What's So Important About Customer Value Management?


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Posted 16-Mar-2004 09:21 AM
1. Do many companies fall short when it comes to incorporating metrics?
Many companies fall short—in several ways. Companies either don’t measure things at all, or they don’t measure the right things. They don’t really understand how their business operates—at the dynamic what factors drives what other factors level—and they end up just measuring obvious but unimportant things. Too many CRM projects are blighted by a lack of appropriate metrics in this way. Even if companies do measure the right things, knowing what to do with them is another matter. As the UK economist John Kay put it in a recent article in the London Financial Times, to know what to do, you have to measure things obliquely. If you just focus on the end result—financial measures for example, or sales results—you will never know if what you’re doing is right or wrong. You will not know what you have to change to make it better. That was why the Balanced Scorecard was invented by Kaplan & Norton back in the 90s; to enable management to focus on the few critical measures that provide the insight to know what to do differently.

2. You do a lot of work around customer value management (CVM), could you explain what that means?
In a nutshell, CVM recognizes that all customers aren’t really equal. To paraphrase George Orwell, “all customers are created equal, but some customers are created more equal than others.” CVM identifies the customers that have the highest value and what you have to do to extract that value from them. Many companies forget that this is a trade-off—you have to give value to take value. CVM also identifies the customers with the lowest (or negative value) and how you should serve them in a way to enable them to create value for the company. It doesn’t just mean firing unprofitable customers. It means managing the customer base as a portfolio—just like a mutual fund manager would manage their portfolio of equity and debt—to optimise value across the whole customer portfolio.

3. How can companies determine customer value? Is there a formula or methodology?
There are at least as many formulae for calculating customer value as there are CRM consultants. It still is not an exact science. Basically, value comes from three sources; from short-term cash-flows, from developing longer-term growth options and from managing risk. The simplest customer value calculations are based upon discounted cash-flows. These are based on future incoming revenues from customers and outgoing costs from serving them, all discounted back to today’s value of money. You can calculate value like this over a lifetime—let’s say over 10 years or more—but in most industries such a long period is too inaccurate to be useful. I generally recommend that discounted cash flows are calculated over the next 3-5 years. That’s the simplest way of looking at value. It also aligns nicely with the duration of most CRM strategies and the annual budgeting cycle. Some companies are using scoring models, but I have never come across a company that couldn’t calculate discounted cash flows if it worked at it. The real value gained is often in the understanding of where customer cash flows come from that you develop by carrying out such an exercise. That can produce some real surprises.

[This message was edited by Bob Thompson on 17-Mar-2004 at 09:25 PM.]

Posted 22-Mar-2004 06:29 AM
I would like to thank you for your clear explaination on CVM metrics and methodology, and to ask you a question.
Would you mind to give some more explainations upon the scoring models you said being used by some companies to measure customer value?
I would be very grateful if you could include some bibliography about it.

Many thanks.


Graham Hill

Posted 01-Apr-2004 03:58 AM

Scoring models are used by some companies (typically at early stages of their CVM development) as a proxy alternative to calculating customer value.

For example, many airlines still use a combination of flight-related factors as a proxy for the value of frequent flying customers. So a customer who usually flies business class has a higher value than one who flies economy. And a long-haul flight is more valuable than a short-haul one. And a full-fare ticket is more valuable than a discounted one, etc.

The problem comes when customers mix and match their flying behaviour. So is a customer who takes one discounted, long-haul trip in economy worth more than one who takes three full-fare short-haul trips in business? Simplistic points scoring models quickly run into difficulties here.

Another use of scoring models I have seen is in identifying customers for targetted marketing campaigns. In the absence of statistical models, some companies use simple points scoring approaches to select customers for a campaign. For example, a higher score would be attached to having a Dr. title—for a luxury car event invitation—than a common or garden Mr. And a Prof. Dr. would score even higher still. These types of points scoring models are full of human selection biases and are again no substitute for statistical analysis of existing customers to identify the characteristics of those with a high propensity to do whatever you want them to do.

Although simple scoring models like these are better than nothing, they are no substitute for calculating the cost and revenue associated with the transactional behaviour of each individual customer.

Graham Hill
Independent CRM Consultant

copparapu bobby(choudesh)

Posted 22-Feb-2006 08:39 AM
I would like to go with the opinion of Teri and Graham as well. Without having customer satisfaction, customer value management is going to be invein. Market and sales strategy depends upon the Customer and Product. pricing and quality would play significant role in this.

Scoring models … Oh.. I really wouldn’t bother. Everybody brining up new methodology, I believe it goes only with Survey.

Most of time either it is the “Product Unavailability” or High Cost Price to the customer leads the organization to wipe off its good history which it build-it up for years. Hence the customer will be directed to another company to have a choice. In this situation, the Company existence will be a question. As the Customer is the KPI here to decide the market and the quality of the product, it is our primary responsibility to hold him by serving him with our products in time.

There are two factors, which we need to understand regarding the customer and sales. (1) Because of the unavailability of the product, the customer will promote another company’s product (2) Supplying time or the delivery time of the product is another important task when organization dealing with customers in the market. In the first case, Customer will have dissatisfaction, and thereby organization is loosing the Valued Customer and in the second case, customer will make the company to hold the orders, therefore the organization has to do the backlog review process of the products, which in turn makes the company, to loose the revenue in the market. Discounting Process is one which helps the market and customer to have high sales revenue.

More often, the supplying of the products at proper time will make the customer to stay in touch with the organization or company, as because of his reference, company will have “Referred Customers”.

I hope my idea about the Customer Value management means customer should be always with us. Whether they may be as Repeated or Referred or New customer who has certain history. Such state would add the value of the Customer.

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

Ed Sander

Posted 19-Mar-2006 11:36 PM

I would be very grateful if you could include some bibliography about it.


A book I could recommend which covers both scoring models and the Lifetime Value calculations which Teri described is:

Strategic Database Marketing
Arthur Hughes


Hope this helps.

Ed Sander

Business Development Manager
Viking Direct/Office Depot

Database Marketing Specialist
Failsafe Database Marketing

Graham Hill

Posted 21-Mar-2006 01:24 AM

I can also recommend the writing of Werner Reinartz of Insead and his colleagues.

You can download much of his writing for free at http://www.reinartz.com/research/PublishedWork.html.

I can also recommend his excellent book.

Graham Hill
Independent CRM Consultant


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