If Customers Are Now Assets, Are Employees Still Costs? LEARN HOW TO CALCULATE EMPLOYEE LIFETIME VALUE everal years ago, marketers began to consider customers as business assets, recognizing that some were more valuable and costly to acquire than others. So they developed a tool called Customer Lifetime Value, or CLV. This tool helped them determine how valuable different customer segments were and how much they should be spending to acquire customers in those segments. That shift led marketers to rethink their budgets. Instead of trying to figure out how to land more customers on the cheap, so to speak, they now had to consider each potential customer’s worth before deciding how much to spend on luring them in. They also had to test their willingness to invest in boosting customer value over time. This was true even to the point of giving away TRYING ELV ON FORFIT 32 HBma BIllINg • maY. juNe.2014 freebies that had nothing to do with the product they were trying to sell – especially when customer research showed how those seemingly irrelevant investments would pay off. If ClV wasn’t enough to shake up the world of marketing, this certainly was. While the customer-as-asset idea was a brave, new step in marketing, it is an old – and mostly ignored – concept when applied to people in the workplace. after decades of proclaiming employees as our greatest business assets, business leaders are still more talk than action. In light of this, we can imagine what it might mean to value employees as business assets in the same way some companies are now valuing their customers. In a nutshell, ClV measures customer purchases minus the cost expended to acquire the customers divided by their years as patrons. ClV is set as the maximum dollar amount a company would be willing to invest to acquire and retain customers in a given customer group. We can apply this concept to employees. like ClV, we could create a metric called elV, or employee lifetime value, by measuring the value of team or unit production minus costs of recruiting, training, salaries, benefits, etc., divided by employee years of service. Further review would show us where our most valuable assets in the company are and could guide decisions about how we should invest in them. For example, we typically view expenses as the evil nemesis of revenue. What is gained by adding revenue can quickly be erased by a few runaway expenses. In accounting systems, employees are labeled as one of those expenses. just as marketers, prior to discovering ClV, treated customer acquisition as an expense and worked to keep advertising costs down, company practices that focus on employees as expenses ignore what employees contribute to profits. as a result, employee recruiting is deemed a success when we achieve the lowest cost per hire instead of the highest elV, and we get the cheapest labor we can find. What is funny is that we would never consider hiring the least expensive lawyer in town to save us from a major disagreement with the Irs or worry that the attorney we chose might be (gasp!) By Kevin Herring S There are some simple steps you can take to explore the concept of employee lifetime value (elV) in your organization. segment your employees by tenure and work unit. research the greatest threats to losing your highest elV employees and teams. speak to employees to learn what you can do to raise elV by making the work more engaging for them. For example, you could consider expanding their opportunities to learn more about the business and its operations, broadening their work and decision latitude, and providing educational opportunities. Finally, you must apply what you learn about your workforce to get the best results. send me an email and let me know what you learn from your experiences. I would love to hear from you!
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