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CRM's Next Evolution
Companies need to shift their focus from customer satisfaction as a measure of ROI to understanding the intrinsic value of individual customers. To do this, they need to examine the relationship between a company's investment in customer relationships and the returns that different customer segments generate in return for those investments.
Posted Jan 31, 2002
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By now, most companies have realized that CRM is not a system or software package; it is a strategy around which successful businesses organize to optimize profitability, grow revenue and improve customer loyalty. For many companies, this realization came as a result of failed CRM implementations where focus on technology overlooked the process and organizational changes integral to successful CRM.

Today, companies understand that CRM requires a more holistic approach, and they are realizing the need to integrate business strategy, core business processes and enabling technologies in the name of the customer. But to truly maximize their returns on these customer investments, companies need to go one step further. Companies need to shift their focus from customer satisfaction as a measure of ROI to understanding the intrinsic value of individual customers. To do this, they need to take a closer look at the relationship between a company's investment in customer relationships and the returns that different customer segments generate in return for those investments.

As companies begin to recognize that broad efforts at satisfying all customers do not guarantee increased revenues or profits, an emphasis on customer value, or Customer Value Management (CVM), defined as the optimal matching of differential customer value with differential customer investment, will become the standard for maximizing returns from the customer base.

The power of CVM rests with the fact that in most companies, a small percentage of customers represent a disproportionately large share of profits, while others may contribute little or even negatively to profits. To treat all customers the same is a waste of valuable resources. Instead, CVM requires companies to evaluate the contributions of different customers; segment customers and prospects based on their overall value, and apply this knowledge to target service and investments accordingly.

With CVM as a guiding principle for managing customer relationships, companies can apply differential treatment according customer value. Companies seek to exceed the expectations of customers that contribute the highest value and build strong "loyalty barriers" to protect the value they contribute. The next most profitable customers also deserve significant investment with the goal of meeting customer needs and migrating toward higher value. Customers that nominally contribute to value should receive selective investment with the goal of migrating to higher profit contribution levels. And yes, some customers, if they cannot be served profitably, should not be invested in. But this should only happen after the company develops a thorough understanding of behavior among this population, and identifies the patterns and predictors that mark a customer with high potential value.

While many companies understand this conceptually, fully engaging CVM is often the more daunting challenge. It requires two very important and often difficult steps. Companies must understand the differential value within the customer base in a meaningful way and be able to differentially manage and invest based on value.

Identifying Differential Customer Value

Unfortunately, most companies start and end their customer analysis with only revenue or transactional measures. But this analysis provides a dangerously incomplete picture. Without a more comprehensive understanding of the profit a customer generates, these measures can lead to investments that only worsen the financial picture. For example, using a revenue-based analysis, Customer A appears to be a high value customer due to high transaction volume. Unfortunately, Customer A also makes frequent calls to customer service, returns most purchases, and demands disproportionately high customer service levels. In a profit-based analysis that integrates these behavioral patterns and factors into the equation, Customer A represents a low value, negative contributing customer. The company may pursue lower cost service alternatives or ultimately encourage Customer A to migrate to a competitor.

Conversely, Customer B appears to be contributing low value, based on low transaction value or because the customer subscribes to the lowest tier service package. However, further analysis would reveal that Customer B has never called customer service, understands how to read the monthly bill, and is a high potential customer for new products. In a profit-based analysis, this is a high value customer. Clearly, revenue-based customer value analysis provides an incomplete picture of customer value and may lead to sub-optimal resource investments and no improvement in overall profitability.

CVM goes beyond revenue analysis to incorporate all customer assignable costs including: customer service contacts (frequency and duration), customer acquisition, cost of goods sold, billing, collections, remittance, bad debt and other marketing and promotion costs. This data is not always easy to obtain, and often must be extracted from across multiple functional areas in an organization. But the time and effort required to compile this information almost always merits the investment, as the resulting information can be revealing, and often surprising, for most companies.

Managing Differential Value

Once a company has a clear picture of true differential customer value, the next step is to develop and apply differential treatments to optimally manage customer value. These treatments must be aligned with the appropriate contact channels. Treatments may include routing customers via the call center Interactive Voice Response (IVR) system, specially tailored direct marketing campaigns, redirecting customer service inquires to the web, or alternate telephone numbers for frequent or preferred customers. For example, specific customers may negatively contribute to value because of frequent inquiries to the call center. Identifying and channeling them to web self-care, or even charging these customers for calls to the call center can begin to shift investment levels into line with value. As another example, high value customers may be immediately routed via IVR to a call center providing highly personalized service. The critical factor is that the selected treatment is valued by the customer, builds loyalty with valuable customers, and/or redirects costs to make less valuable customers more profitable.

Managing differential customer value is dependent on an organizational shift in focus and competencies toward better management of customer touch points. Companies must have the enabling technology to manage customers on a value basis. These may include caller identification, IVR call routing, Web site personalization, or direct mail/email campaign management. For many companies, a CVM approach will be crucial to driving ROI from existing CRM technology investments.

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