WE HAVE FOLLOWED WITH great interest Ray Schultz’s battle with Don Peppers and Martha Rogers (Direct Hit, Sept. 1 and Commentary, Oct. 1). The source of the conflict is Ray’s review of Peppers and Rogers’ new book,

We have followed with great interest Ray Schultz’s battle with Don Peppers and Martha Rogers. The source of the conflict is Ray’s review of Peppers’ and Rogers’ new book, “Return on Customer (The Revolutionary New Way to Maximize the Value of Your Business).”

In “The CRM Cynic: Don and Martha ROC and Roll,” The CRM Loop (July 28, 2005), Ray asserts that Return on Customer (“ROC”) is nothing more than “a repackaging of lifetime value, ROI, and other tools that Lester Wunderman was using when Don and Martha were listening to the Osmonds.” Not surprisingly, Don and Martha disagree. In “Peppers and Rogers Answer the CRM Cynic” (The CRM Loop, Sept. 22, 2005), they claim that:

“Return on Customer…is based not just on LTV, but also on changes in LTV. How you treat a customer or prospective customer today often will change that customer’s LTV, and the amount of this change is real value that you are actually creating (or destroying) today, whether you measure it or not.

“However, even though some sophisticated companies (like Royal Bank of Canada) have begun modeling LTV changes to help evaluate their actions, the plain fact is that no one — not even the shrewdest direct marketer — has yet written anything about tracking LTV change as an aid to making decisions. We’ve been searching the academic and trade literature for two years and we haven’t found a single example. That’s why we maintain that Return on Customer is in fact that rarest of things in business — a truly new idea.”

We are appalled by Don and Martha’s chutzpah. Do they not track online content from sites such as Business Intelligence Network (www.b-eye-network.com), which provides the current thinking from experts such as Bill Inmon, the acknowledged father of data warehousing? If they did, they would have seen Wheaton Group’s April 25, 2005 article, “CRM Growth Simulator: Extending the Data Warehouse.” In the article, Wheaton Group not only advocated tracking LTV change as an aid to making decisions, but described in detail the mechanics of doing so. For example:

“A logical extension… is the construction of a CRM Growth Simulator from the atomic-level data within your warehouse, in order to identify, monitor and take advantage of the dynamics that drive the fortunes of your business. A CRM Growth Simulator works in tandem with the data warehouse to inform both strategy and tactics… Hence, the warehouse functions as a window into previous reality, and the CRM Growth Simulator as a view to the likely future state of things.

“A CRM Growth Simulator’s projections allow the calculation of total estimated ongoing profitability, with a metric known as Enterprise-Wide Long Term Value (“E-LTV”). E-LTV is the sum of estimated long term value across the entire customer base; that is, the discounted sum of all future profit flows. It represents the net present value of the firm…” The Wheaton Group article continues with a section titled, “An Iterative Tool to Inform Both Strategy and Tactics,” and argues that, “A CRM Growth Simulator allows the investigation of E-LTV in an environment that transcends the limitations of past marketing decisions.” The article ends by stating that a CRM Growth Simulator “allows you to take full advantage of the data to inform both your strategy and your tactics. With a robust CRM Growth Simulator, you can drive significant increases in revenue and profit, and a corresponding dramatic increase in E-LTV.”

Along the way, the article even provides examples of “what-if analyses [that] can be processed to answer important strategic and tactical questions such as” [emphasis ours]: *Has E-LTV been increasing, decreasing or staying roughly the same in recent years?

*What would happen if you could lower your variable product or service cost by 1%?

*Would the short-term reduction in profitability from a more aggressive new customer acquisition strategy pay for itself with incremental long-run profits? Specifically, what if your acceptable acquisition cost were increased by 5%, 10% or even 15%?

What can be done to turn things around in the upcoming year? And, from a longer-term perspective, will it adversely affect E-LTV?

How long will a positive event “echo” in your business (i.e., increase E-LTV) or a negative development depress future results (i.e., decrease E-LTV)?

What can your CEO reasonably promise to Wall Street analysts? And, what has to be done to back-up what has already been said (and which perhaps should not have been)?

*How does E-LTV compare with your firm’s market value as determined by the combined price of all shares currently outstanding?

*How does E-LTV compare with an offer on the table to purchase your company?

We truly were shocked by the naiveté of Peppers’ and Rogers’ claim that “no one — not even the shrewdest direct marketer — has yet written anything about tracking LTV change as an aid to making decisions.” We chalked it up to today’s Internet-focused research methodologies. After all, Peppers and Rogers entered the data-driven marketing profession later on in their careers. Therefore, it is understandable that they would have gaps in their awareness of the rich body of pre-Google literature. So, while Ray Schultz mentions Lester Wunderman, we enthusiastically nominate Bob Kestnbaum’s contributions, which we witnessed while working for Bob in the mid-1980’s.

It is a travesty to insinuate that Bob Kestnbaum, a DMA Hall of Fame member, lacked the shrewdness or insight to understand the ramifications of LTV in modern business. Sadly, Bob Kestnbaum passed away several years ago, so he is unable to provide historical perspective on the claims of Peppers and Rogers. It is left to those of us who worked with Bob to vouch for his groundbreaking work as far back as twenty and thirty years ago.

We offer as one piece of evidence Bob’s January 1984 DMA Manual Release, “Growth Strategies for Direct Marketers.” This monograph outlined four broad strategies as levers for growing a business, including altering customer circulation. Bob explicitly refers to changes in LTV as the operational means of assessing progress. The 1984 paper even noted that, “Computer modeling appears to offer the best way to investigate strategy variations and to select and balance strategies in such as way as to optimize the financial performance of the organization.”

We assume that the DMA’s printed manual is now out-of-print and not “Googable.” However, does that excuse Peppers’ and Rogers’ ignorance in light of their bold claim of invention?

Bob tended to practice what he preached rather than service marking it. Therefore, his ideas were not just pipedreams. As young Kestnbaum consultants 20 years ago, we had hands-on involvement with numerous LTV analyses within the context of important applications such as: *Advising our clients about whether to purchase direct marketing companies, and how much to pay for them; *Working with Kraft Foods to start-up and then manage the Gevalia continuity business, including the frequent running of “what-if scenarios” to inform long and short-term planning.

A foundational deliverable from the old Kestnbaum days was bottom-up business simulations. These allowed clients to test alterations in marketing strategies pertaining to both prospects and customers. The principal function behind each simulation was to translate changes in tactical marketing efforts into multi-year P&L statements. These P&L’s, in turn, summarized naturally as the business’s cumulative LTV. Scenario-testing revealed changes to overall LTV, and clarified the short and long term impacts of marketing decisions.

We thought again of Peppers’ and Rogers’ claim that, “We’ve been searching the academic and trade literature for two years and we haven’t found a single example [of anyone having written anything about tracking LTV change as an aid to making decisions].” Could it be that Bob’s LTV contributions have been lost to the profession?

We entered the words “Kestnbaum” and “LTV” into Google and were relieved to find that the very first link is to the seventh chapter of, “Quantitative Approaches for Profit Maximization in Direct Marketing” by Hiek van der Scheer. Contained within the chapter are two citations to a statement that Bob made in 1992.

The document is van der Scheer’s thesis reflecting four years of research at The University of Groningen in the Netherlands. Although we are unfamiliar with the Dutch language, it appears that the thesis was written in 1998. This, of course, is many years prior to Peppers’ and Rogers’ “invention.” Mr. van der Scheer makes an observation that is particularly relevant to the question of whether Return on Customer is a truly new idea:

“As Hoekstra and Huzingh (1996) argue, the traditional way of employing the LTV is too narrow within direct marketing. With regard to the use of the LTV, it should be employed – apart from customer acquisition – for relationship building. That is, the LTV should be used to choose media for communication with customers, develop loyalty programs and assess the strength of the relationship. Fully exploiting the possibilities of the LTV for relationship building has several consequences for the other two aspects of the traditional way of employing LTV…

“Thus, in order to employ the LTV to its fullest extent, it should be used for decisions regarding creating, developing and maintaining relationships. The ultimate goal should be an individual-based normative direct marketing strategy. The strategy should depend on past purchase behavior and on forward-looking data.”

One would think that van der Scheer’s thesis and the 1996 work of Hoekstra and Huzingh would merit scrutiny prior to Peppers’ and Rogers’ claim. Could these works also include more citations of acknowledged and attributed contributions by others to the concept of managing business dynamics using customer-centered long-term financial metrics? Is the fact that this readily available link was not found by Peppers and Rogers a self-indictment of their ignorance that the terms “Kestnbaum” and “LTV” go together?

Having reviewed the evidence, we agree with Ray Schultz’s contention that Return on Customer (ROC) is nothing “but a repackaging of lifetime value, ROI, and other tools that Lester Wunderman was using when Don and Martha were listening to the Osmonds.” We also side with Ray in describing Peppers and Rogers as “one-to-one hustlers.”

Jim Wheaton and Leo Sterk are Principals at Wheaton Group (www.wheatongroup.com), a data mining and decision sciences practice whose primary office is in Chicago. Jim is also a Co-Founder. For additional information, please contact Jim’s home office number at 919-969-8859, or [email protected]