How To Measure Customer Satisfaction

Posted 22-Mar-2004 08:49 PM
Dear Graham,

could you please tell me how to determine the value of a customer

Graham Hill
Guru
Member

Posted 01-Apr-2004 04:52 AM
Sreekanth

A good question.

Calculating customer value is still a bit of financial science mixed up with a lot of managerial art, so to speak.

From a pure financial valuation perspective, the value of a customer is a product of their short-term discounted cashflows and their longer-term growth options, all adjusted for their inherent risk. Short-term cash-flows are typically measured using Discounted Cash Flow (DCF) analysis over 3-5 years, depending upon market volatility and other factors. Longer-term growth options are typically estimated using scenarios (and increasingly, real-option valuation) over 3-plus years. Risk is pretty new to customer valuation. The few companies that do measure risk typically calculate segment Betas. This three-part approach allows you to manage customer segments using 'hard' portfolio management techniques borrowed from financial management.

From a simple, practical perspective, start off calculating short-term growth for segments of customers using DCF over whatever period you are comfortable with for your business. This period may be anything up to the average retention period for the segment, but (obviously) not longer.

DCF analysis calculates the annual profit of the customers within a segment for each year of the calculation period, by deducting the sum of all costs from the sum of all revenues for each individual year. Each year's annual profits are then discounted back to their current value to give a simple customer value. This is your basic bread and butter customer value calculation.

As you become comfortable with the calculation and your customer data, you can start to break the customer segments down into ever finer groups for increased accuracy, based upon, e.g. customer lifecycle stage, variable annual retention rates, refined cost allocation, etc.

As a general rule, you should stop calculating customer value with ever increasing granularity at the point where you don't get additional insight that drives management action. There is already so much error built into the data that goes into customer value calculations that there is little point looking at it in too much detail.

There are many good sources of examples that show graphically how to do this calculation. I recommend that you look at Robert Blattberg's book (Customer Equity—Building and Managing Relationships as Valuable Assets' (2001) HBS Press, for a soup to nuts illustration of the calculations (and the subject as a whole). Or, look at Jay Curry's book 'The Customer Marketing Method—How to Implement & Profit from CRM' (2000) The Free Press, for a simpler approach.

Hope that helps. This is a complex subject.

Graham Hill
Independent CRM Consultant

Posted 04-Apr-2004 11:26 PM
Hi Graham,

thanks a lot for your detailed reply

regards
sreekanth

copparapu bobby(choudesh)
Member

Posted 26-Sep-2006 02:09 PM
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 organization 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