What Drives Customer Value in the Long Term?

Graham Hill
Guru
Member

Posted 02-Apr-2004 05:00 AM
Fellow CRMers

I see part of my role as a CRMGuru to push forward the thinking in Customer Value Management (CVM).

I need your help to do this...

It is becoming increasingly clear that today's CVM thinking based around using customer lifetime value calculations as a simple foundation for targeted marketing, is beginning to give way to a newer view based around managing customers as a portfolio of financially valuable assets. This management process extends across all touchpoints with customers, whether delivered by your company, its partners or by customers themselves.

In this view, the value of a customer is a product of their short-term cash flows and their longer-term growth options all adjusted for risk. The idea of adjusting for risk is still somewhat new to CVM.

One of the big unknowns in all this is how we assess future growth options. This is required not only for estimation of the value of longer-term gowth, but also as in input into risk calculations too.

This is where I need your help, to tell me about what you and your company are doing in this space...

Q. What methods and tools do you use to think about what will happen to customers over the longer-term?

Q. How do you feed this insight into your current customer lifetime value calculations?

Q. And how do you feed it into a range of management actions that this is all supposed to drive?

Some tough questions at the frontier of CVM, but I know many of you are thinking about these issues. Please share your thoughts with the rest of CRMGuru.

Thanks in advance for your responses, Graham

Independent CRM Consultant
CRMGuru Customer Value Management Guru

Behram Hansotia
Member

Posted 08-Apr-2004 10:48 AM
Graham, this concept of evaluating customers' return on a risk adjusted basis and managing the customer portfolio on a risk-return basis smells like the financial CAPM model. I think dealing with this issue on a more operational basis may be more worthwhile.

I have often found it valuable to think about customers in terms of their life cycle: new, vetran, super-veteran, based on their tenure with the company and then further segment each customer life stage by customers' contribution (cash flow) and hazard (churn) rate. The objective now is to understand each segment sufficiently well so you can design experiences and value propositions for each segment so you successfully increase their current contribution and/or decrease their hazard rate. That is, you work on the components of customer LTV. Does this guarantee maximizing customer LTV? probably not theoretically, but it does focus the company on specific performance targets for each customer segment and moves it towards continuous improvement.

Skill sets needed to do this well include significant prowess in:
* Analytics
* Testing
* Marketing creativity
* Ongoing measurement

What do you and your readers think?

Behram Hansotia

Graham Hill
Guru
Member

Posted 16-Apr-2004 07:22 AM
Behram

Thanks for your thoughtful reply.

You are indeed right that my thinking on risk is informed by the Capital Asset Pricing Model, in wide use within financial management circles.

Although I agree with your operational suggestions, I still think it is important to understand customer assets in terms of cashflow, growth options AND risk over the short-term and the longer-term.

The implications of risk are not usally factored into CRM thinking. Obviously, a customer with highly variable buying behaviour(higher risk) is of less value than a customer with more predictable behaviour. Indeed, paradoxically, a higher spending customer with high risk may be LESS valuable to a company than a lower spending customer with low risk! And some CRM activities may significantly increase customer risk by changing behaviour in undesirable, unexpected ways. For example, a marketing promotion driven by a pricing offer may drive customers to stock-pile a product rather than buying it continuously, increasing short-term sales and driving a high marketing ROI, but not increasing overall sales, reducing product margin (the offer is giving away margin), increasing their risk and reducing their value in the process. Not good.

Today's CRM thinking would suggest that you invest your CRM dollars on the higher spending customer, even though you would earn a higher return by investing on the lower spending customer. Or on customers with a higher responsiveness to your CRM efforts.

My questions were aimed at understanding what CRMers out there do to understand the longer-term value of customers and how they are influencing customers to increase their value.

Your suggestions about designing customer experiences and value propositions to match customers'expectations is exactly what I wanted to identify.

Just how do you go about designing experiences and value propositions to do this?

Graham Hill
Independent CRM Consultant