03 Nov What kind of advantages and benefits are possible for a company adopting this objective?? How would it help a company balance the short-term and long-term goals of the company?? Expla
Discussion (50 points) Refer to Chapter 11: Consider the concept of “Return on Customer” (ROC) as discussed in the chapter.
- What kind of advantages and benefits are possible for a company adopting this objective?
- How would it help a company balance the short-term and long-term goals of the company?
- Explain how ROC is different from customer lifetime value LTV?
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
MKT 456-CRM Instructor: Cynthia Bellian, MBA E-mail: [email protected]
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Managing Customer Experience and Relationships: A Strategic Framework
Chapter 11
Optimizing Around the Customer: Measuring the Success of Customer-Based Initiatives and the Customer- Centric Organization
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Chapter 11 Preview
Measuring Customer Value
Customer Equity
Customer Loyalty and Customer Equity
Factors in Customer Equity
Return on Customer
Creating, Harvesting, and Destroying Value
Measuring Return on Customer
Predictive Modeling
Leading Indicators of LTV Change
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Measuring Customer Value
Short-term: immediate sales
Long-term: changes in customer’s predisposition toward company
Balance required
Too aggressively pursuing short-term sales threatens long-term value
Investing too much in great service threatens short-term value (i.e., funds required to produce that great service)
To strike a balance, measure customer equity, or customer lifetime value
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Customer Equity
The principal economic asset
The sum of all current and future customers’ LTV = firm’s total economic value
Describes effectiveness of customer strategies and implementation
However, most companies look at quarterly balance sheets as the primary measure of economic assets – which only measures short-term value
Prospects, as well as current customers, are included in customer lifetime value (or equity)
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Customer Equity and Customer Loyalty
Difficult to measure customer loyalty/customer retention
Defining retention:
A progressive variable – a volume dial, not an on-off switch
A multifaceted variable – one possibly composed of multiple relationships across business units
Distinguish customer attrition and customer defection
Attrition: results from circumstance outside company’s control (retirement, moves out of area)
Defection: customer chooses to move business to the competition
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Factors in Customer Equity
Acquire more customers
Acquire customers who are more valuable
Increase profit per customer
Reduce servicing costs per customer; sell customers additional products or services
Increase the propensity of customers to refer other customers
Reduce the rate of customer attrition
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Return on Customer
Measures how well an enterprise is using customers to create value – both short term and long term
Analogous to return on investment (which measures how efficiently an enterprise uses capital to create value)
Return on Customer = Total Shareholder Return
Just as with TSR, if ROC is less than cost of capital, it’s not worth the investment
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Creating, Harvesting, and Destroying Value
Value creators
Combination of short-term and long-term value created by customers is greater than cost of capital
Future earnings likely to grow
Value harvesters
Harvesting customer profits from customer equity they already have, but are not increasing customer equity
Future earnings likely to decline
Value destroyers
ROC is below zero – likely showing a profit by offering deep discounts
Future earnings will certainly decline
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Creating, harvesting, or destroying value: Will the ROC support the ROI goals?
| Company 1 | Company 2 | Company 3 | Company 4 | Company 5 |
| $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
| $1,200 | $1,200 | $975 | $950 | $900 |
| $200 | $200 | ($25) | ($50) | ($100) |
| $50 | ($50) | $50 | $50 | $50 |
| 25% | 15% | 2.5% | 0 | (5%) |
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Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
Value Destroyer
Value
Harvester
Value
Creator
Beginning customer equity
Ending customer equity
Change in customer equity
Profit during the period
Return on Customer
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Companies 1 and 2 in this table have achieved a combination of profit and customer equity change that nets out to something reasonably positive. In each case they are ending their year with more customer equity than they began it with, so they can expect to grow their earnings in future years. They are creating net new value for their shareholders. In Company 2’s case, this net new value is being created despite the fact that the firm’s reported current profits are negative. We would classify them as “Value Creators.”
Companies 3 and 4, on the other hand, are doing nothing more than treading the financial water. While each is reporting a current profit to its shareholders, all or a good portion of this profit seems to be coming out of existing customer equity, which is not being replenished. As a result, it’s unlikely that either of these companies will be able to achieve much growth in future years. Although they may continue to report tepid, increasingly hard-fought profits for the time being, sooner or later their customer equity will no longer be sufficient to sustain a profit at all. We classify these two firms as “Value Harvesters.”
Company 5 is in the worst situation of all, however. It has scraped out a profit this year, but this profit was only achieved by stealing even more from the future. One can imagine a car manufacturer offering the deepest-ever discounts in order to prop up this year’s numbers, saddling itself in the process with a saturated market and customers trained to wait for discounts, creating a much more difficult problem in making next year’s numbers. This company is on the skids. It may be reporting a profit to shareholders, but for the most part its shareholders are unlikely to be fooled. They will know that what the firm is really doing is “eating itself” and reporting the meal as a profit. We call this kind of company a “Value Destroyer.”
Measuring ROC
Two major steps:
Measure the marketing activities and analyze their effect on customer acquisition, retention, and growth
Estimate customer LTV and total equity of all customers at a certain time point
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Predictive Modeling
Devise an equation for LTV that includes any data on measurable behaviors
Identify the most predictive variables currently available
Generate a second equation for LTV to predict individual customer’s LTV rather than using data to calculate it retrospectively
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Leading Indicators for LTV Change
Lifetime value drivers
Cross-selling rate, share of customer, influence on other customers
Lifestyle changes
Professional/career moves, address changes, marital status changes, children added to household, education level, health
Business and consumer
Behavioral cues
Signing up for different plan, buying product upgrades, signing up for an e-mail newsletter
Customer attitudes
Surveys, market research, RSx tool
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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