language of the CX professionals. And have we done ourselves a disservice by doing that? Have we wrapped it around a language which undermines the confidence of leadership that this really should be about dollars and cents.
Don
I know exactly what you’re talking about and no, the answer is no. We haven’t done ourselves a disservice. Let me give you a quantified way to talk about it, okay?
On the whole, my goal as a business is to create the most possible value from every customer. Alright? I can’t create more value than I can create from the customers I’ve got available or access to, period. So I want to maximize the value that every customer creates. Great. Now, at what point, okay, is that going to happen? My guess is, this is a hypothesis, but I’m…
I think it’s reasonable to assume that the customer is likely to create the most value for you when he or she thinks that you are creating the most value for them. And when does that happen?
When they trust you to act in their interest. That’s when you’re creating the most value for me as a customer. If I know that whatever, if I make a mistake, you’ll tell me and help me, you know, recover the funds. What if, if I am not buying the right product for myself, you’ll tell me, you know, then I can trust you. I want to do more business with you, not less. And that’s when I create the most value for you. So fundamentally, the financial objective of a business, which is to maximize the value every customer creates, is directly aligned with what we would call the reciprocity principle. I treat the customer the way I’d want to be treated if I were the customer. If that were the motto at every business, every business would be competitively strong. They would have customers that were loyal.
Richard
What’s holding companies back from that? Because you could look at a hundred mission statements and they’d all say the same thing, right? And they would all tell you, but we know in practice that’s not what’s being executed. So something’s disconnected between the ideal and the reality.
Don
Yeah, yeah.
No, no, it’s short-term thinking. Short -term thinking. Because fundamentally, we’ve got the accounting systems that all measure the past. So we’ve set up our remuneration systems based on past metrics that are exact and that can be designed to sort of help appreciate the future.
What happens in business is that very few business executives who report to shareholders would pass the marshmallow test. You know that marshmallow test that kids take? You know, the marshmallow test. You put a kid down with a marshmallow and say, now listen, son, you know, in five minutes, I’m going to come back with another marshmallow if this one is still there. But if you’ve eaten it, then you don’t get another one. And then they go away and they just wait for five.
Executives would flunk that test every time. They always flunk the marshmallow test. That’s the problem. There was a survey in the 2010 timeframe. They asked CFOs this question, would you give up real shareholder value to make this quarter’s numbers? You know what percentage said they would? 76%. That’s the marshmallow test.
Richard
So, you know, in defense of the marshmallow failures all over the world, this strikes me as a failure of governance, isn’t it? At the end of the day, we have a system, and the system is that the owners of the business are represented in public companies by boards of directors, and a lot of time and effort is spent coming up with governance structures and reward structures for leaderships of companies.
Don
Yes.
Richard
And if the behavior of leaders is suboptimal for the long-term success of the shareholders, then we’re not getting our governance structures correct. We’re failing at the board level.
Don
Yeah, yeah, yeah. Well, I think there’s good evidence that owner -managed companies are much more likely to take the long-term view because it’s the owner’s money involved. Jeff Bezos, for instance, at Amazon was legendary for disappointing investors who’d wanted a quick hit. But who was right? He was right, right?
The problem that most business people have is not a problem in their psyche or their intelligence. It’s a problem with the alignment of the metrics we use to measure success and reward performance, okay, with the long-term nature of the issue, okay? It’s that misalignment. It’s an alignment problem almost.
Richard
And I think what’s, I don’t dispute anything you’re saying. I think that’s been true for a long time. But I think that, I don’t think we can blame the stock market for that. The stock market is very willing, very willing to make long term bets that aren’t founded on short-term financials. In fact, you could argue that it gets very carried away with itself making long-term bets that aren’t linked to short-term financials. So there’s no shortage of capital ready to pursue.
Don
Yes.
Richard
Uncertain future returns. And if you look at private equity, which has become an increasingly large part of the financial ecosystem, private equity companies are, okay, maybe they’re only looking at a five -year, six -year horizon, but nevertheless, they have a very clear imperative to focus on that kind of multi-year return. They certainly want to put in place programs to achieve that, and they’ve got a very strong value creation focus. So it seems like the infrastructure is there to take place. Is it that we simply haven’t evolved the right approaches to measurement governance, thinking about how we control corporations, how we measure companies? I mean, because there’s a will, isn’t there? I mean, it’s, you know, and you see this behavior by executives, which is short term.
Is it simply that boards lack the tools to do the job?
Don
That’s a good question. I don’t know. My feeling is that companies need to have cultures that are explicitly designed around this long-term view of their business. You want your mission statement to be embraced by everyone, but you want that mission statement to transcend the business model so that you’re always on the lookout for the benefit that you can give to customers for money. Right?
Really good example is Blockbuster Video. Blockbuster Video was a fantastic company, very, very successful. And their corporate mission was to be the very best video rental store you could have anywhere. And they were, okay, until streaming came along. What if their mission that everybody bought into, what if their mission had been, we want to deliver videos to consumers as quickly and efficiently and inexpensively as possible? That’s our mission.
Then they would have been Netflix. There would be no Netflix. It’d be Blockbuster streaming service. So you want to be sure that people agree on what the direction of success is. If the direction of success is building earnings for the revenue report for the quarterly or annual meeting, then that’s a short term, very specific, but not really broadly useful mission, right? A mission statement that has the benefit of the customers, the benefit that you’re selling to customers, the thing that you’re doing to create value in the world. If that’s your mission, then that’s much more powerful and you can unite people around the long-term view, I think.
My feeling is that companies need to have cultures that are explicitly designed around this long-term view of their business. You want your mission statement to be embraced by everyone, but you want that mission statement to transcend the business model so that you’re always on the lookout for the benefit that you can give to customers for money.
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Richard
And that’s going to survive changes in technology because if you’re driving towards an intrinsic value for people, right, then that’s not going to fundamentally change, right, at the end of the day. The mechanisms may change, but the mission survives. And so you’ve got that context you can keep bringing everything you’re doing back to. And that gives people a sort of North Star. So…
Don
Yeah.
Richard
You’re suggesting in some ways a lot of businesses lack that sense of purpose that’s linked to creating value for customers.
Don
to the customer, link to the customer, value creating, value for the customer. That’s the thing here. I sometimes in my lectures, I say, you know, what you want, you want to be Apple, not AOL. Okay. AOL was maniacally focused on the, the, the revenue stream that came from the subscriptions. And even if, you know, they’re legendary for having tried to prevent people from quitting, signing up for the wrong plan. And they’ve, you know, but Apple is legendary for always trying to be on the customer’s side, okay? Helping the customer navigate the digital world in a faster, easier manner. And, you know, they even once had their stock downgraded once by…
Richard
Yeah.
Don
some stock analysts when they were bringing out the, I forget what the chip was, it was a chip that could also deal with Microsoft. Anyway, and it was late. So the chip was late and analysts downgraded it. But one analyst upgraded it because they said they had called Apple and said, we want that Microsoft chip. And they said, well, it’s late if you wait for another, quarter or maybe two quarters, we can sell to you and you’ll save your, you know, know, and they said, well, what kind of company would do that? Turn away a $5 ,000 sale simply because it was the right thing to do. It’s a company that’s going to be around for a long time. That’s what kind of company.
Richard
I think that it’s interesting what you say, but we could have had this conversation, probably did have this conversation, 10 years ago or 15 years ago. So I guess my question is, what’s changed, if anything? So when you look back now, we all have the benefit of being able to see a long enough arc of history to see how things are changing.
Don
Yeah, yeah.
Richard
When you look at today’s environment and the way people are thinking about customers and creating value for customers, what’s new under the sun from your perspective? If anything?
Don
yeah, I think a lot is new. And I think there’s no question about the fact that the quality of the average customer experience across all categories is fantastically better today than it was before, than it ever has been. Things are more convenient, they’re faster, they’re easier, they’re more accurate, they’re functional better. And the reason surveys have shown customer satisfaction staying kind of steady and not rising substantially, I think is because it’s based on expectations. The better the customer experience is, the better I expect it tomorrow and the next day. But the fact is the customer experience is much better today than it was when we were kids. It’s much better.
Richard
And it might just be that the high water mark keeps getting reset by leaders, right? So in some ways, you know, Amazon has changed everyone’s perspective about what logistics means, you know, and it wasn’t that long ago when you order a product and, you know, it said, we’ll ship within two weeks. And people thought, okay, two weeks is pretty normal, right? And now the idea that you get near instantaneous supply chain fulfillment.
Don
Yes, right.
Richard
Has become extremely established and people apply that standard universally. They expect that.
Don
Yeah, right. Yeah. And when we, when Martha and I wrote our first book, The One One Future, one of the chapters was all about home delivery. It was called, take products to customers, not customers to product. And we predicted in 1993, we predicted there would be a tremendous surge in home deliveries, home deliveries within hours, not even days. And people thought that was nuts, but it’s happening.
And why? Because the better the technology has become, the more demand there is for that kind of service. And it’s a, it’s, you know, it’s today we think of it as routine. You know, I think whether or not drone, a drone will ever bring my TV to my apartment. Okay. You know, who knows? But the truth is,
It’s getting easier and easier, faster and faster, and more and more frictionless for me to get the things I want to have a good life as a consumer.
Richard
And you talk about expectations, and I think this is the most important point here, which is everything is relative to expectations. We have, as buyers, whether it’s in business to business or business to consumer, we calibrate everything relative to expectations. What we thought was good or good enough has changed. And so if the bar keeps raising and getting better, it benefits collectively everyone in society. We all get much better.
Don
Yes.
Richard
Does it also suggest, though, that we’ve become much more fine tolerances now, right? As businesses, we have to run companies to a level of efficiency which we’d have considered sort of unheard of 20 years ago, right? In terms of the level of execution. And I think of companies that are in atoms, not bits businesses, you know, manufacturers who have to execute at extremely high levels of performance. And one of the things that we learned during the COVID period was the disruptions to supply chain hit very hard because of those same tolerances. We’ve reduced our margin for error significantly. And so companies, the software businesses have an innate advantage. They’re very flexible if you have virtual products.
Don
Right?
Right. Yeah, that’s a good point.
Richar
But meanwhile, in the world of atoms, you’ve still got to move things around the world. You’ve still got to build supply chain. It’s a more challenging time than it was.
Don
Yeah, yeah, yeah, there’s no Moore’s law for bulldozers. Doesn’t work, right? Yeah.
Richard
Right? Right, exactly. Or airlines, or anything where physics gets involved, it becomes much more difficult. I was… Sorry, go ahead, Don.
Don
Yeah. Yeah. Yeah. But it. Well, I was going to say, yes, it’s much more challenging, but businesses are still doing it all the time. The whole theory of mass customization, the digitized production of physical products, I tell my students mass customization is to customization what the DVD is to the vinyl record, right? Technically, I could customize something much more accurately, but the DVD or the CD is so finely cut in bits and bytes that it’s not even detectable to the human ear. And I think over time, manufacturing is going to be more and more like the CD player as opposed to the vinyl record, you know.
Richard
Interesting. Probably the industry that’s going to have to go through the biggest revolution because the products are getting much more complicated. You know, it was interesting. I was reading about the increase in costs of insurance right now. So the insurance industry is experiencing very high increase in cost. And a lot of it’s because your average motor car is no longer a simple product. It now has thousands of semiconductors involved, right, and is now a software product. And you could argue that Tesla, in some ways, has internalized this much faster than just about any other manufacturer. They understand they’re a software business. You could even make the case that BYD, the Chinese company that’s one of the world’s largest manufacturers of electric cars, which comes again from a software industry perspective, understands that cars are really platforms for software.
I tell my students mass customization is to customization what the DVD is to the vinyl record, right? Technically, I could customize something much more accurately, but the DVD or the CD is so finely cut in bits and bytes that it’s not even detectable to the human ear. And I think over time, manufacturing is going to be more and more like the CD player as opposed to the vinyl record, you know.
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Don
Yes, I agree. Yes.
Richard
And so we now have much more complex products. We now have many more dimensions of customer experience. And we now have a less transactional view of customers. So all of these things point to a different type of thinking in management. And we’re just struggling to catch up with that as the world just moved faster in our ability to manage it.
Don
Yeah. Yeah. No, I couldn’t agree more. And software as a service is just the leading edge of what’s going to… pretty soon every product is going to be connected to the Internet, connected to the manufacturer, and they’re going to help you adjust the toaster the right way. Or the refrigerator is going to remind you that you’re low on milk. Things like that are going to happen. And products themselves, physical products are going to be more and more connected and intelligent and they will anticipate your needs as a customer. So I see that as a pretty bright future. I think for businesses, it means that every business is going to be in what they call the success management business soon.
Right? You know, when, when, when, when a, when a business used to install a, a big customer database, they had to go to Oracle or somebody like that and take six months or a year. And you have to spend thousands, if not millions of dollars on your own servers. And now you can go to Salesforce or somebody else and pay a few thousand dollars. And have the software already because they’re running the software and they can see how you’re using the software. Well, that’s the way all companies are going to be in the future with all these, you know, even consumer products, you know, I’ll get a message from somebody saying, you know, if you took a little more time with the TV remote, you could do it this way or something like that, but they’ll coach you.
And I think…
As the world becomes like that, business executives have to get used to the idea that they are going to be held accountable for their customers’ happiness.
If I’m not happy and it’s because I’m not using your product, I’m going to want to know why didn’t you tell me?
Richard
Yeah, so the mission of the company to some extent evolves from this legacy concept of, you know, we’re doing okay, we’re meeting the basic standards, we’re creating satisfaction because at the end of the day products, they work reliably. It’s almost a sort of industrial revolution, well, post-second world war mentality of, you know, we’re doing well enough,
Don
Yeah. Yeah.
Richard
to an environment where at the end of the day, we have to create success, perhaps is the right term for business to business, delight maybe in consumer context, but the bar just gets raised much higher now for companies. And maybe that’s the whole point. At the end of the day, we started talking about what’s changed over the years, and you said expectations.
Don
Yes.
Richard
Maybe the way to internalize that for people who are thinking about running their companies is resetting the bar, right? This is the time to be rethinking what good enough is going to be, what success is going to look like. And it’s not the time to be backing off that, it’s the time to actually be stretching expectations and reaching much further than companies have historically done.
Don
And let me just make one more suggestion. I agree with you 100 % on what you just said, but I would argue that a lot of companies haven’t yet really glommed on to the idea that the actual mechanics of the marketing and selling process are changed radically by interaction with individual customers. You know, it’s not that I make a product, I try to find as many customers as I can to buy it anymore.
It is, I interact with you, you tell me what you want and I make it for you that way. I do it that way. I change how I treat you, but not him, not him, but you. I’m changing the way I treat you. Now, the more you interact and tell me about how I can treat you differently and the more I’m able to do that, the more loyal you’re going to be to me. Because even if my competitor could do the same, you know, customization that I’m doing,
You have to first teach him what you’ve taught me. Right? So you’re locked in almost. The more context that you can build in an individual customer’s relationship, the more loyal that customer is going to be to you in the long term. And I can’t say that any stronger. It’s a very, very different world than it was in the world of advertising where you make a product, and you advertise it to everybody and you see how many people buy it. And now a business has to be intimately involved in the customer’s own usage and consumption of the product. And…
When I was in the advertising business, long before interactivity, there was a truth that we knew. The fastest way to kill a bad product is with great advertising. Because as soon as everybody tries it, it’ll be dead. Right? But that’s not the way advertising works anymore. That’s not the way marketing works anymore. We’re intimately involved in our customers’ consumption process.
Richard
Ha ha ha.
Don
Okay, we want that process to be successful, to make them happy, to satisfy their need, whatever need that was.
Richard
Which also means we’ve got to be a lot more thoughtful about who we sell our products to. Because at the end of the day, we’re not going to build successful companies if we don’t understand the likelihood that that customer is going to be delighted before we just sell it. Indiscriminate selling of a product is not going to create lifetime customers. It’s simply going to create very short term wins. But I think that’s a…
Don
Very different world.
Exactly, exactly.
And a short-term business.
Richard
Bigger lesson for the marketing community that we probably have time for today. Don, as ever, this fascinating conversation, we just head off and it goes in really interesting directions. No, I don’t think so. I think it’s exactly the right topic to be talking about. I just have to point out that, because you mentioned earlier, the right behind you in sequence of chronological sequence is your collection of books there. So…
Don
Hope I didn’t take you on too wild a ride, but thank you.
Richard
For those on video.
Don
This is the first book we wrote, Martha and I, One to One Future, and this is the most recent one, which is the fourth edition of our textbook. And these books up here are in foreign languages. Our books have been published in 35 countries and 17 languages, and it’s been a real honor too.
Richard
Well, it’s a testimony to your endurance, but also your ability to stay original and contemporary as things have gone by, right? And it takes a lot of effort to create a book, but it also takes even more effort to create the thought processes and stay on top of it. And congratulations for what’s been a remarkable contribution over time. And thanks again for taking the time to join us today and share your observations.
Don
Thank you, Richard.
ABOUT THE CX ICONOCLASTS
Don Peppers is recognized as a global authority on marketing and business competition. Currently he is Founder, Peppers & Rogers Group, and CX Speakers. Perhaps surprisingly, he earned a B.S. in Astronautical Engineering from the U.S. Air Force Academy, and started his career there, before moving on to business and and academic life. His first book, The One to One Future, written with Martha Rogers, Ph.D., in 1993, is widely credited with having launched the CRM revolution. BusinessWeek called their book the “bible of the new marketing,” Tom Peters named it his choice for “book of the year,” and Inc. Magazine’s editor-in-chief called it “one of the two or three most important business books ever written.”Altogether, Don has authored or co-authored a legacy of international business best-sellers that have collectively sold over a million copies in 18 languages.
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