Customer Equity Management

A few thoughts on Customer Equity Nick Poulos The value of our business is the sum of the value of all our customer relationships The value of your company is equal to the sum of all the revenue from all of your customers. Not exactly the textbook definition. Your CFO, without much grumbling, will allow it, however. Most of us are aware of Paretto’s Law, which would suggest that 80% of your profits come from 20% of your customers. A more startling rule is what Kaplan and Cooper call “20/200 Rule.” 20% of our customers return 200% of our profits. While you recover from the shock this statement presents – and, it is verifiable! – it is more important that we realize that there are proven fact-based approaches that lay down a roadmap that allows you to optimize your customers and mitigate the rules. Like your other assets managed in your portfolio, your customers can be viewed as a portfolio of assets, which you can manage proactively. Successful management of your customer portfolio brings a series of cascading benefits to your firm. The primary benefits are your ability to maximize shareholder and stakeholder value; and your ability to optimize your “market coverage strategy.” The latter benefit is vital, since virtually every organization has limited resources. So it is critically important to invest those limited resource in direct proportion to the return we expect to receive from our investment in our primary assets - our customers. Market leaders Target, Segment and Grade their customers. Recognizing that they cannot be all things to all people, their goal is to maximize yield: they want to invest their limited marketing, sales, and service dollars in direct proportion to the return they expect and need. Starting from the point of Targeting and consciously defining a customer; we then work through Ideal Customer identification, Segmentation and Grading (or, valuation). The result allows us to analyze our total customer universe. We can take a further step: Customer equity analysis can be combined with (a modified) activity-based costing (to discover our cost-to-serve), which in turn allows us to optimize our investment in sales, customer service, marketing and with our channels/ channel partners. The models, analytics and tools of the data base, relationship marketer / eCRM practitioner provide a “dot-to-dot” template with which to assure coverage optimization and hence optimal use of the firm’s limited resources. This paper deals with a portion of the process issues and introduces an analytical framework. The technology infrastructure – data- warehouse, CTI for the contact center, the eCRM and/or SCM package are outside the scope of this discussion. Let’s take a look at how the simple pyramid, used to represent graphically our customer universe, can help us understand a little bit more about our own customers and their worth as assets. The Business Issue Since our portfolio of customers represents the primary asset that we must manage, we need to make the most informed investment decisions we can when it comes to investing our resources into this group of assets. Whether the resource is time, money, or people, the optimal allocation of resources is a critical issue, a critical challenge, for almost every business organization, since no enterprise has unlimited resources. The customer relationship marketing models, which have been refined during the past 25 years, provide a critical key to unlock the answer to this problem. In no functional area of business is this resource allocation problem more true than in sales, marketing, and servicing customers and/or prospects. In fact, the search for the optimal allocation of resources in these functional areas is something akin to the search for the Holy Grail. This resource allocation (and concomitant knowledge management) issue should be a Board Level issue. Several years ago Adrian Slywotzky used the pyramid reproduced below to illustrate the increasingly competitive challenges of today’s marketplace and to emphasize just how critical it is to move this conversation out of from the Sale and / or IT departments and to the Board Room.1 This first pyramid shows how, in most mature, competitive industries, the sales function (together with service and product marketing) is faced with: • Price and margin pressure at the top of the pyramid, where the size of the targeted accounts is the largest • Margin (cost-to-serve) pressures at the bottom of the pyramid, where the largest number of accounts exist • An eventual overabundance of competition – once all your competitors realize where you are making your money - in the middle, where the most profit is initially available • A shrinking middle layer The 3 take-aways from this diagram: A All of us focus our efforts on the Major accounts where the margins are the thinnest – so the competition heats up and… B. There are so many “minor accounts” that we don’t have the resources to serve them profitably, and so we under serve the select few that go up the pyramid to the top C. The “middle accounts” are the most profitable – that is until everyone notices that we make our money there or that those accounts are becoming “major accounts” and so everyone wants a piece of the action Faced with this competitive global scenario, is there a proven way to examine our customer universe with an eye to increasing the value of our customer portfolio? The answer is a resounding “yes!” The Thesis: an interlude The planning tools, operational models, feedback loops, and performance metrics of data-based, relationship marketing provide those templates with which we can create optimal resource allocation and coverage models. What follows is a guideline for optimizing the allocation of resources, together with the attendant analysis and one possible implementation roadmap. Background Supposition We live and work in a time in which each of us faces allocation constraints pertaining to use of money, time, and people. Furthermore, the competitive arena we operate in is wholly unlike that of just a few years ago. The marketer’s Holy Grail is to get the right message, product, and/or service to the right person, at the right time, in the format that customers have indicated they prefer: investing their limited resources (time, money and human) in direct proportion to the expected return. In fact, this is the primary goal of an optimal allocation model. An optimal coverage model would also: • Support a retention, and loyalty-, focused, customer-based business design • Make effective use of the organization’s limited resources • Make investment decisions based on reciprocal commitment or mutual interdependence of your Ideal, Best customers and channel partners • Establish integration and synergy across the three functional areas responsible for servicing the customers: i.e., product marketing, sales, and customer service. My contention is that there is a fairly well defined path the enterprise can take when analyzing and assessing its allocation challenges. This path is mapped out through the use of the tools, templates, and planning of the data-based, relationship marketer. Resource allocation must also bring to bear the relationship marketer’s theories about managing the point of contact, managing the customer across their lifecycle of interactions with the company, managing the value of the customer portfolio, and managing knowledge across the company and across the value chain. Specifically, there is a spectrum, or “continuum of relevant customer contact activities,” that needs to be mapped to create an optimal and effective resource allocation model. The major group of inter-related tasks that the organization is to undertake – in conjunction with the analysis of their customer equity – will be to conduct an assessment, or audit, of their marketing, sales, and customer service activities so as to surface the key interdependencies between them, as well as with site logistics. Implicit in this assessment will be the attempt to understand how to move from the “current state” to the “desired end-state”. In the audit the company will: • Make visible and apparent where integration between the functional areas is necessary • Make apparent where non-discretionary accountability must reside • Revisit the current account selection process • Revisit key account management practices • Objectively verify whether an account is relationship – or transaction-oriented • Assess the skills, training, and behavioral components of the relevant customer contact people in each of the functional areas • Assess degree of cooperative, cross-functional teamwork along with supporting account planning, communications, and contact management tools Even as times have become tougher it doesn’t appear that enough businesses have heeded Slywotzky’s and elevated sales to a strategic boardroom issue. My assertion, however, is that we can achieve the greatest return on our portfolio of assets combining this thinking and by applying the models of customer relationship marketing and knowledge management to the problem of resource allocation and by extension to customer equity management. The Customer Portfolio Pyramid “Sure, it makes sense “philosophically” but all this stuff fails to hit home.” I can hear you say this. So, let me suggest that you take the pyramid and use it differently in order to present the value of the firm’s customers. Once this exercise is finished, I guarantee you will feel vastly different about how your company spends its limited time, money and other resource – and about your customers. Take your financial results from the last several years and analyze the buying behavior of your customers. (if your segmentation schema is complete, do this analysis by segment). Simply stack rank your customers by sales volume. Then let us “grade” or “apply a valuation” to the customers’ past buying habits. While most of us have used simple grading techniques such as A-B-C, I suggest that we need to get greater granularity in order to make more informed, better decisions on how to invest our resources. The second pyramid I suggest you create and deploy makes use of a “sizing” metaphor to visually allow our managers and individual contributors to see exactly what each account is worth. (This discussion takes hints from all the practitioners who discuss account grading and especially from Curry & Curry’s Customer Marketing Method). Break the customer results using these percentages: 2%, 3%, 15%, 25 %, 25%, 25% and 5%. The top 2% and the bottom 5%% (could be 7 or 10% or more) should be excluded from the general customer inventory analysis because they represent accounts that we should serve in different ways. (For Example: Major account teams for the top 2%; in-bound customer service handled via the web for the smallest 5%). While the graphic is interesting in and of itself, the real insight comes to the forefront once you investigate the actual profitability of the customers in each of the grades. While most of us are aware of Paretto’s rule, a more startling finding will likely emerge from this analysis: 200% of the profits come from 20% of the customers. And therein is both the take-away nugget and the challenge to address in implementing market coverage and customer equity management. Once the pyramid has been created – it must become a living document. Not only can it be used at the Board level but, perhaps with more immediate and tangible impact, it can be used to guide decisions and actions at the level of the individual field sales representative, the field service rep and the contact center rep. The Determinants: Reprise of the Interlude Customer Equity Management is a strategy that requires a supporting business design. What the practitioner needs is a framework for determining how to allocate resources and then how to optimize the deployment of these resource to provide the optimal “market coverage” necessary to maximize the portfolio of our customer assets. There are a great many steps involved, yet, in some ways, creating this framework is much like the dot-to-dot games from our childhood. Below are some types of information that will be required, both to “connect the dots,” and to build an effective allocation model: • Company strategy and vision • Target market • Customer and market reach • Definition of customer • Go-to-market mechanism • Activity based costing (or economic value added) analysis of the marketing, sales, and service processes • Analysis of current and required customer knowledge, customer economics, and the technologies used to connect with customers • Map of current market coverage with number of accounts (targeted, actual, and potential) by territory • Understanding of account segment membership • An account contact matrix model • An account valuation/weighted potential model • A volume/margin/duration model (to manage customer equity) • Results from qualitative, directional research that includes marketing, sales, service, and the end-user customer (plus channels[s], if applicable) • Data about customers: e.g., customer cycles (buying, budgeting, forecasting), number of contacts per site, key influencers by site in the complex selling decision, etc. • Accurate time/responsibility mapping for field sales and service personnel • The right set of metrics Although the preceding list looks more like a laundry list than a practical approach, we can, in practice, proceed from the point of accumulating this knowledge to crafting an actionable coverage and resource allocation model for the company The Building Blocks The primary building block for moving forward will be the analysis of the current portfolio of your customers. Combining the knowledge acquired from the steps identified above together with the results of an analysis of the economics of sales, customer service, marketing and channel coverage, will take us to the point of crafting a final resource allocation model. Perhaps the most tangible and useful will be the customer pyramid because everyone can relate to it. Performing the marketing and sales cost-to-serve analysis (Modified Activity based costing) takes us directly to the next challenge: Customer Based costing. To complete this phase we will want to identify how we interface with our prospects and customers. More importantly, we will want to map our contact points, our contact frequency, content and a marketing calendar. During this series of interlinked tasks we will investigate certain specific data-based, relationship marketing concepts. These include: a. The multi-dimensional data cube b. The opportunity management funnel c. An activity based costing analysis of the cost-to-serve our customers d. An understanding of how often and by what means we do contact our customers or contact matrix e. Directed and very focused conversations (e.g., focus groups) in which we have our customers help us define what is of value to, and valued by, them f. A marketing and sales communications calendar and activity audit. Taken together, these concepts and you then can map the ideal “allocation model” for your organization. What happens to the strategist who follows this path is rewarding to say the least. S/he can build and deploy: • A centralized marketing database with a four level architecture necessary to conduct effective business-to-business relationship marketing in complex selling situations: individual functional group, application served, street address, and enterprise • A repository of your corporate memory that can be used to share knowledge across the company and the company’s value chain • A method to stimulate leads with a closed-loop system for tracking them and the economics around both generating leads and closing sales • An activity-based costing model with which to manage cost to serve and cost to communicate – and customer profitability • A method that discovers how their customers define, and prefer to receive, relevance and value in communications • A holistic way of viewing all corporate messaging that will build a single voice to customers • A detailed understanding of the respective roles, responsibilities, and concerns of the field sales and service employees Taking these steps and combining them with the ideal “allocation model” can and should be done inside your enterprise. The result will create a double win: the development of the critical competence for the next millennium, and judicial, optimal investment of your limited resources. The result will create three complementary skill sets: 1. An integrated, data-based, relationship marketing competence 2. An optimal resource allocation model that effectively matches your product, services, and messages to your target customers and prospects 3. A deliberate effort to manage both the profitability of individual customer relationships as well as the value of your portfolio of customer assets.