As the age-old dictum goes, you can`t manage what you can`t measure! Measuring customer value is a vital activity, not something to be tagged on as an aside to satisfy the marketing department.
In terms of the one-to-one model of customer relationship management (CRM), measuring customer value is the second step of the identify-differentiate-interact-communicate chain of activities. Differentiating customers by value implies that you have already put yourself in a position to ask two fundamental questions:
* What is this customer`s current value to me (that is, to my company)?
* What is his future/potential (or lifetime) value to me?
These insights and understanding will ensure you are able to act correctly and consistently with these customers (leading to the third leg of one-to-one: interaction). For instance, there is no purpose to be served in spending as much time, money and effort on a low-value customer as on one with high value (and conversely, giving all customers a vanilla experience will lead, logically, to many of your customers being disenchanted with your company).
It is through understanding customer behaviour in one or another direction that we will begin to divine propensity to buy, and buy again, which is the Holy Grail of CRM.
Doug Leather, CEO, Knowledge Factory
Without the ability to measure customer value, you have no way of building individual relationships, or of ensuring that you are building the right relationships. With such a programme in place, however, you can position your brand for the long-term and allocate the requisite resources.
The first steps to customer value are getting your existing data accurate and introducing hygiene routines and disciplines to keep it as accurate and clean as possible, and then capturing as much information about your customer activities as possible.
Data hygiene is also about reducing the overall cost of reaching customers: if you`re in mass marketing, with hundreds of thousands or millions of existing and potential customers, with an average production and mailing cost of R3.50 to R5 to reach each person, you do not want to be working with an inaccuracy rate of 20% to 35%, figures not uncommon in this market sector. Then there is opportunity cost, and the consequential cost of interacting incorrectly with high-value people.
Any time and resource you devote to data hygiene will be well spent, and any attempts at cutting corners will turn out to be false economy.
If your business is engaged in a high-value, high-intimacy market sector (motor cars, for instance), it would seem inconceivable that the appropriate executives were not capturing all information about a buyer so as to stimulate interaction and promote the possibility of a repeat purchase. (If only this were the case: experience shows that most companies you would expect to apply these disciplines do not!) If you are in the exact opposite market, that of high-volume, low-value transaction, low intimacy (in effect mass, retail consumption), then it is incumbent on you to conduct periodic focus groups and customer studies to understand what is driving customer purchases: in essence, why people like and accept one product or service and not another.
Stimulate data gathering
Along with this, mass consumption companies would find clubs, loyalty cards and campaigns, coupons, free samples, special interest groups and other mechanisms to stimulate data gathering. Such data gathering, of course, enhances the potential for segmentation, based on identified commonalities and differences. It also increases, quite dramatically, the chances of the data being accurate and detailed, as people are likely to surrender quite a bit of information if they perceive value in doing so. Finally, ongoing interaction is also a way to ensure data is current, another Holy Grail of marketing teams!
It is through understanding customer behaviour in one or another direction that we will begin to divine propensity to buy, and buy again, which is the Holy Grail of CRM.
All of this mandated, of course, on the principles that it costs five times more to acquire a new customer than to retain an existing one, and on the Pareto Principle, that 80% of sales come from 20% of customers (if you can identify and retain them, you`ve hit the mother lode).
Of particular importance is that the executive team buys into - and is seen to champion - the overall customer value process. Research conducted by UK-based QCi with more than 350 executives worldwide revealed that more than three-quarters of executives are not directly involved with the overall process of customer acquisition, intimacy and retention.
With data gathering and hygiene subsumed and executive buy-in obtained, key customer advocates can begin building customer value models. Complex and sophisticated analyses can be performed against these models, driving long-term marketing decisions. Third-party data can also be invoked in various layers, further adding to the density and richness of the customer value model and yielding unexpected insights.
These can include propensity of a particular group to buy products or services based on identified commonalities; these commonalities can be projected onto similar groupings of consumers who then form the likely next target market. The increasing power of such customer models, and their relatively low cost relative to actually executing a full-blown marketing exercise, can allow customer executives to run any number of what-if exercises and scenarios to arrive at the best likely outcomes.
These are all key elements of why and how you would invoke customer value measurement in your business. Now, we need to consider what it is that you would be measuring. Here are just a few of the key performance indicators that would permit you to acquire, retain and grow customers, creating the potential for the cycle to be repeated:
* Revenue per customer - today and potential/lifetime.
* Total purchases over a lifetime.
* Average purchase value, frequency and time between purchases.
* Share of market and share of wallet.
* Segmentation and profits per segment.
* Customer retention and churn.
* Customer satisfaction, which will be what encourages repeat buying (quite easily and empirically proven through focus groups and surveys).
* Channel effectiveness: measuring the ways in which various channels - direct, indirect, contact centre, Web, self-service, walk-in - encourage or inhibit customer interaction and, thereby, retention or churn.
Finally, any change in internal approaches, policies and corporate behaviour on this scale needs a degree of change management if it is to succeed. This begins with communication.
For the customer value measurement programme to be effective on an ongoing basis, its findings and insights need to be made available to the key people who are in a position to act on them and extend their value: the customer-facing people. These can be contact centre agents, frontline service people, reps out on the road, or stock-standard salespeople. What is of importance is that these people, having ultimate responsibility for delivering on the customer mandate, are able to extend and fulfil it. This will close the loop from executive strategy to line staff execution.
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