Part Five: Getting a Handle on Customer Metrics
(I. Barry Goldberg, principal consulting partner of Matterhorn International, continues his six-part series on integrating customers into strategy to form a truly customer-focused company.)
Nowhere in the CRM community is there more contradiction and confusion than in customer metrics. People either espouse customer metrics as the holy grail of CRM or they label them a waste of time. But the basics are simple--your ability to use customer-centered metrics to mange your business will depend largely on what business you are in and the relative importance of sustained customer relationships.
Defining Customer Metrics
Direct marketers often chuckle at the idea of customer metrics. The acquisition cost of a magazine subscription is so high that tracking renewals has been part of their landscape since day one. They understand that lifetime value in their model is more important than today's sale. Why else would renewal promotions begin on month five of a 12-month subscription?
Key customer metrics include:
• Cost of acquisition
• Lifetime value (profitability)
• Product/service penetration (personal and household)
• Cost of service
• Attrition by segment (especially behavioral segment)
• Attrition by deciles
Many of these overlap and there is continuing debate about whether segments and households count. Every business is different and some may have more direct application to yours than others. My counsel to organizations starting down this road is to simply choose some areas that they are effectively able to measure.
Why Customer Metrics?
An old business axiom says: "What does not get measured does not get managed." This is especially true with customers. Remember that the IT and organizational DNA of most companies was engineered for transactions or products. The more transaction/product-intensive your business is, the more likely it is that both the original organizational design and IT architecture barely recognize customers. As a result, the usual success measures that companies employ come from financial reporting only. Many businesses, if they could start with a blank slate, should measure customer outcomes on a par with financials--or even ahead of them.
No business can afford a poor reputation for serving customers; however, some businesses require more focus on customers than others. The key here is not to rely solely on financials as the measure of success simply because that is what you have always done. If you want to move your company to a more customer-centric model, you need to start by measuring customer-centered outcomes. I would love to tell you this is easy; but for most companies it requires a significant commitment and, often, a leap of faith.
Relationship Between Financial and Customer Metrics
Here is where the rubber meets (or more accurately, does not meet) the road. Most executives can tell you about their organization's financial performance. But very few carry customer performance in their head, much less manage according to it. Although it has always been true to some extent, our current business climate has even more strongly emphasized financial performance as the end-all, rather than an indicator of other more foundational issues. Capital markets measure companies by their financial performance, so our challenge becomes to connect customer metrics to traditional financial metrics, introducing a classic chicken-and-egg cycle:
•In order to measure customer outcomes sufficiently to truly connect them to financial performance, a company must have a fully evolved customer data infrastructure to capture costs and return based on customer performance.
•In order to have a fully evolved infrastructure capable of capturing costs and return based on customer performance, a company must have made the necessary investments.
I remember getting very excited when Dr. Bruce Morgan, a Yale economist, examined a related topic in his book, strategy and Enterprise Value in the Relationship Economy. We had a spirited exchange about whether his economic findings could be used to link traditional financial metrics to customer metrics. His conclusion was that at some point in the process, in order to make a meaningful difference, executives would have to take a chance. (When an economist tells you it requires a leap of faith, you know you are in for a challenge.) Of course, a number of things can be done to examine ROI--especially on the expense side. Keep in mind that ROI on CRM is different from customer metrics. Measuring customer outcomes and behaviors is the best way to gauge CRM success.
The Executive Dashboard
Every executive has a set of key metrics for the organization--the gauges and meters on the dashboard by which he or she pilots. These tend to be quantitative measurements that can be monitored constantly and do not require a fire drill in the reporting group to produce. In most cases, they are mainly financial metrics (EBITDA, ROA, ROE, etc.). Some also include internal measurements such as employee attrition or even customer satisfaction scores. But it is when your CEO can rattle off customer attrition stats or average lifetime profitability with the same confidence that he or she knows the balance sheet, you will be on your way to a more customer centric model. After all, the inverse of that old business adage is: "What gets measured, gets managed."