Customer Value Management: Are you customer-focused or customer-obsessed?

WHITE PAPER CUSTOMER VALUE MANAGEMENT: ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? Balancing customer and shareholder value ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? Table of Contents Introduction ................................................................................................. 1 Understanding costs, potential customer value and customer needs ..... 2 Evaluating customers by combining financial value with loyalty ............. 3 The trade-off between customer and shareholder value .......................... 7 Focusing, without obsessing, on the customer ......................................... 9 Methods for measuring existing customer potential ............................... 10 Requirements for a customer-focused strategy ...................................... 11 1. A single view of the customer ........................................................ 11 2. An understanding of customer value and profitability drivers ........ 12 3. Meaningful customer segmentation schemes................................. 13 4. Targeted cross-selling, up-selling and retention programs ............ 14 5. Effective marketing delivery systems ............................................. 14 Realigning around customers rather than products ................................ 15 Preparing for the integration of customer analytics ................................ 16 Physics, customer value and shareholder wealth ................................... 17 About SAS .................................................................................................. 19 i ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? This white paper was written by Gary Cokins, an internationally recognized expert, speaker and author on the subject of advanced cost management and performance management systems. He is a solutions manager with SAS, a leading provider of business intelligence and analytic software headquar- tered in Cary, NC. Gary received a B.S. in Industrial Engineering/Operations Research from Cornell University and an M.B.A. from Northwestern Universi- ty’s Kellogg School of Management. Gary began his career at FMC Corpora- tion and has served as a management consultant with Deloitte, KPMG Peat Marwick and Electronic Data Systems (EDS). His latest book is Performance Management: Finding the Missing Pieces to Close the Intelligence Gap. Gary can be reached at gary.cokins@sas.com. ii ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? Introduction In 2005, Best Buy stunned the business media by announcing that it was focusing its marketing and sales efforts to attract and grow only those customers most likely to generate profits. This strategy implied that Best Buy would pay little or no attention to certain types of customers, such as infrequent shoppers or customers who only pur- Business is no longer just about chase discounted items. increasing sales. It’s about Best Buy’s competitors immediately broadcast to the marketplace that they would increasing the profitability of sales. cater to all customers equally. Best Buy held their ground and continued to outpace the industry average on profits. In its seemingly cold strategy, Best Buy was pursuing a fact that many organizations have sensed intuitively – some customers are more profitable than others. Addition- ally, some customers have more potential to be profitable in the future. Business is no longer just about increasing sales. It’s about increasing the profitability of sales. It is not enough only to measure gross margin profitability for sales of prod- ucts and services. Most products or service lines require fairly standard and predict- able work activities that do not vary from month to month and are, therefore, not dependent on customer behavior. Companies must instead start to identify the dif- ference in cost to serve between different types of customers (called the fully loaded costs of serving a customer). This effort will help them get a full picture of where their businesses are making or losing money. Peter Mathias and Noel Capon of Columbia University explain the importance of measuring fully loaded costs: “Most sales people manage for short-term revenues (regardless of profits). … With an increasingly sophisticated customer base that wants lower prices, greater service and more control, this strategy most often results in declining profit margins and commoditization. “Increasingly buying power and market influence is being concentrated in an ever-smaller number of strategic customers. Hence, going forward, we believe that companies will have to think beyond short-term revenue and profitability of today. They will have to take the long view and manage their strategic customer relationships as assets. They will attempt to maximize the net present value (NPV) of future profit streams from these customers, thus shifting to the enhancement of long-term Customer Relationship Capital.”1 It is important to understand that customers sometimes become unprofitable as a direct result of the way the business operates in its relationship with them. For exam- ple, a profitable customer may inadvertently be cross-sold a product or service that cannibalizes an existing source of revenue for the business. Similarly, the way the sales process is conducted and remunerated for sales staff may well encourage the acquisition of unprofitable customers. 1 Mathias, Peter F., and Noel Capon. “Managing Strategic Customer Relationships as Assets.” Columbia Business School (2003), p. 2. 1 ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? Hence, companies must improve in several areas to develop successful strategies that focus on customer value. Any customer-related initiative or interaction must dif- ferentiate customers to give insight into the value-creating potential of those custom- ers. Nevertheless, at the strategy level, many companies remain focused on push- ■ Ultimately, insight into the value ing out products rather than drawing in customers. If a company’s strategic focus is created by each customer to sell as many products as possible, customers will be overwhelmed by irrelevant relationship provides the most useful marketing and sales offers, and their satisfaction will be lowered. It is very difficult to acquire, grow or retain profitable customers in that kind of environment. information for decision makers. Ultimately, insight into the value created by each customer relationship provides the most useful information for decision makers. Traditional CRM profit measures typi- cally calculate historical revenues and costs and, therefore, do not provide insights to future value creation. Understanding costs, potential customer value and customer needs A customer-oriented strategy for improving shareholder wealth should focus on three factors: costs, potential customer value and customer needs. When companies miss the mark on these three areas, they end up placing customers into the wrong value groups. This error ripples out to enable suboptimal managerial decisions, misalloca- tion of marketing and sales resources, and, ultimately, lower profits, slower growth and lost competitive advantage. Companies need a complete picture of the measur- able value of each customer relationship. “The only value your company will ever create is the value that comes from custom- ers – the ones you have now and the ones you will have in the future,” say Peppers and Rogers in their most recent book, Return on Customer. “To remain competitive, you must figure out how to keep your customers longer, grow them into bigger cus- tomers, make them more profitable and serve them more efficiently.” Over time, enterprise value goes up because a company can maximize its return on customer.2 Let’s look more closely at the three important factors for a customer- oriented strategy. ■ Costs. Any measure of customer value depends on an accurate view of both revenue and costs. All companies use sales accounting systems to track and assign sources of revenue to individual customers. And there is usually enough transparency between customers and their purchases to come up with a reliable revenue figure for each customer. Unfortunately, the same transparency does not apply to costs, and many companies struggle to get a clear picture of the cost-to- serve for different customers. 2 Peppers, Don, and Martha Rogers, Ph.D. Return on Customer: Creating Maximum Value from Your Scarcest Resource. Currency/DoubleDay (2005). Return on Customers and ROC are registered ser- vice marks of Peppers & Rogers Group, a division of Carlson Marketing Group. 2 ARE YOU CUSTOMER-FOCUSED OR CUSTOMER-OBSESSED? Without an accurate view of customer-related costs, companies end up with a distorted understanding of customer value. Customers thought to be high-value, for instance, may actually be much less valuable if their cost-to-serve far exceeds the average.