Valuation of Customers (Part 2 of 2)
In Part 1 of this article, we learned that valuation of assets should be applied to customers. Once we assign values to customers, we can better allocate our limited resources towards retaining the highest value-creating customers. We will now expand on what we can do to retain and build the customer asset base.
One beginning question to ask is: What customers do we want to keep? The range of values we have calculated for customers will help us answer this question. Some businesses (like a foodstore) will have narrow valuations since almost all sales are marginal. Other businesses with wide variations in profit margins will have a much more diverse spread of valuations. Wide variations in valuations will give us a customer base with a high skew curve. Businesses with wide variations and high skew curves will tend to emphasize frequent marketing programs, special sales, and other strategies directed at the high-end of the skew curve. Businesses with low skew curves have a flat customer base and thus, they will allocate their marketing efforts more uniformly throughout the entire customer mix. For businesses with low skew curves, one way to segment out customers is by their needs. For example, a clothing retailer provides numerous needs - children's shoes, men's neck ties, etc. The greater the differentiation in needs amongst your customers, the greater the need to learn from the customer.
Therefore, retaining customers is a function of gaining new knowledge about the customer. This requires that you establish a relationship with the customer. Once you begin to interact with the customer, you start to identify unique needs of the customer. This is important since customers are not interested in making choices. Customers are best satisfied when you deliver products and/or services that are customized to their specific needs. Customer retention comes from treating each and every customer differently. The most loyal customers are those who expect you to remember what their specific needs are. The more specific a customer is with your business, the more you will be able to learn from the customer. And the less likely the customer will defect and move over to the competition.
As the organization learns from the customer, it will be necessary to deliver customized products and services. The organization will have to become increasingly flexible with marketing and production. Additionally, a needs specific program should be directed at high value customers. The high value customers are the ones that you must retain. In the book Enterprise One to One, the authors Don Peppers and Martha Rogers note that a learning relationship between the business and the customer can only take place if:
- The business has the capabilities to deliver customized products and services in a cost-effective manner.
- The business has intelligence about the customer and this intelligence allows the business to anticipate customer needs.
- The business is very flexible and there is a strong interface between production, marketing, and other components of customer service.
- The customer is required to tell the business what specifications are required. Customers direct production, marketing, and other parts of customer service.
Finally, the emphasis is not on trying to bring in new customers. The emphasis is on providing more and more unique products and services. This wider product mix brings in the new customers. Consequently, the organization must be customized to meet the needs of the customer. This may require changing the organizational structure.
We no longer live in a world where one common product or service can be spread amongst the customer mix. We are quickly moving into a world where products and services are customized to meet individual customer needs. Customization based on learning from the customer is critical to value creation in the future.
Written by: Matt H. Evans, CPA, CMA, CFM | Email: firstname.lastname@example.org | Phone: 1-877-807-8756
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