Maximizing Asset Value One Customer at a Time

Derive a deeper understanding of customer value

by Don Peppers & Martha Rogers, Ph.D.

Regardless of the business you are in, your customers are your most important financial assets. As with other financial assets, customers need to be efficiently valued in order for you to increase the profitability of your customer portfolio over the long term. Yet, firms often fall short of realizing this goal because they don't fully understand the dynamics of customer value and the drivers of customer growth. What's a decision maker to do?

Assigning value to customers
Let's look at how one might arrive at a deeper understanding of customer value. Similar to other financial assets, a customer's value is determined by the profitability the customer will deliver in the future. It follows that you want to know when the value of your customer asset increases or decreases, and what kinds of events or situations drive these changes. This may sound simple conceptually, but it can be challenging to put into practice. You have to identify the dynamics that drive the future profitability of your customers in order to arrive at a meaningful measure of customer value.

This leads some decision makers to employ the concept of lifetime value (LTV) to measure a customer's value to the enterprise. At its most basic, LTV refers to the future economic worth of a customer and can be further defined as the net present value of the likely future income stream generated by an individual customer. For instance, LTV might be the expected number of purchase transactions from a customer each year times the number of years the customer is expected to remain loyal times the discounted net present value of the margins on those purchases each year. Ideally, lifetime value would capture all the various behaviors of a customer that have any bearing on the enterprise's profit from that customer. Technology is obviously a key part of the process. Customer transaction databases along with sophisticated analytics used by decision science professionals help to quantify LTV, in effect modeling your customer's behavior in the past to predict your customer's behavior (and value) in the future.

Regardless of the formula a company uses to calculate lifetime customer value, it's not enough to simply measure it and identify high value customers. You need to understand what constitute the "leading indicators" of value change so that you can take action to increase the profitability of your customers.

Growing customer profitability
Customers with high value scores have some things in common. They have a high total revenue or profit over their lifetime with your company. And, they score near the top of your customer value measurements in the areas of recency, frequency, etc. However, it's the differences in the needs of your high value customers that will inform the value creation strategies you implement.  

Consider the case where we want to increase the value of the top 10 percent of customers of, say, a cruise line. Analysis shows that the cruise line's high value customers can be segmented into three groups. Customers in the first group are frequent cruisers but otherwise not very big spenders. They go on three or four cruises per year, but stay in the lowest cabin classes and spend little onboard. A second group is made up of customers who go on a cruise less frequently - maybe every other year - but they live it up when they do, staying in a high-end suite and spending lavishly. A third group goes once a year, stays in middle-tier cabins and spends a respectable amount on board.

What's the lesson here? The cruise line's marketers learned that not all high value customers are created equal. Each of the three high value customer segments is driven by different motivations. They have similar values, as customers, but they have radically different needs from the cruise line and will respond to different types of offers. It's up to the cruise line to capture the needs insight and use it to drive customer value higher.

Valuable financial services customers
Financial services, even more than the cruise industry, is a high transaction business where customer valuation and differentiation are crucial to the efficient allocation of resources aimed at increasing customer profitability. This certainly proved true for Toronto-based Canadian Imperial Bank of Commerce (CIBC)* when it implemented a new data warehouse and faced the challenge of managing its more than 9 million personal and business customers across independent lines of business. Historically, CIBC had been account-focused rather than customer-focused. And as a result, a customer with multiple accounts was treated as if he were multiple customers.

Using technology and analytics to achieve a customer-centric approach, CIBC learned to effectively segment its customers by needs and preferences, as well as by profitability and potential. The bank actually creates a monthly P&L for each customer in order to monitor changes in customer value. This also allows CIBC to ensure that each customer receives product offers that meet individual needs, such as second mortgages for homeowners and retirement saving plans for working couples. The bank is constantly trying to understand what factors drive value creation for specific types of customers.

What are the results? Intelligence-driven campaigns for pre-approved credit cards are generating astounding acceptance rates of 20 percent to 30 percent. Some personalized campaigns reaching out to new customers generate a 300 percent return on investment! And these are just a few success stories out of many. As a result of such successes, CIBC has become deeply committed to managing customers in a very analytical way.

Owing in large part to its ability to identify factors that drive value across distinct customer segments, CIBC is able to implement campaigns that meet customer needs and increase customer profitability. As we have seen, savvy decision makers understand their customers' individual needs and the value each customer represents to their enterprise. Using this knowledge, these decision makers are better able to efficiently allocate marketing, sales and service resources to increase the value of their most important financial asset: each individual customer.

* The story of CIBC was taken from two sources: Return on Customer: Creating Maximum Value from Your Scarcest Resource, by Don Peppers and Martha Rogers, Ph.D., Currency/Doubleday 2005,  pp.196-201; and “Winning the ‘moneyball’ game,” by Britton Manasco, Peppers & Rogers Group, published by techtarget.com, 30 May 2005.