David Reibstein is professor of marketing at the University of Pennsylvania's Wharton School, and a managing partner at Marketing NPV. BtoB recently asked him about trends in customer lifetime value as a tool to inform marketing decisions.
BtoB:Calculating customer lifetime value seems almost magical. How can you plot a customer's potential for future sales?
Reibstein: One way is determining the share you have of a customer's purchases of the product you're selling. It's alled share of requirements, also known as share of wallet. Simply, it's the percentage of a customer's purchases of a particular product that they place with you. It's fairly new in the b2b world, but perhaps more important here than in b-to-c.
Reibstein: If I have a high share of requirements, I know that the best way for me to grow is to get new customers. If I have a low share of requirements, I want to focus instead on getting a larger share of my existing customer base. That's a significantly different way of looking at allocating marketing resources. It's more important for b2b companies because many don't even know who their customers are.
BtoB: Is that because many b2b companies rely on resellers, and thereby can't access their final customers?
Reibstein: Yes. Companies somehow have to go to the ultimate customer and ask the question, "How much of this product do you buy?" There's still tons of opportunity to be had here. That's why it's such an exciting area.
BtoB: What's wrong with simply looking at your "best" customers, the ones who give you lots of money?
Reibstein: Let's say you have two customers, one of whom gives you $2 million in sales and the other, $1 million. I might think the first is more valuable to me, until I calculate that his total purchases for that product is exactly $2 million, while the second spends $20 million overall on the item from various suppliers. Since I have a low share of requirements with the second customer, there is a huge upside here and I should dive deeper to sell more to him.