How to Maximize Your Return on Customer In the Real World

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How to Maximize YourReturn on CustomerIn the
Real World
Martha Rogers, Ph.D. rogers_at_1to1.com
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Consider What New Technology Hath Wrought The
learning relationship
Customer talks with you
FEEDBACK

• The more effort customer invests, the greater
• his stake in making relationship work
• Going to a competitor reinventing the
  relationship

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The Key Strategic Issue

• What can you do now
• to make your customers
• more loyal and valuable,
• even though your competitors
• will do the same thing,
• the same way?

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Where does all our revenue come from?

• From products?
• From vendors?
• From our brands?
• No, its simple
• All our revenue comes from customers
• Fact Some customers are worth more than others

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Traditionally, Companies and Customers are
Adversaries

• Consider the language weve used when we talk
  about customers
• We segment them
• We expose them to our messages
• We develop promotion schemes
• We fight share wars
• Fundamentally, its a zero-sum game
• No alignment between company goals and what
  customer wants, except when a company gets caught

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Smart Companies, Foolish Choices

• The internet service provider who reaped
  temporary revenue
• And how one airline made money
• The Do Not Call referendum
• So why are companies still calling?
• Finders-keepers marketing only pays off for a
  minute
• So why do companies do it?
• Surely the sheer resentment of masses of
  customers should count for something?
• Could companies economic calculations be wrong?

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Value Measures from a Previous Century

• Management decisions that affect future cash
  flow
• GAAP sets ground rules for measuring and
  reporting and helps compare performance between
  companies
• Firms value is tangible assets plus net present
  value of all future cash flows
• Stock price fluctuates with different investors
  expectations about those cash flows
• But investors look at other variables too

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Value Measures from a Previous Century
(Contd.)

• Activity-Based Costing (ABC)
• More accurate than traditional, total-cost
  accounting
• Focuses on many indirect costs, such as overhead
  and infrastructure
• But ABC has disadvantages
• Doesnt account for cost of capital
• Ignores investment expenses and allows capital to
  be diluted
• Economic Value Added (EVA) registered TM of
  Stern Stewart
• Focuses on maximizing shareholder value
• Incorporates cost of capital and accounts for
  capital dilution
• Looks at business-unit level and above
• Historical measure
• Can be used by medium and large businesses

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What is Return on Customer?

• Customers are the scarce resource for a business
• ROC measures true economic return on this
  resource
• Consider the ROI on a portfolio of securities
• Tally up dividend and interest income during the
  period
• Then add in any increases or decreases in the
  value of the underlying securities
• But what if you only counted the income?
• A company is like a portfolio of customers who
• Buy things currently (current-period profit), and
• Go up and down in value (changes in customer
  equity)

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The Goal for a Business Organic Growth

• Same-store sales increases
• Account penetration
• Increased share of customer
• Margin protection and improvement
• Churn reduction
• New customer acquisition
• New products and services for unmet needs

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In Contrast to Purely Financial Growth

• Todays company executives are much more wary of
  acquisitions and business combinations
• Best examples of financially grown conglomerates
  are also house of cards empires with little
  lasting value
• Enron
• Tyco
• Vivendi
• WorldCom
• New U.S. accounting guidelines impose more
  discipline on use of mergers as a tool for
  top-line revenue growth
• Much less pooling allowed
• Stricter amortization of good will
• Constant re-evaluations (and write-downs) of
  acquired assets

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Customer Equity is the Right Metric

• First, it is a matter of common sense
• The firm is engaging its customers in
  customer-specific interactions and activities,
  therefore
• Our objective must be to increase the long-term
  value of each customer engaged!
• But second, management needs an accurate way to
  evaluate its own actions
• Resolving conflicts and prioritizing actions
  requires an over-arching set of guidelines
• Customer equity stands above these conflicts
• Every management decision should be made based on
  how it effects customer equity

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Choosing the Right Accounting Treatment

• Rolling up LTVs to get customer equity
• Should LTV be based on marginal financial
  contribution?
• Or, should it be calculated from fully allocated
  profit?
• Recognizing capital costs
• Use a strict cash flow analysis?
• Or, add CRM capex and back out CRM depreciation?
• How customer equity is calculated will change
  based on the purpose of the analysis
• Is it to decide whether to launch a new business?
• Or are we cutting service costs?

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Actions That Increase Customer Equity

• Acquiring profitable customers
• Retaining profitable customers longer
• Eliminating unprofitable customers
• Up-selling additional products in a solution
• Cross-selling other products to customers
• Referral and word-of-mouth benefits
• Reducing the cost of service for customers

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Enterprise Creates Value Two Ways

• Profits are harvested, and
• Customer equity is created or destroyed.
• Needed A metric to capture the effects of both
  types of value creation.
• Customers are the scarce resource.
• So what is the rate at which a company creates
  economic value from its customers?
• Return on Customer

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ROC A Speedometer for Organic Growth

• ROC measures the efficiency of a firms true
  value creation with customers
• Return on Customer has important implications for
• Pricing policy
• Sales force organization
• Distribution channel management
• Product and service development
• Supply-chain automation
• ROC should also be used to evaluate new ventures
  and business combinations
• Customer equity of the combined entity should
  exceed the sum of the entities individual
  customer equities

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Warning Marketing can destroy value!

• Example Start with a million customers
• A marketing campaign generates a 1 response
  (10,000)
• Cost is 1 per solicitation, or 1 million total
• Each response generates 125 in LTV profit, or
  1.25 million total
• So each individual campaign is successful, with a
  250,000 profit
• But suppose non-responders become just 0.5 less
  likely to respond with each solicitation
• Then with each campaign customer equity decreases
  by more than the profit harvested!

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What Customer Strategy is not

• Its not just the technology.
• Technology is an important first step, but not
  the only step
• Its not just some personalized e-mail.
• Its not just more sophisticated segmentation.
• Its not just a more efficient call center.
• Its not just the job the marketers do.
• Its not just a new sales training approach.
• Its not just good customer service random
  acts of CRM that cant be remembered the next
  time we see this customer.
• We will not build customer equity with better
  targeted harassment!

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And What Customer Strategy is

• Building shareholder value by increasing the
  value of the customer base.
• Using information about each customer to make
  each customer more valuable to the firm, and the
  firm more valuable to each customer, while
  decreasing the cost of servicing each customer.
• Enterprise-wide.
• Applying more resources to more valuable
  customers, and more resources to keeping valuable
  customers rather than acquiring new ones of
  unknown value.

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And What Customer Strategy is(Contd.)

• Deliberately increasing customer equity through
  every decision, every day, and holding key
  company leaders accountable for that increase.
  Counting the increase, or return on customer, as
  revenue minus the customer equity used today to
  get that revenue today.
• Treating different customers differently to build
  ROC.

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What if we could, and did, measure how much
todays decisions really cost?

• What if account managers, and CEOs, were
  penalized for the customer equity they have to
  spend today to achieve this quarters revenues?
• What if Wall Street analysts held companies
  accountable for customer equity (as the best
  measure of enterprise value) as well as current
  revenue?

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Starting Now, Customers are our Business

• And aligning our interests with the customers
  makes the most sense
• Otherwise we will be irrationally
  self-destructive
• Managers do not behave badly because they are bad
• They behave badly because they are in the dark
• And the little guidance they get drives them in a
  direction at odds with the interest of the only
  value their firm will ever have Customers

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Starting Now, Customers are our Business
(Contd.)

• Product expertise can be duplicated
• Products will come and go.
• We cant prevent a competitor from knowing what
  we know about these products.
• Customer expertise is competitively defendable,
  unique and permanent
• What advantage can you get from information?
• Customers are the only reason we have a business
• Thus, measuring the value of the customer base
  and using that to make managerial decisions is
  imperative
• We call it customer equity

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Maximizing the Value of the Customer Base Means
Treating Different Customers Differently
Relationships are the vehicle for
customer-specific actions
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Learning Relationships are All Around Us

• 20th Century Competitive advantage came from
  product and brand and service
• 21st Century Competitive advantage comes from
  information

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The Information Advantage Kingsway

• Shopping bags are a commodity.
• How to break out of lowest-bid trap?
• Use information about each customer to extend the
  definition of the business and build ROC.
• Kingsway charges up to 7 more than competitors.
• Now Kingsway is in the inventory-movement
  business.
• What business are you in?

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The Information Advantage Tesco

• Groceries are a commodity.
• How to break out of lowest-price trap?
• Use information about each customer to extend
  the definition of the business.
• Ten years ago the discount grocery business.
• Now The households needs business.
• What business are you in?
• Relationships are the tool to build value.

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Treating Different Customers Differently
What if we increase the value of the customer
base by managing the mix of customers?
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Visualizing an increase in customer equity
This necessarily implies customer-specific
objectives and strategies
Relationships with individual customers become
the vehicle
Number of Customers
Profitability (estimated LTV in )
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The Nature of a Relationship

• Interaction is required, both ways between two
  parties
• Interactions drive a change in behavior
• Relationships are reciprocal
• Relationships are iterative by nature
• A context develops over time
• It gets easier and easier to continue the
  relationship
• There is an ongoing benefit to both parties
• Each party wants to recover from mistakes
• Every relationship is different
• Relationships are measurable

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Successful Relationships Generate Trust

• Trust is the engine of all commerce
• When I trust the company I deal with
• I can share my personal, private or sensitive
  information
• I trust you to make recommendations and act in my
  own interest
• Youll help me even in areas outside of your main
  business
• Earning and keeping the trust of customers is
  equivalent to taking the customers point of view
  
• Trust is inversely related to the amount of
  self-orientation a customer perceives in a
  company
• The opposite of self-orientation the principle
  of reciprocity

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Creating a Culture of Customer Trust

• Treat the customer the way you would want to be
  treated if you were the customer.

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More Than Numbers and Processes

• Both parties have to be willing to engage in a
  relationship
• The customer must trust the company
• The parties must be committed to having a
  relationship
• There must be a mutual benefit and alignment
  between the parties
• So dont be misled by economics and equations
• True success only comes from seeing your business
  from your customers perspective
• To get real value from customers, first deliver
  real value to them

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Customer Relationships Protect Unit Margins and
Reduce Churn

• Better customer service or satisfaction
• At lower cost
• What we learned from the hotel chain
• Margins are the flip side of learning
  relationships
• If its in the customers interest to stay loyal
• Competitors discounts will have less appeal
• You will spend less on acquisition expenses
• Loyal customers cost less to serve
• Higher marginsless churn

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Making it Practical

• Maximize Return on Customer by breaking customer
  base into portfolios
• Evaluate managers based on portfolios ROC.
• Value creation at the molecular level.
• But changes in customer equity must now be
  predicted from current actions
• Otherwise, how will managers be evaluated?
• So what are the leading indicators of customer
  equity change?

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Three Types of Leading Indicators

• Attitudinal indicators
• Willingness to recommend, customer satisfaction,
  brand preference, level of trust and confidence
• Behavioral indicators
• Changes in account profile, interactions, sales,
  referrals, returns, complaints
• LTV components
• What variables go into the companys LTV
  equation?
• Churn rate, frequency of purchase, share of
  customer, service contract, account penetration
  level

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Behavioral Indicators

• Financial services firm
• A fall-off in transactions indicates increased
  risk of attrition
• Credit card firm
• Married couple each using a jointly held card
  increases loyalty dramatically
• Automotive firm
• Customer buying on referral is more likely to be
  satisfied longer and to buy additional products
  and services
• Electronics retailer
• Customer enlisting for e-mail newsletter more
  likely to return to store for future purchases

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ROC is Qualitative, Not Just Quantitative

• Gaining customer trust involves both culture and
  capabilities
• Up to now, the best examples of ROC success have
  been from companies not tracking it formally
• Ritz-Carlton, USAA, Charles Schwab, Peter Jones
• What any company can do
• Even without financial tracking mechanisms
• See things from the customer perspective
• Act in the customers interest, to solve customer
  problem
• Employees want the capability to behave this way
• But companies are hesitant to push customer
  service without the metrics to hold costs down
• Now, with ROC, a company can measure costs and
  benefits accurately

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Building Customer Equity

• Short-term and long-term return.
• Revenue enhancement and cost reduction.
• To pay off, investments to build the value of the
  customer base must be
• Measurable
• Reportable
• Manageable
• Impactful
• The value of the customer is critical. How do
  you measure that?

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Examples All Over the Globe

• Tesco
• National Australia Bank
• Hewlett-Packard
• BMW
• Bentley Software Systems
• Zanes Cycle Shop in Connecticut

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Why are companies doing this?

• In order to make sense to their customers
• Remembering customers from one transaction to the
  next
• Behaving in an outwardly rational manner
• Customers demand this kind of treatment
• To eliminate waste and duplication of effort
• Using computers to work faster, more efficiently
• To improve the long-term value of the enterprise
• Increasing the value of the customer base
• Getting, keeping and growing customers

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We Know What a Memorable Customer Experience
Could Be

• Youre a very frequent flyer on Northwest, so you
  get frequent free upgrades to first class. But
  instead of treating you like all platinum flyers,
  they know what matters most about first class to
  you, and you always find a bottle of water on
  your seat in first class.
• You walk into your doctors office and all of
  your data is available, your prescription order
  is e-mailed to the pharmacy, which checks for
  interactions, and sends your medicine to your
  home. Your insurance forms are automatically
  filed and the difference, once you approve, is
  deducted from your checking account.
• Your dry cleaner gives you plastic bags with bar
  codes which tell who you are, how you like your
  starch, and your preferred method of delivery and
  billing. They keep track of your buttons and make
  repairs as needed.

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• What experience should I expect if Im your
  customer?
• What will make me want to buy more, rather than
  merely to buy now? And buy it from you?
• What do you need to do to make it happen?

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1to1 Meeting More Needs
Enhanced Customer Need Set

• Add-on marketing services, publishing (Reed
  Elsevier)
• Anticipating needs
• Recording contact data
• Recording interaction data
• 365 virtual customer TDCD
• E-commerce
• Customer collaboration
• Value streams
• Community knowledge
• Alliances/resources
• Delivering increased ROC

Product-Service Bundle
Billing, invoicing, cost control
Service packaging
Core Product
Customer strategy
Promotion, communication
Service operations
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Eneco

• Dutch seller of natural gas
• Many green house customers
• Customization maintaining the green houses
  complete environment
• Temperature
• Humidity
• CO2 content
• Using remote monitoring
• What business are you in?

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How much will you spend on CRM?
More than 25 of U.S. firms will spend more than
500,000 over the next two years, for a total of
8.7 billion in 2006 Led by financial services,
retail and telecom -- Jupiter Media Metrix
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Value-building relationships are certainly not
easy

• Survey of more than 100 CRM technology
  implementations
• Implemented on time 55
• (median implementation time 8 months)
• Implemented on budget 63
• Achieved all goals 31
• No meaningful results 32

Source Journal of Customer Loyalty
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Why so many CRM failures?

• The strategy problem
• Ready, fire, aim!
• What do we need our customer strategy to do?
• How do we measure and report?
• The information problem
• Understand the whole value and need of each
  customer.
• The adoption problem
• Many different players at the firm are involved
  in a CRM implementation, and critical to its
  success.

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Ask Yourself What Is Your Firms Most Unique,
Non-Replicable Asset?

• Products?
• Brand equity?
• Sales staff?
• Merchandise?
• Stores?
• Computers and calling centers?
• Marketing programs and tie-ins?
• Or customers?

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And Who Manages Your Most Valuable Asset?

• You have product managers, regional managers,
  operations managers, Web master, promotions
  manager, department managers, sales territory
  managers, call center managers, help desk
  managers, merchandise managers, campaign
  managers, etc.
• Whos responsible for managing customer
  relationships and growing customer equity for
  each of your customers?
• How do you measure that?
• How do you reward it?
• How will you build the value of the customer base?

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The Challenge of 1to1 Is Not Technology
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Ross Controls The Learning Relationship

• Why would I switch to you? Youre already five
  product generations behind where I am with
  Ross.
• -- CEO, Knight Industries, speaking to
  a Ross competitor
• Ross had to overhaul its selling process
• salespeople integrators

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Adoption Basics

• Get everyone on board
• Friday night at Chicago OHare
• Do things for the right reasons
• Caution improving process may slow you down
• Use customer information and relationships to
  improve cash flow
• Which payment envelopes should be opened first?
• Should credit card issuers forgive 7.3 billion a
  year in late fees?

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Relationships cant be installed.
They must be adopted.
?
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Ultimately, Adoption Requires a Customer Value
Culture Built Into the DNA
USAAs Golden Rule of Customer Service

• Treat the customer the way you would want to be
  treated if you were the customer.

B/Gen. Robert McDermott
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Issues to Keep Us Awake Nights

• For every step we take toward building the value
  of the customer base, ask
• How will this benefit the customer?
• How much will it cost to do this?
• How much will it cost not to do this?
• What if a competitor does it first?
• How much can we expect it to pay off?
• Short-term
• Long-term
• Revenue enhancement
• Cost reduction
• How can we use a strong brand to leverage
  relationships?
• Whos managing our most valuable asset?
  Compensation?
• How will we measure our success?
• What business are we in?

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Thought Experiment
If you were launching a brand new, customer-
strategy business today
How would you compete with your organization?
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Peppers and Rogers Group
rogers_at_1to1.com

• Management consulting in building customer equity
• 12 offices around the world
• Including Norwalk, San Mateo, UK, Brazil, Mexico,
  Singapore, Sydney, Turkey, South Africa

• Recently acquired by Carlson Marketing Group,
  which expands capabilities
• Magazines, newsletters
• www.1to1.com

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rogers_at_1to1.com
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www.1to1.com