• June 1, 2005
  • By Colin Beasty, (former) Associate Editor, CRM Magazine

Required Reading: Value Thy Customers

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It's important for companies to objectively assess the value of their customers, but conventional measures of customer lifetime value haven't been linked to overall business value and haven't been useful to senior managers. In Managing Customers as Investments, Sunil Gupta and Donald R. Lehmann show readers how to overcome both of these shortcomings. CRM magazine
's Colin Beasty spoke with Gupta about some key practices companies can utilize to make customer value a larger part of their management decisions. CRM magazine: In the book, you say that conventional measures of customer lifetime value have, traditionally, not been linked to a company's overall business value and therefore haven't been useful to senior management? What do you mean by that? Gupta: Often companies get bogged down by the data warehouses, technology, and everything else they are trying to collect. This sophistication of data collection is used for tactical purposes, such as ad campaigns, which catalog is sent to which customer, etc. While there's nothing wrong with that, those are the kinds of issues a CEO of the company really doesn't worry about on a daily basis. What I mean is, if the customer is the life-blood of any organization, then customer metrics should also be influential in making decisions at the top management level. They are not used because they get bogged down by the complexity of the CRM model. In this book, we've tried to accomplish two things. First, can we do a simple, back-of-the-envelope calculation that gives a manager a ballpark figure of what is the value of my customer and how do I increase it? We call that number the margin multiple. Second, we want to show senior management how to make decisions based off that number. CRM magazine: In Chapter 3 you say that effective customer-based strategies take into consideration the two sides of a customer relationship with a firm, the value that a firm provides to a customer and the value a customer provides to the firm. What did you mean? Gupta: We believe customer value is like a two-sided coin. One side is a firm should provide value to a customer. That is how most people have viewed marketing and, historically, what marketing people have been good at. What marketing people haven't been good at is what is the value these customers provide back to us. In Chapter 3, we attempt to show the readers the flip side of the coin, and how to calculate the return after spending $5 million on a marketing campaign to improve customer satisfaction. CRM magazine: What will readers find most interesting about your book? Gupta: Two things. The first idea is that readers will understand there is a simple way to get a ballpark estimated value of customer lifetime value without going through endless calculations, databases, sophisticated processes, etc. That's the idea of the margin multiple. Secondly, customer value can provide a strong link to the shareholder value and firm value. Other Page Turners:
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