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Valuing Customer Value 

Lynn Hunsaker | Aug 25, 2011 304 views No Comments

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Customer Value Management (CVM) is widely undervalued in the way we practice customer experience management (CEM). Excellent resources on the CVM topic abound, yet few executives &#8212 and even few CEM professionals — are aware of them. Sometimes CVM seems too quantitative or difficult to grasp or implement, but the companies that have distilled customer value management principles are certainly reaping higher value for their stakeholders, especially customers! In addition to step-by-step calculations for customer lifetime value, return on customer, customer equity, customer value-added, and other essential metrics, CVM literature provides practical advice that is absolutely necessary for managing customer experience right.

Firms of Endearment (by Sisodia, Sheth & Wolfe) explains how "endearing companies tend to be enduring companies". By asking a broad sample of people which companies they love, and then working backward to identify those companies’ collective, distinctive set of core values, policies, and operating attributes — and then their return on equity — amazing findings resulted. The firms of endearment (FoE) list includes the usual suspects, and then some: Amazon, BMW, Caterpillar, Google, Harley Davidson, IDEO, IKEA, JetBlue, Johnson & Johnson, LL Bean, REI, Trader Joe’s, UPS — to name a few. "They actively align the interests of all stakeholder groups, not just balance them … and can do seemingly contradictory things such as pay high wages, charge low prices, and get higher profitability." Indeed, the financials seal the deal: " the public FoEs returned 1,026 percent for investors over the 10 years ending June 30, 2006, compared to 122 percent for the S&P 500; that’s more than a 8-to-1 ratio! Over a 10-year horizon, FoEs outperformed the Good to Great companies by a 3.1-to-1 ratio."

Customer Value Investment (by Mahajan) explains CVM in a story format, making the topic very easy to grasp, with numerous profound statements. "The customer is indispensable to our business. Without him, we have no business. The customer is an asset that can either appreciate or depreciate, depending on how we touch him. When a customer leaves, the asset is diminished or is depreciated. This asset can be shown on a balance sheet and helps in the valuation of a company. This, of course, benefits the shareholder in the long run. The asset is important for the investors and shareholders to view."

"Satisfaction can be measured only after an event or after you have bought. Value tells you why you buy. Perceived value is the cause. Satisfaction is the result. Don’t you think it is better to understand the cause, rather than only the result? … In reality, what can be more important than customers to an organization? … If you get the customer’s heart share, market share will follow!"

Customer InvestmentReturn on Customer (by Peppers & Rogers) emphasizes trust as the key to building customer value. "Repeat after us: The only value your company will ever create is the value that comes from customers – the ones you have now, and the ones you will have in the future. To create value, you must put yourself in the customer’s shoes, understand the customer’s needs, and then act accordingly. Ultimately, this requires you to earn your customer’s trust. What value does the customer get? The customer, too, must weigh long-term as well as short-term factors, assessing the value he gets from his relationship with you. And for the customer, such a relationship will be of the most value if he feels he can trust you to respect his interests as if they were your own. The fact is that maximizing your return on a customer and maximizing the customer’s trust are quite similar tasks. … Understanding what customers need from you — figuring out what motivates your customers — is a boardroom issue, because it is vital to your firm’s long-term success."

Return on marketing investment (ROMI) is growing in popularity as a means to wise management of marketing resources. Return on customer (ROC) is not as well understood. "ROMI by contrast, might consider the value of customers in evaluating marketing spending, to choose between campaign or other specific marketing investments. ROMI can’t guide a company in making the most of its scarcest resource: customers. ROC enables a firm to make decisions based not just on the capital needed to create more value, but on the amount of customer equity required for it. Because customers are scarcer than capital, ROC is a more efficient metric for maximizing overall value creation, and ultimately, ROC will improve decisions about everything from marketing investments to product development, factory improvements, store manager compensation, financial reporting and even business combinations."

Customer Value CreationMastering Customer Value Management (by Kordupleski & Simpson) explains that "businesses have a greater chance of thriving over the long term if they think of shareholder value as the reward, not the purpose. … When you look at what many companies measure, how they use this data to manage the business, and what their people get rewarded for, customers often get lost in the shuffle. By losing sight of the long-term purpose of the business — to create value for customers — these business leaders have betrayed employees, customers, and shareholders. … The concepts and tools of customer value management (CVM) offer a way to target investments for improvement — investments that companies are already making — to areas that have the highest payoff for the company and the customer. Companies can actually raise their profits by raising the value of their offering."

In-depth analyses of business performance revealed a "strong link between EVA (economic value-added: return on invested capital multiplied by the amount of capital invested) and share price and CVA (customer value-added: perceived worth of your offer divided by perceived worth of competitive offer). The top 20% of businesses on the relative value scale had a ROI of almost twice that of the bottom 20%. It didn’t matter whether a company’s strategy was to compete on price or to compete on quality. What mattered was that customers felt they received better value for the money paid than they could get form the competition. Customer value management is not an end in itself. It’s about creating competitive advantage and driving business success."

Converting Customer Value (by Murphy, Burton, Gleaves, Kitshoff) explains the pitfalls of common practices: "Using average returns does not allow changes to be made to improve overall profitability, nor does it assist with the selection of future new business units or shares. By failing to recognize the issue of customer profitability, companies fail to recognize that, despite a healthy bottom line, there can be a considerable number of unprofitable customers within their customer portfolio." And like all the books referenced in this article, this one goes beyond step-by-step calculations to recommend strategies for creating value, acquiring profitable customers rather than unprofitable ones, and converting unprofitable to profitable customers. For example: "What if customers charged the organization for their time? Reducing customer non-value added (NVA) time is a new source of competitive advantage. Map the time customers spend engaged with the company or product. Focus on finding the points of impatience, when a little bit of a customer’s time wasted causes disproportionate irritation. Customers’ complaints should be explored carefully, so that similar complaints do not become ingrained.&quot’

Driving Customer Equity (by Rust & Zeithaml) explains why we need to replace product focus with customer focus: "Customers do not choose products in isolation. Rather they choose assortments of products that fit together in a complimentary manner. … The profits of individual products are not separate and distinct, but rather synergize to produce a successful and profitable customer relationship. Product-specific financial accounting need not be abolished, but it should assume a lesser role. More important, detailed, customer-specific accounting is necessary to get an accurate picture of profitability and, hence, the long-term value of the firm." The ClearAction B2B CEM Benchmarking Study revealed that executives still think about customer experience as a measure of past or current performance, whereas "a firm is only as good as its customers think it will be the next time they do business with that firm." The authors discuss "three actionable drivers: Value Equity, the customer’s objective evaluation of the firm’s offerings; Brand Equity, the customer’s subjective view of the firm and its offerings; and Retention Equity, the customer’s view of the strength of the relationship between the customer and the firm."

To transform your company’s profitability, and to optimize customer experience, learn all the CVM principles you can, and integrate these proven best practices into your company culture.

Note: a Customer Value Management seminar series will be available September 19-23, 2011, in the San Francisco Bay Area: http://www.ClearAction.biz/value.

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