Marketing is maths and always has been. Ever since the first shopkeeper realised that a sign on the side of his building would drive more sales than it cost to erect then the mathematics of promotion and consumption have been in place. The sums have become more complicated, with search marketing now more akin to a science than an art, but the core cost/benefit calculation remains the same.
argue that its more than just maths, but creativity is simply an important variable in the marketing equation. A great storyline, film or image may increase the effectiveness of an advertising treatment, but if it costs more than it generates, then it's not an effective creative approach.
For companies marketing a product, one number which matters a great deal is customer lifetime value. That is the total discounted value that a customer will deliver in sales terms over their lifetime with a company. Customer lifetime value determines how much you can spend acquiring and retaining customers. Whether you can afford to give a customer a free Xbox when they sign up for a bank account depends on your knowledge of their predicted customer lifetime value.
Understanding customer lifetime value has brought juicy offers to consumers because a marketer can amortise an upfront marketing cost over the lifecycle of a customer. Just as importantly, it has made firms more profitable, leading (in general) to better services for consumers.
Powerful though it is, customer lifetime value has its shortcomings.
Most importantly, it fails to account for the economic value of an essential human behaviour -- word-of-mouth. The fact that Jenny may (indirectly) persuade her friends to buy that phone or get that car, but that Bob's friends rarely pay attention to his choices.
We believe it is time to replace customer lifetime value with the idea of customer network lifetime value (CNLV). This is the notion that a customer's value to a company is the discounted value of their future purchases plus the discounted value of the referrals they drive to your business.
To use me as an example, in technology, where I have encouraged my friends to switch phone networks or handsets, my CNLV far exceeds my CLV. But on cars, where my friends (to their credit) ignore my purchasing habits, my CNLV and CLV are the same.
It matters because companies make important judgements based on how valuable they think we are to them. If they see Jenny and under-estimate her value (because they don't account for her power to refer) they will misallocate marketing resources.
Most powerfully, they discover that, for advocates, the economic value of referrals could be substantially greater than their actual direct spend with a company. Effectively, a "low value" customer who was a networked advocate brought more economic value to the firm than a "big spender".
To understand why networked advocates may be so much more powerful, take an extreme example. If you are a designer of fashion t-shirts, you want Lady Gaga to buy one of your designs. She may only ever buy one of them -- giving her a low CLV -- but the impact of her purchase on your subsequent sales to her fans could be enormous, giving her a massive CNLV.
This referral factor is not a new phenomenon. Some markets have recognised the power of referral for years, most notably pharmaceuticals. Because of the complex nature of the product and regulatory restrictions around advertising, pharma companies have long used referral as a powerful marketing tool, and today spend up to 20 percent of their marketing on so-called "influence marketing".
Influential doctors speak at the right conferences, write the big hitting academic papers and are sought out by other doctors for their advice. Therefore, if a pharma company can get their products in front of that super-doctor then they can access their customer network lifetime value, multiplying the value of their marketing efforts many-fold.
The power of influence is also not unknown in other marketing sectors. Fashion, drink and technology brands have long known that getting their products into the hands of the right celebrity or journalist is a quick route to mass market acceptance. Tech firms like Dropbox, financial services firms like American Express and telcos like BT regularly attempt to plug into a basic referral mechanic by providing introduction bonuses to customers who bring others with them.
Now, however, the science of influence is -- as with so many other things -- being democratised by the internet. Interaction on social networks provides brands with a map of influence at a macro level. Instead of relying on a handful of hard-to-reach celebrities or journalists for advocacy, brands can identify and activate their truly influential fans, ordinary people who have built strong reputations in certain subjects, a group we call the "magic middle".
New social influence marketing firms like mine and Klout, are providing brands with these influence maps, letting them identify this magic middle of influencers. If you can get your product into the hand of a few thousand magic middle influencers in an honest way, you can ensure an authentic conversation amongst their networks, driving awareness and, more importantly, referral, advocacy and purchase.
Customer network value is only going to become more important, driven by a renewed ability to identify and leverage influence on the web and by the increasing cost and diminishing return of traditional advertising in a competitive advertising market. This could have a profound impact on the way that brands spend their marketing dollars.