Increasing Customer Value One Contact at a Time

Original Post: 7/17/2003
Ask a dozen customer-facing managers in any large company whether their CRM initiatives have been a success and the chances are that many of them will say “no.” Ask them why they failed, and they will talk about big bets on technology, insufficient management support, a lack of focus on customers and a number of other factors. And ask the others why their initiatives succeeded, and they will tell you about having a customer-focused strategy, line-level training and support, an emphasis on measuring outcomes, and a number of other factors.

But look past their generic answers — at the root causes of CRM success and failure — and a different picture emerges. This one shows which CRM capabilities create (and destroy) value — and the additional value from using the capabilities more effectively. Value is created during contacts with customers, both for the company and for its customers, but it leaks away through inefficiency. A phone company making a sale instantly creates value, whereas being slow to collect an overdue phone bill erodes it.
The picture also shows the priority with which to use CRM capabilities to optimize short-term value and which to invest in for future value growth. The phone company creates short-term value by optimizing marketing campaigns, whereas, investing in its brand creates growth in the future.

What is Customer Value Management?

Companies have long realized that profits are generated by doing the right things, for the right customers, at the right time, as cost effectively as possible. But until recently, they didn’t have the right tools to optimize bottom-line value.

So what exactly is Customer Value Management (CVM)?

Customer Value Management is the ongoing dynamic optimization of the value of a portfolio of customers throughout their lifetime with your company.

CVM is about ongoing dynamic optimization. That means optimizing the value of your contacts with customers at a single moment in time and dynamically re-optimizing value as their behavior changes. This is not new. Modeling and simulation techniques developed by operations researchers have been used to solve optimization problems for decades. What is new, however, are CVM tools that can optimize contacts with customers and then re-optimize them as you learn more about the customers.

CVM is also about optimizing the value of a portfolio of customers over their lifetimes. Not all customers have the same value. Some have a higher value because they spend more over a longer period. But loyal customers are not always the most valuable. Recent research has shown that short-lived customers with high spending patterns can be just as valuable as the highest spending loyal customers. So where should you spend your marketing budget? On trying to capture the high spend of “butterfly” customers — or on capturing the spend of loyal customers? And what about the majority of average customers? CVM provides you with the tools to optimize value across the entire customer portfolio over their lifetime.

Show me the Money!

The foundation of CVM is understanding how value is created during contacts with customers. Although you can maximize value in the short-term — by offering as little value for customers as possible — this is not a viable longer-term strategy. Optimizing value also requires that you understand how value is created for the customer — and the trade-offs between the two.

The most common measure of the customer value is Customer Lifetime Value (CLV). This is made up of a combination of short-term cash flow (typically over 2–3 years) and longer-term growth options (typically over 4–10 years), both adjusted for risk. This three-way split is critical. Short-term cash flow focuses strategy and tactics on optimizing customer value in the immediate future. It also drives the annual budgeting cycle, which limits the resources available to create value in the coming year. Longer-term growth options focuses on the capabilities to develop to create value in the longer-term future. Risk erodes value and comes from variations in customers’ behavior, in business capabilities, and external factors such as competitor activities.

Value to the customer is more difficult to measure, but no less important to understand. Fortunately, most companies have enough market research to understand their key needs and enough transaction data to relate them to their actual buying behavior. Understanding the relationships between customers’ needs and a company’s capabilities is critical in effective CVM. It is pointless attracting high value customers if you don’t have the right capabilities to serve them profitably.

Once you understand the dynamics of customer value, you can segment them. But risk-adjusted value is not enough for segmentation; at least two other factors need to be incorporated. The first is needs-capabilities fit. This describes how well you can meet the segment’s needs with your business capabilities. Companies with a high needs-capabilities fit are more able to create additional value during contacts with customers. The second is the segment’s affinity with the company. The more customers feel an affinity with you, the more likely they are to do business with you and the more likely they are to stay with you if you make a mistake. Although these are not the only factors behind an effective value-based segmentation, they are the foundation.

Optimizing Short-term Value

As companies have experimented with CVM, a number of strategic steps have emerged. Each step builds upon the previous one and creates additional value for the company and its customers. Although companies do not have to go through each step, they do provide a tried and tested pathway to follow.

Many companies still run marketing campaigns by creating product-based offers then looking for enough customers to hit their response targets. Sitting behind this is a marketing planning approach driven by products and that doesn’t consider customers’ needs. The inevitable result is high volumes of “junk mail,” low response rates, and irritated customers. The first step in CVM is based on targeted marketing campaigns. This uses statistical models, typically “Next Best Product” models, to target marketing campaigns at just those customers who are likely to benefit from them. Although this may seem obvious, most companies are still product-driven and their marketing shows it. The benefits for those who do move to targeted marketing campaigns include up to 30 percent higher returns on marketing investment.

The next step is to extend targeted marketing beyond campaigns to other contacts. Targeted contact management uses similar statistical models, typically “Next Best Activity” models, to identify what the next best contact activity should be to drive product sales to target customers. This could be a marketing campaign, but it could equally be a “health check” phone call to the customer. The benefits can be significant. One credit card company, which piloted targeted contact management, identified an increase in sales of 25 percent and a reduction in cost of 10 percent, worth over $20 million when rolled out to its entire customer base.

Developing Longer-term Customer Value

Companies that master the first two steps continue to improve value creation as the CVM approach is adopted across the organization and with partners. But they still focus on the next campaign or contact, rather than on managing customers over the longer-term based on value-driven insights.

The next step is optimized contact management. This develops customer development plans for each segment, setting out which contacts should be made to which customer and when, to optimize value creation. With the customers of most companies already saturated with outbound mails and contacts, this approach plans the right contacts to optimize value creation. A leading European bank piloting optimized contact management uses statistical models and business rules to plan the sequence of customer contacts that optimize value for creation for the bank and its customers. Just prior to being carried out, the contacts are re-evaluated to take into account recent customer events and a “customer action prompt” delivered to the appropriate channel. The approach is expected to deliver a significant increase in the bank’s return on marketing investment through making the right contacts, at the right time, through the right channels, to the right customers.

Leading companies are starting to extend CVM thinking to inbound contacts too. The same types of statistical models and business rules can also be used to predict why customers are likely to contact your company and what to do. With a good understanding of customers’ needs and the right “sales from service” capabilities, they can expect to turn up to 50 percent of inbound calls to create additional sales.

As companies continue to struggle with CRM, CVM will continue to play a bigger and bigger role. And the reasons why are not hard to understand. Firstly, it provides you with a tried and tested set of tools to drive additional value growth. This applies just as much for your customers as for your shareholders. It does this by optimizing short-term value creation through campaign and contact optimization and by developing longer-term growth options through value-based customer planning.
For leading edge companies, CVM is the only practical way to optimize value growth from their CRM initiatives.

Test Your CVM Capabilities. Can You Answer YES to All These Questions?

To see how far you are down the path to successful Customer Value Management, take a couple of minutes to take this CVM quiz. Then look at your score to see how well you did. It should get you thinking about what Customer Value Management can do for you.

1. Do you know what drives value creation in your company? And value destruction?

2. And for your customers?

3. Do you know which of your business capabilities support value creation?

4. Can you identify the best opportunities to create additional value? In the short and long term?

5. Can you identify what you need to do to harvest that value?

6. In light of your business capabilities, do you know the trade-offs you must make to harvest that value quickly?

7. Do you optimize the choice of outbound campaigns and contacts with customers to create additional value in the short-term?

8. Do you plan contacts with customers to optimize value creation over the longer-term?

9. Do you use closed-loop reporting to measure the performance of CVM and to continuously improve its effectiveness?

10. Have you created a plan to develop your CVM capabilities in line with the value opportunities?
How well did you do?

If you answered YES to 9 or more questions — well done, you are a leading CVM company. You are probably the runaway leader in your industry.

If you answered YES to 6–8 questions — you are well on the way to managing customers for value, but you still have work to do. You are probably one of the leaders in your industry.

If you answered YES to 3–5 questions — you have started, but you clearly have some way to go before you can manage customers for value.

If you answered YES to 2 or less more questions — then you really need to think hard about adopting Customer Value Management. Otherwise, you may not have any customers left to manage for value in the future!

Related articles

• Valuing Customer Value (customerthink.com)

• CVM Blog (nwelford.wordpress.com)