One thing is sure: Customers are one constant in a world of uncertainty and change. In Chapter 20 I will discuss creating value not only for customers in the form of satisfaction but also for an organization’s investors and owners in finan- cial terms of economic value. However, the unchallenged belief that increasing sales volume is the only key can lead companies to depressed profitability just to sustain sales growth. Some customers are unprofitable to conduct business with.
What matters is to shift mind-sets and thinking from sales volume at any cost to profitablesales volume.
Security investment analysts and stock brokers struggle with placing a market value share-price on stocks. Many of them fall back to focusing on short-term fi- nancial results as a substitute or proxy for long-term potential. One way to help shift the investor’s focus to long-term value creation is to take a closer look at a company’s customers. When an organization’s customer base is expanding and its existing customers are being managed to higher levels of profit (see Part CUSTOMER INTELLIGENCE AND RELATIONSHIP MANAGMENT 153 ccc_cokins_17_151-172 .qxd 1/14/04 10:30 AM Page 153
Three on customer profitability computed with ABM), there is a foundation in place to manage even higher profit growth.
So customers really matter. A way for investors, shareholders, and a manage- ment team to think about measuring a company’s promise for long-term eco- nomic value growth performance is to measure its customers. How many customers does it have? How much profit is it earning from each customer today and in the future? What types of customers are the best to up-sell? What kind of new customers are being added and what is the growth rate of additions?
(Later in this chapter I will discuss measuring customer lifetime value[CLV]
as a predictive measure computed in financial terms. Since changes in customer behavior are usually not volatile, CLV may be useful to understand profit mo- mentum. CLV measures are not interrupted by one-time charges and other short- term but substantial financial statement surprises.)1
Customers will always exist. However, customers have widely varying de- mands—and their demands are increasing. Ideally, the cost-to-serve compo- nent of each customer’s profit contribution should therefore be measured to provide economic visibility. That is where ABM fits in. But let’s not get ahead of our story.
Internet-enabled e-commerce is irreversibly shifting power from the seller to the buyer. This power shift results from the buyer’s access to so much more in- formation for product education and comparison shopping. The result is the con- sumer will become king or queen. Customers have an abundance of options; and now they can get information about products or services that interest them in a much shorter amount of time than what today appear as the antiquated ways of the past. The customer is in control more than ever before. Consequently, from a supplier’s perspective, customer retention becomes even more critical, and treat- ing customers as a lifetime stream of revenues becomes paramount. In a later section in this chapter, “Customer Value Measurement Using Customer Lifetime Value,” I will describe ways to link customer revenues to organizational profits.
They should never be assumed to always go in the same direction.
With e-commerce, each customer can express his or her unique desires and will increasingly search for customized goods and services. Technology is mak- ing this possible. As widely varying customization and tailoring for individuals becomes widespread, how will supply chain manufacturers and distributors dis- tinguish their profitable customers from their unprofitable ones? The answer can be provided with ABM customer profitability calculations.
However, the level of profitability is only one variable or factor for formulat- ing a personalized marketing strategy. CI and CRM involve as many variables as are relevant to keep buyers buying from you. Other examples of variables may be geodemographic or behavioral. Geodemographic variables include gender, 154 INTEGRATING PERFORMANCE MANAGEMENT WITH CORE SOLUTIONS ccc_cokins_17_151-172 .qxd 1/14/04 10:30 AM Page 154
age, income level, family status (single, married with young children, empty nesters, retired, etc.), recent purchase history, or where they live. Behavioral variables may include customers being loyal, cautious, early adopters, spend- thrift, sophisticated, and so on. Analytic CRM examines combinations of these to maximize offer response rates.
CUSTOMER INTELLIGENCE AND RELATIONSHIP MANAGMENT 155
Transition from Mass Marketing to Customer Database Marketing Systems
A historical perspective will aid in understanding the marketing revolution that is under way.
Customer intelligence/customer relationship management (CI/CRM) sys- tems evolved as a result of advanced information technology and large data- bases used to refine marketing and sales efforts. The CI/CRM tools enable companies to target individual customers or micromarket segments with pin- point accuracy and manage the dialogue and interactions. In the earlier appli- cations of operational CRM (without much analytical CI) in the 1990s, the goal was simply to promote products and emphasize key services to specific types or groups of sales prospects or existing customers. Early operational CRM also focused on cost savings by automating business process work flows or lowering transaction costs, such as in call centers.
Much has changed now. The emphasis since then is on growing revenues, not simply lowering costs. And today mainframes have migrated to the desk top. The Internet takes relating to customers a step further by blending com- puting and communications into a platform-independent, globally accessible, and universally usable medium. Analytical CI, based on customer database marketing systems, has evolved as an important companion to operational CRM. For example, call center CRM tools may guide the telemarketer to make shorter calls to increase the number of calls, whereas analytical CI can increase the likelihood of acceptance of an offer during a call. A factor in de- ploying analytical CI is the marketing strategy that may be requiring a shift from increasing market share via more sales to increasing profit by better un- derstanding customer profiles.
It used to be that lowering costs and quickly bringing products to market could ensure a company’s success. Now e-commerce is creating a customer- focused approach to business. One of the earliest books on this topic was The One to One Future: Building Relationships One Customer at a Time, by Don Peppers and Martha Rogers.aTheir premise was that it is no longer sufficient
(Continued) ccc_cokins_17_151-172 .qxd 1/14/04 10:30 AM Page 155
156 INTEGRATING PERFORMANCE MANAGEMENT WITH CORE SOLUTIONS
Transition from Mass Marketing to
Customer Database Marketing Systems (Continued)
to offer products and use advertising to attract customers—now a business needs to understand eachcustomer’s unique requirements. That is, follow- ing World War II, mass marketing was appropriate; a company produced standard products and sold them to large common groups of customers, usually via mass media. “One size fits all” was accepted. But no longer. The CI/CRM way of thinking has shifted the concept of “share of market” to
“share of wallet.”
Most people in developed countries own the basic material things they re- quire, like clothes, furniture, and appliances. What they are more interested in are the subtle differentiators that the world of fashion has focused on—
quality items that people emotionally bond with, such as brand names. Hav- ing choice among product or service line diversity makes people feel like individuals or like part of a group they gladly relate to (e.g., Starbucks). Cus- tomer database marketing can monitor customers’ unique preferences with one-to-one dialogues.
The economics of profit support CI/CRM. It is exponentially more expen- sive to acquire new customers than to retain existing ones. Hence, customer satisfaction, always suspected as important, is now officially sanctioned as es- sential and critical. In short, the message is that suppliers must now continu- ously seek ways to engage in more content-relevant communications and interactions with their customers. This includes proactively anticipating cus- tomer needs.
Increasingly companies are realizing that improving their profitability re- quires more and better customer contact and more intimate customer rela- tionships. And indiscriminate mass marketing techniques are shifting to database marketing, sometimes called relationship marketing.
Although the marketing and sales functions clearly see the links between increasing customer satisfaction and generating higher revenues, the accoun- tants have traditionally focused on encouraging cost reduction as a road to higher profits. The wise managers recognize that some of the best profit- generating opportunities come from improvements, such as attaining higher quality, that achieve both lower costs and higher revenues from increased customer satisfaction.
aDon Peppers and Martha Rogers, The One to One Future: Building Relationships One Customer at a Time(New York: Currency/Doubleday, 1997).
ccc_cokins_17_151-172 .qxd 1/14/04 10:30 AM Page 156