Can Your Customers Be Worth More?

by Don Peppers and Martha Rogers, Ph.D.

Its customer base is the most important asset any business has. So how can you manage that asset proactively for maximum return?

The writing on the wall is clear: Business begins and ends with the customer, making the customer base the most valuable asset any company possesses. Thus it makes good sense to manage that asset to maximize its value. Over the last decade, customer-driven initiatives have helped companies do just that.

But here’s where things tend to get a bit fuzzy. On the whole, the customer base remains overlooked as an asset, hovering just under the radar of decision makers. As a result, most firms adopt operational-focused customer relationship management (CRM) strategies such as a self-service Web site or up-selling and cross-selling in the customer interaction center. The problem is, an operational approach by itself can only take you so far. Without analytics-driven intelligence gleaned from the customer base, your initiative likely will result in diminished impact and lower returns.

Consider the big picture: If the goal of business is to drive efficiency and maximum return by making the right offer to the right customer at the right time, then a more rigorous, quantitative understanding of individual customers is needed. This takes us beyond operational tactics, demographic analyses or even the oft-cited 80-20 rule, and into the realm of customers’ value and needs. To unlock fully the ROI potential of a customer base, you must first understand the value and needs of individual customers via analytic analysis, then use that insight to treat different customers differently.

Determining customer value
"What are my individual customers worth?" "Which ones are most valuable to the enterprise?" "Where do the greatest growth opportunities lie?" Questions like these are coming to the minds of decision makers today. Understanding how to answer them – and how and when to act on that intelligence – are the tough parts.

Customer value is determined according to profitability or contribution to the enterprise. The most useful customer-valuation approaches focus on the financial contributions of customers, rather than simple sales revenues or fully allocated profit. The net present value of a customer’s expected stream of future contribution is the closest you can come to quantifying the customer’s lifetime value (LTV) to the firm.

To make this assessment, individual customers must be ranked according to two criteria: actual value and potential value. According to Peppers & Rogers Group, actual value is the customer’s expected LTV if "business as usual" goes unchanged. If the firm takes no action to alter the customer’s behavior, factors such as revenue, level of engagement, referrals and communications will stay the same. In this scenario, the opportunity to grow and capture the ROI potential of a customer base is limited. On the other hand, potential value measures unrealized opportunity: "How much of a customer’s business goes to the competition?" "How much more of his business can you capture if you modify your treatment of him?" The goal is to capture that unrealized potential by using proactive strategies to change the customer’s future behavior.

Completing the loop
And there’s the catch – but also the key to success. Changing customer behavior to capture that unrealized value is what customer strategies are all about: buying from an additional product line, purchasing the service package along with the product, shopping online as well as offline, and so on. It’s also where most customer initiatives go awry. While knowledge of customers’ value is important, you need to know much more about your customers if you hope to use CRM or analytics tools to increase their value. For that, you need to know why customers act the way they do: What are the different reasons two different customers buy the very same thing? Why does customer A make multiple purchases over several channels while customer B only uses the Web?

What steps can the enterprise take to alter customer B’s behavior? The only way to answer questions like these is to use analytics tools to drill down into a customer’s needs. Perhaps customer B above is a sales agent who spends a lot of time on the road. She relies on the Web and e-mail as her channels of choice for evaluating offers and making purchases. Armed with this information, the smart enterprise would stop sending her the glossy brochure and increase the number of relevant offers via e-mail based on her purchase history. But the same enterprise would understand that a soccer mom, although she, too, buys from the Web, does her browsing and shopping first from the catalog. This means it’s not enough just to understand who your customers are, but what each one needs – and what you need to do next to be as valuable to the customer as possible – in order to increase the customer’s value to the enterprise.

Over time, customer interaction and analytics insight will reveal common needs among customers. This commonality allows customers to be separated into groups, or portfolios, that can be managed by the enterprise. Portfolio management holds a customer manager accountable for making managerial decisions that increase the value of each customer in the portfolio over time. Now the loop is complete. Armed with an understanding of why customers act the way they do, and what value individual customers have to the enterprise, you can alter the customers’ behavior by making the right offer to the right customer at the right time.

The payoff
A growing number of companies are using analytics-driven insight to unlock the value of their customer bases. A widely recognized telecommunications firm now collects an additional $1.2 million in additional monthly revenue by using analytics insight to reduce its customer churn by just .2 percent. And these are just the tip of the iceberg.

According to research firm IDC, enterprises that have successfully utilized analytical CRM applications have generated a median ROI of 55 percent. The ROI can come in any number of forms: squeezing every dollar out of previous IT investments, identifying and retaining at-risk customers, increasing the efficiency and effectiveness of marketing campaigns, reducing churn, and moving customers up the value chain to become more profitable over time.

As returns like these steadily push analytics and proactive management of the customer base into the spotlight, more decision makers will find themselves asking two key questions: "What are my customers worth?" and "How can my customers be worth more?" By using analytics to uncover the value and needs of individual customers, you can optimally manage your customer base as a powerful financial asset.