Customer Selection: strategy as choice

Selection, Not Tunnel Vision
Social media reinforces what B2B marketers have long known.
Targeted communications to select customers can create an
on-going dialogue, grow into deeper conversation, create bonds between
customer and dealer and company, and affect a conversation to loyalty.

It has been our experience that, by looking at proper customer
selection, effective data-based, loyalty-focused, business-to-business
marketers escape the kind of tunnel vision that results in
traditional mass-media attempts to send one watered-down
message to an entire, undifferentiated universe. Instead, they find
that they are able to invest more budget in highly targeted
communications to the segments most likely to become loyal
customers.
These companies have the tools to become more active relationship
managers with both dealers and end-users. They educate their
organizations about the needs of individual segments, continually
enhance the delivery of products and services, develop targeted
offers more likely to draw a response, and better allocate resources
in the design of sales territories.
And, since they’re talking to each customer’s specific concerns, a
dialog is established; relationships are formed; satisfaction, growth
and profits follow; and, with them employee performance and
morale are increased — reinforcing the feedback loop that leads to
a sustainable competitive advantage.

Mapping touch points: How complex is your B2B customer decision process?

Your customer-buying decision: how complex is it?

The CFO of a multi-billion dollar, multi-national recently told me that his #1 objective was to simplify & reduce the complexity of his business. Another Chief Strategy Officer wonders how his customer, colleagues, and competitors can absorb and intelligently make use of the complex technology that now seems to control his marketspace. If our leaders feel some “pain” relative to complexity, does this complexity affect our customers’ experiences? And, how does this product/service/technology complexity affect buying decisions?

How does the complexity differ or change when we move from B2C to the B2B world? And, how does social media alter the decision making and the customer insight?

In the B2C world, Apple seems to have mastered the complexity / simplicity challenge in all that it does: computers, phones, iPods, and iTunes. Think about the last time you visited the iTunes store. Apple’s customer experience management process is the ne plus ultra of complexity made simple, made seamless, and made to create satisfied, loyal advocates of its customers. And, with today’s launch of the iPad, Apple seems to have done it again.

While automation or technology exists to assist with this exercise, we suggest an approach based upon mapping – actually identifying on paper – how, when, and why - a customer (or, prospect, etc.) comes in contact with your company, its products, services, and performance issues. It’s an approach that has been around for a while, and it also is one called out in the recent book Answering the Ultimate Question, (cf., pp. 97 ff.) from the founding partners of Satmetrics.

When was the last time that you mapped the various touch-points, and life-cycle progressions, that your company has with its customers? There are two famous articles that readily come to mind. “Staple yourself to an order” was perhaps the first to treat the subject. Fred Reichheld’s “customer corridor” (in The Loyalty Effect, pgs. 201-203) may have been the next significant, and the more famous, exposition. My sense is that “practitioners” have gotten better over the last 20 years in understanding their customers’ buying behaviors. But in today’s world of social media’s strong incursion seamlessly coupled with multiple buying and communications channels, companies must master mapping their customer experiences if they are to provide outstanding customer experience and relationship management solutions.

We’d love to hear back from those of you who have starting their customer mapping work. Once the mapping is done, however, there will be work to do! Cooperation and coordination across all functional areas will become even more vital for the company that wants to demonstrate that it truly is customer-focused and customer-based.

thought-starter # 3, loyalty versus frequency

Thought-starter # 3: Loyalty versus frequency

“At the core of any successful enterprise, enabling its very existence is the value creation process. Value creation generates the energy which holds the business together… The forces of loyalty are measurable in cash flow terms

because of the linkages between loyalty, value and profits. Loyalty is inextricably linked to the creation of value.”

-Fred Reichheld, Bain

Examining the historical purchase behavior, captured in our marketing database, we can define the value our customers have had in prior years. We can also project out what these same customers might be worth over the next five to ten years. Most of us know this projection as lifetime value (LTV). As we examine

the value of our customers to make the decision to establish loyalty bonds, it’s essential that we recognize three things:

1. LTV is a projection based on historical behavior.

2. LTV has more to do with how we treat our customers after

we have acquired them than how we acquired them.

3. LTV is most effectively measured by measuring the re l a t i o n s h i p

we have with our customers, not with measuring transactions.

Frequency Programs vs. Loyalty Programs

This brings us to frequency programs. Frequency programs are usually transaction-focused, non-selective and often destructive. Most of us participate in a multitude of them. Initiated in the early 1980s by the airlines to entice business travelers, many companies have successfully replicated these once highly successful programs.

All too often, however, frequency programs are created as me-too administrative programs, programs that merely respond to competitive offerings, programs that shift-the-burden away from a true loyalty solution. Following this logic, a poorly conceived or executed frequency program will not help us select the best customers for our business. A frequency program may cause us to acquire customers we cannot service adequately or, even worse, diminish the perceived value of our product offering. In short, frequency programs and loyalty programs are two distinctly different animals.

Executed as relationship-welding, relationship-enhancing efforts, loyalty programs must be derived from the strategic corporate mission. The best loyalty programs aim to create value-based relationships with our best customers. The determinant variables in this equation are:

1. How well do your external service values align with your customers’ needs?

2. Do your external service values align with your core competencies?

3. Do your core competencies rest on a foundation of loyal employees?

Let us offer this simple comparative matrix to allow you to evaluate the purpose of your own loyalty effort.

Loyalty Focus Frequency Focus

Recognizes… • Heterogeneity • Homogeneity

• Employee contribution • Responses to mailings

• Value-added • Transaction-based

• Customer-focused • Competitive-focused

• Needs-based • Incentive-driven

• Relationship-focused • Payout-focused

• Two-way dialog • One-way communications

• One size fits one • One size fits all

• Needs-based • Mailing list bias

• Outside-in focus • Inside-out focus

• Focused targeting • Indiscriminate targeting

Measures… • Share of customer • Response rate

• Share of requirement • RFM

• Duration of relationship • Cost per response

• E:R for customer • E:R for mailing

Loyalty Management and Customer Experience Management at their foundation use the best tools and practices of the data-based, integrated, direct marketing practitioners to build, develop and foster relationships and loyalty where appropriate. Always based upon the delivery of value. Data-based relationship marketing affords you the opportunity to redefine the traditional “value chain.” Today’s loyalty-based marketer is more about building community: mutually interdependent alliances of stakeholders including employees, customers and vendors. All predicated on delivering value to the relationship and relevance in each and every individual contact. Fully recognizing that value changes with each new touch, or contact, between your customers and your company.

Customer Retention Strategies and Tactics

Thought-starter # 2, the calculus of loyalty

Thought-starter # 2: the calculus of loyalty

There is a calculus of loyalty. Experience, coupled with the latest findings published by Bain and TARP, now demonstrate this. In business, as in our personal lives, loyalty (etymologically related to the Latin lex or “law, faithfulness”) has definite rewards. The single most compelling reason for a business to exist is to create value for its customer community. If your purpose in life (for your business) is to create value, you’ll prosper and grow and loyalty will be the single largest contributing factor. If not, you’ll be out of business in the next five to ten years.

Until recently, the rewards of business loyalty were understood only intuitively. It made sense to us as marketers that loyal customers bring with them greater profit over time. In fact, the original frequency programs were designed to capitalize on, and are direct evidence of, this intuitive knowledge.

Frequency programs and frequency measures may be destructive, however, unless the economics of loyalty are taken into account.

Loyalty reliably measures whether superior value has been delivered. Most of

us now recognize that “value” is completely customer-defined. The equation might look something like this:

your customers’ expectations for the experience – “the actual”

VALUE = ____________________________

Cost

When our customers experience continuous, reliable, and increasing value we know that they will be Loyal. Loyalty brings with it a series of second-order economic effects, which cascade through the business system:

1. Revenues and market share grow through repeat sales,

purchase of other products and referrals.

2. Costs to acquire and to serve existing customers shrink.

3. Profits go up.

4. The company culture change.

A self-renewing, continuous improvement process installs itself. Employees have increased job pride and satisfaction. Employees stay longer while customers come back.

In achieving customer loyalty, the single most important decision any company can make is selecting its customers. We can neither serve every customer well nor be all things to all customers. It’s a costly istake, a diminishing of our resources and skills, to try to retain each and every customer because, quite simply, not every customer is worth retaining. In fact, we need to learn how to identify and disengage with customers who are not profitable to serve.

To wrestle with the subject of loyalty, it’s vitally important that we define who a customer is and then define their lifetime value, expressed in net potential value (NPV) terms.

Then, we must understand how much of the customers’ “share of wallet” belongs to us today and how much of their wallet we can earn. We can then make intelligent decisions about how to invest in our current and potential customer audiences based upon their reciprocal commitment to us (as demonstrated by their pocketbooks).

What Variables Do We Me a s u re ?

We define a customer by at least two variables; e.g., a customer is someone who buys X number of dollars worth of my products over Z period of time. We can add dimension to this definition by expanding the definition;

e.g., someone who buys X number of dollars of Y number of products over Z period of time. Finally, we would want to add the contribution margin of that customer and/or net profit dollars.

Share of Customer and Lifetime Value

While this is an important step in all forms of marketing, in the business-to-business environment we further need to understand how much our customer spends on competitive products That is, the share of wallet (share of customer). For example, if Sue Ann buys $400 of our widgets and a total of $600 of widgets, her loyalty coefficient to us is much higher than if she buys a total of $7,500 worth of

widgets. (Note, however, that some buyers may have constraints on having a single source for any product family; the realization of this “truth” and including this variable in our understanding helps flesh out the calculus.)

In addition to understanding the value of our customer, it is essential that we define the rate at which we lose customers — the defection rate — as well as how many customers we acquire during a given year. Caution is called for here: a greatly skewed picture of the value of our customer community will result if we average the defection rate out, e.g., over 10 years. That’s because most companies report their defection rate is highest over the earlier years of a customer’s lifetime. Any loyalty valuation must recognize this.

I know that many of us see the admonition to “define who a customer is” and laugh or belittle the maker of the statement. But keep in mind the fate of IBM — while IBM touted the fact that everybody was their customer, millions of dollars of replacement parts and add-on business went elsewhere.

A customer, then, is someone who buys X-number of dollars of Y-product offerings in Z-period of time. That is, we define a customer by the dollar amount, the penetration or depth of products purchased, and the factor of pertinent recency.