The Mighty Demand Rating
Which products are in highest demand by which customer segments? Which customers have latent demand for up-sell and cross-sells? Which customers have a lack of demand and are at risk of churn? Where is demand most likely to be created with a marketing campaign? Understanding the health of the recurring-revenue business revolves around a full understanding of customer demand. Your web logs can tell you this if you apply the right filter. Unfortunately, most organization track and report customer demand in qualitative measures such as customer satisfaction scores. The consequence is many revenue generating initiatives are based intuition and experience rather than evidence.
What if you could track demand for your products as easily as your financial portfolio? You could know exactly which customers and segments are more likely to purchase and drive more productivity from revenue generating initiatives. In the stock market, the P/E ratio for a company is a financial indicator of investor demand for a company's stock, giving investors a single, normalized number that can be analyzed and compared across the portfolio. Demand rating is just that and provides a means of representing customer demand for your product in a single number that can be analyzed and compared.
Demand rating compares how much a customer uses a service to how much they pay for it-usage divided by contract value. Depending upon the offering, usage can be tracked as the number of sessions, downloads, transactions, storage, etc. and contract value is just that-how much the customer pays. The ratio between the two is quite potent, normalizing all the variables and resulting in a quantifiable indicator of demand for each specific customer.
There are three, interrelated components for calculating a demand rating-usage (session data), contract data (terms of the customer relationship) and firmographics (the demographics of an organization.)
Usage data, in the subscription world, describes what value is consumed over time. Especially in the B2B world, it's not about a single user visit, but about aggregated groups of users at different locations. It's stuck in web logs and tapping it requires a highly longitudinal view of the customer.
Contract data is the information about what customers were willing to pay for the value received-what licenses were purchased, when. It includes information regarding the number of users that are licensed, the cost of those licenses and the time period that is covered.
Because usage profiles vary dramatically, the final component-firmographics-is what is knowable about your customer provides the necessary segmentation data for comparing demand amongst peers. Information such as the size, growth and location of the company are all included in this realm. Firmographic information come from public sources such as corporate web sites, private sources such as Hoovers, and is increasingly available from social networking sites such as LinkedIn.
Once calculated, demand rating is a number that changes everything. Suddenly, demand can be understood over time, and it can be understood in comparison to other specific customers, to segments of customers and across product lines. High demand ratings are good and low ratings are bad, and the rating implicitly incorporates revenue risk and opportunity into the equation. Demand rating enables customers to be averaged, ranked and compared. Instead of relying upon the intuition of account managers as an indicator of the strength of the relationship it, demand rating uses analytics.
And it's useful across a broad set of functions in the organization. For Sales, demand ratings give visibility into customers or groups of customers that have revenue risk or opportunity. For Product Management, it gives insight into product strengths and weaknesses and changing customer attitudes and behaviors. For Client Services, it identifies areas of low usage that could be addressed with educational programs, training or licensing changes. For Marketing, it helps narrow the target for promotional programs. For Management, demand ratings give a single version of the truth-one real-time, comparable view of the state of the business across all departments. For most recurring revenue businesses, demand ratings yield a 10-15 percent productivity improvement on revenue generating initiatives.
Demand rating is a new approach customer engagement that is deceptively simple but should be seriously considered. It's kind of like checking in on your stock portfolio. The winners and losers pop to the forefront clearly, enabling good clear, actionable decisions. It's essentially a new lens into what's really happening in the business.
About the Author
Scout Analytics Senior Vice President of Marketing and Strategy Matthew Shanahan (Matt@scoutanalytics.com) has nearly 25 years of experience in the technology industry, with a rich history in product strategy and management. He is a frequent speaker about business models and operational strategies at industry events, with a specialty on the rise and impact of recurring revenue models.
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