Customer Value Measurement

Tomas
Member

Posted 27-Nov-2003 04:13 AM
Dears,
I am trying to find artciles and whitepapers about methodology how to measure customer value but I've found it a problem. I work at my paper work in university and I'd like to describe different types of customer value indexes.
Could you help me, please, where I can find documents about customer value ivaluation and indexes which are used in such score. Thank you.

Graham Hill
Guru
Member

Posted 28-Nov-2003 03:42 AM
Tomas

There is a whole lot out there on Customer Value Measurement, but sadly, much of it is of dubious value.

The best books on the subject to-date are

Roland Rust, 'Driving Customer Equity: How Customer Lifetime Value is Reshaping Corporate Strategy'The Free Press (2001), and

Robert C. Blattberg, 'Customer Equity: Building and Managing Relationships as Valuable Assets'
Harvard Business School Press 2001.

Both these books by well respected authors looks at how you can calculate customer value, albeit from a subtly different perspective.

But be careful, it is not just a case of totting up annual spend and multiplying it by the likely tenure of the customer. That assumes a business steady-state without changing customer needs, without tough competitors, and without ups and downs in the economy. This is a state that very rarely exists.

Armed with a bit of careful thought, you should be able to calculate a reasonable short-term customer value (say 2-5 years max) that will guide your decisioning within the timetable of most business' strategy setting and certainly within the timetable of this year's annual budget allocation process.

You should also be able to calculate a longer-term value (say 3 years out) using real-option valuation techniques that will guide your decisioning about what business options to invest in to create value from customers in the more distant (and unforecastable) future.

But that is not all. You should also be looking at what impact risk will have on value creation in the near and distant future. Although this is rarely carried out at the moment, you should look at calculating Betas for individual segments of customers, to give you an idea of the volatility in customer value that you will need to discount the segments' value by to represent their true risk-adjusted value. High value, high risk customers are often not much better than low value, low risk customers at the end of the day.

Armed with this three part view of risk at the segment level, you can look at constructing a portfolio of customers that effectively optimise value creation. You should look at the impact each of your CRM investments (and other investments too) on the whole portfolio when making decisions about how much to invest in what, from what campaigns to run next month, all the way to what technologies to invest in in the longer-term to leverage customer insight.

Let me know if you need more details on this or other customer value-related topics.

Graham Hill
Independent CRM Consultant
CRMGuru Customer Value Management Guru

Rick Volz
Member

Posted 11-Dec-2003 01:10 PM
Tomas, Graham

From our perspective, Customer Value measurement is critical to all aspects of CRM and consists of two behavior driven measures: Current Profit and "Lifetime" Value. It is important that these are behavior driven measures since it is the interaction of the customer with the organization that generates revenue (from purchases or fees, etc..) and consumes the cost of the organization. Current profit should be a complete financial picture at a point in time; how profitable or unprofitable is a customer this month. It allows an organization to analyze trends, patterns and drivers of profit including Revenues, Direct and Indirect Expenses, Risk, answering the question "WHY". In addition Capital can be applied as well in order to determine ROI or Share-holder Value Added. Life-time Value we feel should begin with a solid foundation of profit and project value no more than 5 years out. Therefore profit, in addition to the results of propensity to buy and attrition modeling feed the LTV calculation engine.

We have a number of differnt whitepapers and case studies on how our clients should use and are using these customer value measures.

Rick Volz
Director, Business Development
Teradata, a division of NCR

Graham Hill
Guru
Member

Posted 12-Dec-2003 10:28 PM
Tomas, Rick

I think a little caution is in order here.

Whilst I agree in principle with the gist of Rick's response, you must be careful not to get carried away with the spurious accuracy of the customer lifetime value calculation.

Many things influence the customer over their lifecycle of tenure with the company. For example, as a recent Insead working paper (1) confirms, customers typically go through exploration-build up-maturity-decline phases during the relationship. Knowing which phase your customer is in has significant implications for their current and future value, their remaining lifetime and how they need to be managed for optimum value over their remaining lifetime. So, if you measure profit and lifetime during the exploration phase, you will likely understimate the breadth and depth of the relationship and its associated value. Conversely, if you measure it during the maturity phase, the opposite will apply.

The same cautionary note applies to a number of other factors that moderate the customer's value to the business.

I think you get the picture. Calculating lifetime value is a continuous process of trying to understand what is happening in the customer's world and working out the implications for value creation within the business. It's not just a case of running the numbers, no matter how big a database of transactional data you have.

Graham Hill
CRMGuru Customer Value Management Guru

(1) Jap & Anderson, 'Testing the Lifecycle Theory of Interorganisational Relations: Do Performance Outcomes Depend Upon the Path Taken', Insead Working Paper 2003/17/MKT

Rick Volz
Member

Posted 15-Dec-2003 10:08 AM
Graham,
I completely agree with the points you make about LTV. Our experience is that the usefullness of LTV has its believers and non-believers. In addition, often times calculating LTV is a one-time activity in support of a specific initiative rather than a continuous (monthly or at least quarterly) and rigorous process. In order to improve the use of LTV, we encourage our clients to focus on continuing to microsegment, refine and "operationalize" their predictive models and LTV process. For those believers in LTV, aside from another attribute of segmentation and target marketing, we see it used as a business objective and measuring stick of the effectiveness of Relationship Management tactics and strategies. Finally, it is used as a metric of the acceptable level of investment in the LTV object (customer, product, etc.)

Rick Volz
Director, Business Development
Teradata, a division of NCR

Graham Hill
Guru
Member

Posted 18-Dec-2003 12:12 AM
Rick

Your point about using CLTV in segmentation is very important. Segmentation MUST incorporate some measure of customer value if it is to be used to differentiate how customers are handled based upon their value to the organisation. But it also raises an important point about the larger 'value' equation.

CLTV represents the organisation's understanding of the customer's value to itself. The implication is that customers worth more to the organisation should receive more from the organisation in return, whether that is keener prices, priority access to staff or just better treatment in general.

But that is only half the picture. CLTV must be balanced against the customer's perception of the value of the organisation (and all it stands for) to them. The implication here is that an organisation that doesn't offer much value to the customer will find itself less and less able to extract value from the customer in return. Over time the customer may well defect.

One of the most important factors that influence the customer's perceptions of value are the degree to which the organisation meets the customer's needs (relatively easy to describe by the customer), wants (not so easy to describe as the customer often doesn't know them themself) and expectations (how much of each of the above they expect to receive). Another factor is the customer's affinity to the organisation. As research has shown, customers with a high affinity to an organisation will accept quite a few snafus before they defect (1). Both factors are rather difficult to quantify and often do not find their way into the transaction data-heavy databases usually used to drive segmentation.

If you want to develop a well-rounded segmentation approach, you are going to need to incoporate risk-adjusted customer value, your organisation's ability to deliver against the customer's needs, wants and expectations, and the customer's affinity to your organisation into the segmentation mix.

Graham Hill
CRMGuru Customer Value Management Guru

(1) R. Oliver, and I. MacMillan, 'A Catastrophe Model For Developing Service Strategies', Journal of Marketing, 1992

Jan
Member

Posted 18-Dec-2003 11:15 AM
All sounds a bit theoretical to me. I have seen LTV used by companies and with confidence as well. So while we have these debates industry are happily using and refining its apllications to their own competitive advantage. Is it possible to get some real users views how "theoretical" problems (if they exist in their markets) are dealt with?

Jan

Graham Hill
Guru
Member

Posted 19-Dec-2003 01:50 AM
Jan

They may sound a bit theoretical to you, but for many of my clients in the financial services, mobile telecoms and automotive industries, they are issues that they are wrestling with today.

That CLTV is becoming widely used does not require much discussion, but the approaches you can take to calculate it do.

The discussion to-date has been in response to Tomas' (an academic) request for different methodologies with which to measure CLTV. A variety of recent, well-received books and commercial white papers have been put forward, which provide several frameworks with which to think about measuring CLTV.

This is not about constructing 'Whale Curve' graphics, or about using simple excel spreadsheets to construct them. Nor is it about how confident companies feel using these types of tools. It is about developing robust analytical tools that provide powerful insights about customers with which to manage daily business. In today's hyper-competitive business environment, simple spreadsheet models are less and less appropriate.

A recent CLTV study in the insurance industry looked at how useful different models were at calculating current customer value and predicting lifetime value. The study found that simple steady-state models of the type you imply typically resulted in up to 20% of individual customers having the wrong current value calculated and being placed in the wrong segment. And these models were much worse at predicting the future value of customers and in valuing an entire segment. And this in a relatively steady state industry like insurance.

Only more sophisticated models that started to bring in other factors, such as variable customer defection rates over time, customer lifecycle-driven behaviour, variable product purchase over time, etc, were successful at predicting longer term value and valuing a segment accurately.

Incorporating more behavioural information about customers, segment risk and commitment-based affinity factors simply extends this thinking for information-based industries where competitive advantage is achieved largely by being more responsive to customers' needs.

But then again I could be wrong.

Please feel free to share with us your own approach to calculating CLTV, so that we can learn from your experiences too.

Graham Hill
Independent CRM Consultant
CRMGuru Customer Value Management Guru

ahona
Member

Posted 19-Dec-2003 02:44 AM
We handle patients so there is slight diffence, I believe in theway we should assess the value of these cutomers. I request your advice and guidance.
I am looking for a way to assess our services to enable us rectify, improvise, better our services and hold onto our patients for life.
Products will be refreshed, refused or withdrawn by the prescribing physician but the complete medical history on the database will help us to track for another disease or drug so it is a tool for a life time relationship. But I need an accurate tool to measure patient assessment of our services.

We have tried mail feedback - but these are elderly ailing so not many of them access mails.

Feedback forms - are porbably too much of an effort when suffering from cancer or severe RA or glaicoma.

On the invoice - while the delivery of medicine is being given - to some extent successful but then it could be biased inthe presence of the representative.

Feedback over the phone to the patient-relationship executive may not be accurately noted.

Do you have any suggestion?

ahona ghosh
head-customercare
medybiz private limited
bangalore

Mei Lin Fung
Member
Picture of Mei Lin Fung

Posted 12-Jan-2004 11:53 AM
Ahona,

Start with the definition of CLV, that the value of the customers to Medybiz, is the Net Present value of the stream of Revenues less Expenses over the lifetime of all the customers.

Instead of thinking in individual terms to asses the value of the customers, other groups are looking at the calculation in macro terms, over groups of customers with the intent to increase the overall quality of life for segments of customers/patients.

There is a common ground in the patient assessment and the medical assessment, and that is the prognosis for future quality of life of the patient. A patient does not always have the information and expertise to actually judge the quality of medical services, so in your situation, more needs to be done to define what it is you are doing for your patients and what the goal of the care actually is.

From this common ground,I refer to creating outcome models that draw data from the existing medical history, so that a patient can see the treatment possibilities and actual outcomes experienced by actual patients of similar demographic, at the same point in their lifecycle.

Patients can then be informed of the treatment options and involved in making decisions - and this will provide much more incentive to stay with Medybiz because few other healthcare organizations currently take this Patient-centric approach, educating and putting more informed decision making (as appropriate) into the hands of the patients.

Sometimes tweaking only the customer service portion of a healthcare organization is akin to shifting deck chairs on the Titanic.

Successful healthcare organizations build reputations and attract an increasing number of customers by having a reputation for improving the quality of life of the vast majority of their customers. This reputation must be backed up by numbers.

Patients who have all their service requests well answersed, but experience a decreasing quality of life, will not be long term customers, neither will they encourage others to join. The reverse of this is what you want to achieve.

Exchange Synergism
Member

Posted 23-Mar-2006 03:58 PM
Just in case it's "never too late" to add to the knowledgebase of the forum, anyone interested in a series of articles about Customer Profitability measurement published by the Canadian Marketing Association fall 2005 a part of their Customer Profitability Conference they are available (free) at the Marketing Strategy Canada Forum mscforum.com Knowledge Base -

http://www.mscforum.com/kb.php under White Papaers and Articles section.

The only requirement for use is proper attribution.

David McNab
Exchange Synergism Ltd.
http://www.mscforum.com

copparapu bobby(choudesh)
Member

Posted 27-Sep-2006 03:55 PM
Hi graham

beautiful reference given for the customer value measurement is concerned. They are really great. I guess "thomas" may be looking for simple information. Thomas if you need sufficient information in hand, you can go through them as well other folks mentioned - to say it in brief, my idea would be as follows :

customer value will be determined on basis of the following options (1) the total revenue raised by the customer (2) referred programms or award winning programmes which customer referred organization or the products (3) The time he stayed or his group with an organization.

The value of the customer decides as I said earlier—If the customer could raised more sales revenue for an organization (for its products) is an important one here. The more sales from the customer side for the products vs the time average he spent with the organization is going to be considered to consider the value of the customer.
secondly the referred customers group from this customer who has been with the orgnaization is going to be another key issue where the referred customers whether they may be attending to this particular organization for award winning programmes or sales (discount sales programmes ) or attending the promotional campaigns—but on the whole whatever the organization it got out of their referred customers is another KPI to consider the value of the customer.

Thirdly, the duration he stayed with the orgnaization or products vs the sales revenue for (quarterly) or yearly is something can be considered to evaluate the customer value for the organisation.

choudesh copparapu
SFA/CRM/Data Integration specialist
Sea Shells Data Warehouse