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How Profitable Are Your Customers?
Industry executives answer the question, Is it necessary to estimate a customer's lifetime value to determine their true profitability?
Posted Mar 30, 2004
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Customer profitability is always a hot topic. Using CRM to bolster relationships is one way organizations can boost that profitability. At the recent Frost & Sullivan Sales & Marketing Executive Summit CRM magazine Editor-in-Chief Ginger Conlon, moderator of the SuperPowers of CRM panel, asked the panelists, "Is it necessary to estimate a customer's lifetime value to determine their true profitability?" Robb Ecklund, vice president, CRM product marketing, Oracle: The only exception to that rule would be businesses that have a shorter planning horizon. But the more forward-looking organizations are thinking about their customers in terms of lifetime purchases. The quintessential example is people who buy cars. That's a huge purchase, but automotive companies need to think about lifetime buying patterns, and that first car purchase does a lot to establish that. If I like my Ford, I'll tend to buy another Ford. But we shouldn't just think about the lifetime value of a particular individual, [we should also consider] the purchases that he or she may influence. In financial services, for example, I may not do a lot of business with my bank, but my spouse owns a business or sits on a board, so by relation, I am also an important customer to my bank. Jon Wurfl, director, global CRM communications, SAP AG: You have to recognize the industry you're in and [understand what is] customer lifetime value, and how you can keep that lifetime as long as possible. How can you turn those skateboarders into midlevel income earners that are loyal and -- brand-loyal to you? And so you do have to plan for lifetime value, if you can -- as long as you can figure out what's after that next lifetime. Barbry McGann, vice president of product management, PeopleSoft Enterprise CRM, PeopleSoft: How you calculate customer value is going to be one of your differentiators, and each industry has a different calculation of value. It isn't narrow as just one calculation and it can bring in [customers'] roles and relationships. If you look at the different industries, financial services is famous for setting the standard with trying to master "How do I plan based on my customer's life cycle?" So they're a student in college, what are they going to need from a financial institution now and then, when they grow into getting married and their first job, planning out how do you get the right offers and grow and develop that customer over time so he or she can be a key customer and very loyal customer in the long term.
I think the other industries are following suit. You can't pick up an article today, especially in the high-tech industry, where you don't see service as a way to grow their businesses. And that means understanding the life cycles of your customers and also the products and how do you grow that relationship over time. We're in an economy right now where it's important to go after your install base, to grow that install base and to grow those strong relationships, and how do you do that if you don't have a strategy to do so? Jeff Pulver, vice president, worldwide marketing, Siebel Systems: It comes down to growing that relationship with a customer, gathering as much data as you can. Because, often, you can't make an early call given just a few data points. But building that relationship long term and understanding more about that customer in terms of where are they in their in their demographic, where are they in their age group, family connections, etc. So the more you drill down and understand that customer, the more you can assess that profitability. Brett Queener, vice president, field operations, Salesforce.com: I think lifetime value is very dangerous. If you've got fifty data quality experts and you're in banking and you've got terabytes of warehouse and you're sure your data's very clean and you spend a couple million dollars for a consulting company to make sure the model works, then [lifetime value] is something you can rely on. For me, it's just one metric you would look at. There are other models of profitability we can [use]. I've seen many lifetime-value models that look inherently flawed. If you are six or seven years down your CRM initiative and all the gates are go, then maybe start to rely more on lifetime value. Fr many companies, maybe it makes them feel a little like underachievers that they haven't figured out what the lifetime-value model is out of the gate.
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