or years, companies have been pursuing long-term customers, lavishing them with marketing dollars in the form of loyalty programs, direct-mail campaigns, and big-budget corporate events. Such companies tend to assume loyal customers are also profitable customers who spend more than new customers, generate more word of mouth, and cost less to manage. This assumption is false.

But often, corporate marketers heavily weight their event strategies toward these long-term customers to reward them, and work to retain them and incrementally grow their business. Their thinking: Long-term customers are eminently valuable to our brand, and our bottom line. So why not allocate our event dollars toward this known-commodity cohort?

The truth is, loyalty does not correlate with profitability. Many recent studies across a variety of industries have measured customer profitability, and have found that loyal customers are not necessarily profitable, and vice versa.

There are several explanations for this finding. Long-term customers often expect lower prices in return for their loyalty, yielding lower profits than short-term customers. Loyal customers can also be more demanding and require significant management resources.

Additional studies have also shattered the myth that loyal customers help to market a company’s products. The research did not find a strong correlation between customer longevity and word-of-mouth marketing.

All of this research indicates that the practice of chasing and focusing on retaining loyal customers is the wrong marketing strategy. What is the right strategy? Chasing profitable customers.

LOOK FORWARD, NOT BACKWARD

To maximize your events’ ROI, you want to focus your efforts on those customers worth retaining, and those worth acquiring or winning back (and at what cost) — all while understanding that some customers should be let go.

To rethink the approach to your events’ invitation lists, work with your finance or marketing-analytics colleagues to identify the most profitable customers. Then apply that customer data to help you improve your event program’s focus on cultivating more profits from those valuable buyers.

Of course these can be complex metrics to uncover. One mistake that companies make when computing profitability at the customer level is to assume that customers who have been profitable in the past will be profitable in the future. They then allocate a lot of resources, including event dollars, to that group of customers.

This strategy is faulty because it looks backward instead of forward. The customers that were profitable in the past are not necessarily the customers that are going to be profitable in the future due to changes in their businesses, purchasing lifecycles, shifts in product preferences, and so on.

To determine the right — meaning most profitable — customers to involve in your event programs, it’s essential to accurately estimate the future profit potential of your customers. Some of my doctoral students and I have developed a new, forward-looking way to calculate Customer Lifetime Value (CLV). This equation estimates the value of each and every customer as follows: CLV = probability that a customer will buy in the future (x) average monthly gross contribution (–) marketing and acquisition costs.

CLV AT WORK

When we take a group of customers and look at their distribution, from the highest CLV to the lowest, we find that the CLV decreases exponentially. The lowest 30 to 40 percent of customers actually have a negative CLV — the company, in many cases, actually loses money by doing business with them. For example, the company may be discounting its products below a profitable level in order to retain these low-CLV clients. Or, in the context of corporate events, perhaps they are wasting too large a percentage of their event-marketing dollars to host these drags to their bottom line.

The middle 40 percent to 50 percent of customers generally tend to break even. And the top 20 percent of customers with the highest CLV actually provide more than 100 percent of a company’s profit, when you consider the fact that they offset the customers who generate negative profits. For example, we have discovered that in the banking industry, the top 20 percent of customers actually provide 150 percent of the profit, because the bottom 30 percent of customers pulls the profit down by 50 percent. The middle group, at break-even status, does not contribute to overall profit or loss.

This new profitability-based metric represents a somewhat revolutionary discovery for most companies. It should inspire you to rethink your customer management, and therefore your company’s events, targeting your most profitable customers instead of your most loyal ones, which in most organizations tend to be viewed as the VIPs. Companies like Sprint Nextel and Com-cast Corp., for example, have used this metric and decided to “fire” many of their nonprofitable customers. Those companies took the bold move of saying, “If I keep those customers, I have to charge my other customers more money to offset the loss. Why should I make my good customers subsidize unprofitable customers?”

The same goes for events: Why should you invest your resources to host those customers who actually cost your company money? Instead, determine who your most profitable customers are, and focus your event strategies on retaining them, growing their business with you, and learning more about them.

CLV-BASED EVENT STRATEGIES

When you know the lifetime value of your customers, you can use this information to create event-marketing strategies that target the right customers, through the right mix of communication channels, at the right times. The following five strategies illustrate some ways in which CLV can guide your marketing decisions and help your event program contribute to maximizing customer profitability.

1. Reset benchmarks. Say you typically invite 10,000 customers to your annual user event. Before reaching out to that many people again, weigh each customer’s future revenue and profitability potential against the expense of inviting and hosting them at the event. You may find that you have been inviting 10,000 customers when you should be targeting your most profitable 2,000 customers instead.

2. Treat the right customers. Do you often hold VIP events? They’re a great opportunity for peer-to-peer knowledge sharing and special treatment, all under your brand auspices. But who is really a VIP? As previously mentioned, for many companies the VIPs are assumed to be long-term customers and loyal event attendees. Based on CLV, are those VIPs really VIPs when it comes to profit?

Think back to our earlier discussion of CLV: Your top 20 percent of customers are probably providing more than 100 percent of your company’s profits. These are the customers you should be inviting to your VIP events and offering special opportunities to interact with you in unique ways. When your event program’s success hinges on positive ROI, designing events to support the needs of these important customers will pay dividends not only for your company’s bottom line, but for your event program’s success as well.

3. Optimally allocate resources. After you determine the CLV for each of your customers, you can evaluate the most cost-effective way to communicate with them. In other words, be sure that the cost of contacting a customer over time does not surpass the expected revenue from that customer. Naturally, this means that your most profitable customers should gain entrée to your higher touch — and maybe higher cost — face-to-face events which offer a richer mode of communication. Others, such as customers who are not currently contributing to company profits or those who bring you slim profit margins, may be better managed through e-mail streams or online events.

4. Pitch the right product to the right customer at the right time. The ideal contact strategy for customers is to first choose the “right” customer based on his or her CLV, then predict what product the customer will buy next based on your company’s product mix and your knowledge of the customer’s business cycle, and finally predict when the customer is likely to buy this product.

At a corporate event, this knowledge could enable the host to customize session tracks to specific customers, guide your staff to initiate one-on-one conversations with customers based on specific products you expect to interest them next, and cross-sell customers on additional products and services to which you can introduce them at your event.

Exploring cross-sell opportunities can also help you identify customers who may not have been on your original event-invitation list. Say a customer with marginal profitability, based on your purchase modeling, could move into a more-profitable level if he purchases a particular product or service from you. If that customer has, in the past, responded well to high-touch event strategies, you might consider inviting him to your next event to help move him toward that purchase.

5. Prevent customer attrition. An event, during which at-risk customers have a forum to address any discontent and you have an opportunity to rebuild eroding goodwill, is an optimal opportunity to reduce attrition risk — for the right customers. A customer with a negative CLV is clearly not worth the event-marketing dollars required to prevent defection. For customers with a positive CLV, the cost of intervention, including your event-marketing spend, should not exceed the CLV.

For your profitable but at-risk customers, consider an event agenda that includes ample time for them to have direct dialogue with company executives from multiple functional areas regarding their concerns — and allow your executives ample time to respond. You can aggregate insight about themes arising from customer complaints, report them back to your colleagues, and use them to craft future event-content strategies. Customers will appreciate your openness during difficult face-to-face conversations, and will appreciate seeing you take action in the form of future event content based on their concerns. What better way to reduce attrition?

So look for ways to use events to help your company retain and grow those customers who are truly profitable, and avoid “overserving” those customers who may have longstanding relationships with your company but are no longer contributing to your bottom line. It will help you equip your event-marketing program with a powerful story about events’ role in cultivating profitable customers while improving your own program’s ROI.e