In the previous column in this series, I looked at the vital need to identify customers. This was by way of a foundational exercise so we could get a view of our customers. As indicated in that column, there can be no customer relationship management (CRM), no segmentation, no profiling, unless a proper data foundation has been laid.
Very often a satisfied customer is a great marketing asset.
Doug Leather is MD of Intact Solutions.
With the data foundation in place, and all customers identified, we can begin the process of differentiating customers. We need to differentiate customers by value and by need in order to identify those customers who will show a return on investment. We are trying to determine who our most profitable customers are so we can service them better and to ensure they continue to do business with us. We want to maximise the profitability of our activities, and to grow our share of customer.
The basis of the valuation activity is twofold: firstly to determine the actual value of the customer and then the strategic value of each customer. This is not rocket science: The actual value is the return the company is currently enjoying. By calculating the net present value of all future profits based on current behaviours and buying patterns, one can predict the lifetime value of the customer.
The strategic value, however, is the potential value or "share of wallet" that we may not have. This may not always be directly measured in rands and cents. Companies must also consider the value of customers as references. Very often a satisfied customer is a great marketing asset.
Having identified your most valuable customers and your potentially most growable customers, you can begin understanding the needs of those customers. Understanding the needs and reacting to those needs ensures differentiated service, which builds customer retention.
Customer tiers
Once we understand or assimilate value and need, we can tier our customers accordingly. Superimposing the cost to service those clients will give us an idea of profitability. This will enable us to allocate resources and investment appropriately. Of importance is to note that tiering is done so as to treat people differently. Good service is the price of admission to good relationships, and should be a given.
The Pareto Principle - that 20% of your customers give you 80% of your business - will soon be found to apply. It is these we will deem our most valuable customers. For instance:
When it comes to buyers of long-distance telecommunications services, the top 5% of customers account for 60% usage.
Studies indicate that 16% of house-goods buyers are responsible for 63% of goods bought.
And in the US, a mere 0.2% of US car renters account for 25% of revenue.
Clearly, not all customers are created equal, not all customers are desirable and every good customer is someone else`s prospect.
If you can differentiate customers, then you are able to treat different customers differently. This, ultimately, is the true intent of CRM. Let`s look at two examples:
A high-end business furniture firm has 20 000 customers. Expensive office furniture catalogues are sent to all 20 000 customers on a quarterly basis. The company does not have a sophisticated data warehouse. It uses the previous two years` revenue as a proxy variable and discovers that 3 000 customers account for 50% of the revenue. Marketing expense is reallocated. The top 3 000 customers receive a quarterly magazine and one-on-one telephonic communication, the next 10 000 continue to receive quarterly catalogues and the bottom 7 000 customers receive postcards offering catalogues should they reply in the positive.
Credito Emiliano Bank in Italy has 300 branches and 360 000 customers. It has tiered these customers across three areas: private banking, high asset and low asset. It has structured the bank around portfolios of customer needs, identifying 30 separate, needs-based portfolios, set against such metrics as risk tolerance, financial goals, and specific services clients might need.
Today`s sagging economy is an ideal time to pursue CRM initiatives. These strategies are very effective at reducing costs, which, even if you don`t boost revenue, is a survival technique. Differentiation is fundamental in developing a customer-centric philosophy, and in creating profitable relationships. Differentiation is one of the required steps in the journey towards customer centricity. However it`s used, differentiation is the next, powerful part of the equation, which leads us ultimately to customer interaction/communication, which is the focus of the next column in this series.
(Please note that Industry Insight pieces reflect the view of the author only. For further stories and opinions on this subject, please visit ITWeb`s related sections.)
* Doug Leather is MD of Intact Solutions.
** Some information used from Peppers & Rogers methodology, with thanks.
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