Barring “Unknown Unknowns,” 2008 Will Be the Year of Customer Valuation

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Customer valuation has traditionally been a tantalizing customer management tool—full of untapped promise. This will be the year it comes into its own, I predict. Of course, making predictions is a lot harder than you might think. It’s not the extrapolation of current trends that’s so difficult. That’s quite easy, No, it’s spotting the trends that will suddenly arrive out of nowhere to disrupt my carefully worked-out predictions that’s so hard. It’s those “unknown unknowns,” to quote former U.S. Defense Secretary Donald Rumsfeld (and you see where that got him), that could create a crack in my crystal ball.

With that caveat, I bring you four predictions on how customer valuation will affect your business in the coming year.

  • Wider adoption of basic customer lifetime value




    Customer Lifetime Value (CLV) has had a hard ride so far. Although calculating CLV is not so difficult, (it’s just the sum total of a customer’s future profits over his or her lifetime of being a customer, discounted back to today’s value), many companies have had problems working out what an individual customer’s profitability is. Much of the problem lies with the product focus that management accounting systems have. But steady progress is being made to reorient them around customers. I predict that many of these problems will be swept away in 2008 as marketers look increasingly to metrics like CLV to justify their budgets and—if the CMO Council is right in its recent Marketing Outlook Report—to justify their very existence. There’s nothing like a bit of self-interest to motivate marketers to start crunching CLV numbers.
  • Increasing focus on customer value portfolios




    Another trend that looks likely to grow is not in perceiving customers as being of high value or low value but, instead, in viewing them as a portfolio of customers of different risk-adjusted value. The important thing here is the addition of the word, “risk.” Risk reduces the value of a customer. It might be risk associated with highly volatile spending patterns; or declining loyalty in more competitive markets or in today’s networked world; or simply dissatisfaction triggered by silly mistakes by marketers. Just look what happened to Apple’s share price after the debacle of having to reduce the price of its much-touted iPhone after only a few weeks in the market earlier in 2007. By constructing a portfolio of groups of customers with different risk-adjusted value, a company can better manage the value of its entire customer base. I predict that more companies will start to use this approach to manage the total value of their customer base and to report that value to financial markets, too.
  • Incorporating customer word of mouth into CLV




    The basic CLV model assumes that customers are solitary figures. But look around yourself when you next go shopping and you will see people out in small or larger groups, shopping together. People are social animals and the power of friends’ word-of-mouth (WOM) recommendations in driving purchases is now well established. Some companies are already starting to incorporate the value of customer WOM in their CLV models. For example, Kumar, et. al., in a recent edition of the Harvard Business Review looked at the value of word-of-mouth recommendations for telecommunications companies and financial services customers. Amazingly, they found that a customer’s WOM was worth up to four times more than his or her basic CLV. That’s a lot of additional value. With the enormous growth in communities and social networks, the breeding grounds for WOM, I predict that more companies will incorporate the value of WOM in their CLV calculations.
  • Valuing customer social networks




    One of the most discussed topics in 2007 was the exponential growth of social networks like MySpace, Bebo and Facebook. Now every large corporation wants to buy a slice of the action. Microsoft was the latest to take the bait, beating out Google when it paid $240 million for a 1.6 percent stake in Facebook, effectively valuing Facebook at $15 billion. Lots of other companies have customer social networks of their own: airlines, loyalty programs and telcos, for example.




    All of these are starting to look to networks as an additional source of value, not so much as something to sell to a rich corporation like Microsoft but as something that can be harnessed to drive innovation, marketing and customer self-service. For example, analysts like Finnish start-up Xtract are carrying out social network analyses for mobile telcos on their customer-calling networks, to identify those customers who sit at the center of calling networks or who link networks together. Although this is still early days, I predict that these central customers in customer social networks will start to have their network value calculated and will become the subject of very special loyalty programs to keep them and their customer network with the company.

It sure is going to be an exciting time for all you customer value management practitioners out there. We will have to wait until this time next year to see whether my predictions have come true or whether Rumsfeld’s unknown unknowns will change everything I know about customer valuation

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6 COMMENTS

  1. I was delighted to see you put your thoughts out there for the new year, Graham, it’s refreshing to think that there is some mileage left in the customer profitability metrics space. After working in this space for over 10 years, I was getting concerned that the whole topic is getting a little tired.

    Of course models are generally still pretty crude in most organizations, and there are indeed interesting new wines to be put in the old bottle as with the referral value concepts Kumar is working with (but beware the double-count). But that isn’t where I think the really big traction lies… most companies still use this rich information in very limited ways. The potential to operationalize these insights is enormous, and can have large impact on results. Unfortunately those who know how don’t talk about it much, because how they actually do something with the information has become something of a trade secret in many companies.

    As a final thought, and since we are looking to the future, I also hope that the customer view willbe complemented by greater insights into cannibalization, velocity and attrition in the new year. That’s where we’ve been spending a lot of R&D and it looks very interesting indeed.

    All the best in the New Year, Graham and fellow readers !

    Dave McNab
    ___________

    Customer Flow of Funds
    Customer Value Measurement and Management

  2. Since all of our customers are inside a box, it would be nice to derive a set of metrics to determine the size and shape of the ideal customer’s box so we can figure out which potentials customer belong in that box or a similar box.

  3. That’s a great post Graham…The valuation of social networks is throroughly contemporary…Some social media buzzwords for 2008, as predicted by Pete Blackshaw would be relevant to your fourth prediction from the CRM standpoint.I kindof like “friendiligence”, “converstations” and “social mediation”. As he says
    “Brands now have multiple entry points for meaningful dialogues or conversations with consumers. These are essentially converstations. Brands fully immersed in CGM or social media may have dozens of conversations, from the consumer affairs interfaces and toll-free numbers to the corporate blog. They all matter, and every brand manager should know his or her converstations.”

    Too good….and as you say

    “to be harnessed to drive innovation, marketing and customer self service”…..
    That sums it all………

  4. David, Small Business, Vandana

    Thanks for your comments. They are much appreciated.

    They prompted me to return your wisdom in kind with a fifth prediction.

    • Valuing social networking platforms

    As companies get to grips with the dynamics of social networks, they will recognise the value of providing their own platform where customers can network together. For example, Dutch airline KLM’s Flying Blue frequent flyer programme offers a Golf Community for frequent flyers to get together to play golf when abroad on their travels. They also offer similar communities for frequent flyers in Africa and China too. As customers start to use such social networking platforms, companies like KLM can introduce other carefully-selected partners to the platform to offer their own value-adding services, thus creating a multi-sided market similar to the early days of Amazon or eBay. Multi-sided markets give the platform owner the opportunity to add value to customers, to add value to partners and to extract a small fee from one or both parties for doing so. Done carefully, this can be a big value generator. For example, a recent valuation of Air Canada found that Aeroplan, its frequent flyer programme was worth 50% more than the airline itself!

    I predict that as companies become comfortable with enabling social networks, that they will look to use them to create value through developing multi-sided markets.

    What do you think?

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

  5. Great topic (about customers) to end one year and start a new one with. I believe 2008 should be called “A Year of the Customer” instead of “The Year of the Customer.” All years since commerce started, have been “years of the customer.” Certainly, CRM programs were developed to sell to more customers and more to current customers. A business only survives and grows if this is happens because it is they who determine what will be sold, when it will be sold, when, how often and for how much.. However, it does not stop at this point. Customers depend on what their customers buy and when, how often and for how much, and that determines what your business sells, when, how often, how much and for how much.

    This is not a new concept. Daniel Defoe (of Robinson Crusoe fame) wrote this in, what I believe to be the best book ever written on business, “The Compete English Tradesman” in the early 18th Century:

    “It is debated much among men of business, whether trade is at this time in a prosperous and thriving condition, or in a languishing and declining state; or, in a word, whether we are going backwards or forward. I shall not meddle with that debate here, having no occasion to take up the little space allowed me in anything remote from my design. But I will propose it as I really believe it to be: namely, that we are rather in a state of balance between the extremes; I hope we are not much declined, and I fear we are not much advanced. But I must add, that if we do not immediately set about some new methods for altering this depending condition, we shall soon decline; and on the contrary, if we should exert ourselves, we have before us infinite advantages of improving our commerce, and that to a great degree.”

    ” . . . . a well-experienced tradesman had rather see his warehouse too empty than to full; if it be too empty he can fill it when we pleases . . . but a thronged warehouse is a sign of the want of customers, and of a bad market, whereas an empty warehouse is a sign of a quick demand.”

    With this in mind, maybe CRM should be, if it could be, a way to track what one’s customers’ customers buy . . . as this is where the money comes from to pay for one’s CRM efforts.

    AlanAlan J. Zell, Ambassador of Selling, Attitudes for Selling
    [email protected]
    http://www.sellingselling.com
    Winner of the Murray Award for Marketing Excellence
    Member, PNW Sales & Marketing Group
    Member, Institute of Management Consultants

  6. Alan

    Thanks for your comment. It is much appreciated.

    I agree with you entirely that every year is the year of the customer. It is patently obvious for most businesses, that value is only created during touchpoints with customers. When value is exchanged with them (usually for money). Sadly, it has become a truism that companies talk about putting customers first but then proceed to put themselves first. Customers are used to this flim-flam and don’t believe what must companies promise. They are still disappointed though when it is not delivered.

    Your point about the extended value chain is interesting. The one company that really has taken this to heart is Toyota. It looks intensively both upstream at its suppliers and their suppliers, and downstream at its customers and their customers too. Other lean companies also do this as part of the lean philosophy.

    If you are interested in the extended value chain, I recommend you look at two books:

    Womack & Jones
    Lean Solutions: How Companies and Customers Can Create Value and Wealth Together
    Which describes how customers drive the lean consumption process (and by implication how customers’ customers drive that).
    http://www.lean.org/Bookstore/ProductDetails.cfm?SelectedProductID=131

    Womack & Jones
    Seeing the Whole: Managing the Extended Value Chain
    Which provides a workbook to think through and map the extended value chain in your business using lean principles.
    http://www.lean.org/Bookstore/ProductDetails.cfm?SelectedProductID=74

    I own and use both books in my work. Both are available from the Lean Enterprise Institute in the USA

    Graham Hill
    Independent CRM Consultant
    Interim CRM Manager

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