How to Maximize Your Return on Customer In the Real World

1. How to Maximize YourReturn on CustomerIn the Real World Martha Rogers, Ph.D. rogers@1to1.com

2. Save me time You tailor your product, service or interactions Consider What New Technology Hath Wrought: The “learning relationship” Customer talks with you FEEDBACK • The more effort customer invests, the greater • his stake in making relationship work • Going to a competitor = reinventing the relationship

3. What can you do now to make your customers more loyal and valuable, even though your competitors will do the same thing, the same way? The Key Strategic Issue

4. Where does all our revenue come from? • From products? • From vendors? • From our brands? • No, it’s simple – • All our revenue comes from customers • Fact: Some customers are worth more than others

5. Traditionally, Companies and Customers are Adversaries • Consider the language we’ve used when we talk about customers We “segment” them We “expose” them to our messages We develop promotion “schemes” We fight share “wars” • Fundamentally, it’s a zero-sum game • No alignment between company goals and what customer wants, except when a company gets caught

6. Smart Companies, Foolish Choices • The internet service provider who reaped temporary revenue • And how one airline made money • The “Do Not Call” referendum • So why are companies still calling? • Finders-keepers marketing only pays off for a minute • So why do companies do it? • Surely the sheer resentment of masses of customers should count for something? • Could companies’ economic calculations be wrong?

7. Value Measures from a Previous Century • Management = decisions that affect future cash flow • GAAP sets ground rules for measuring and reporting and helps compare performance between companies • Firm’s value is tangible assets plus net present value of all future cash flows • Stock price fluctuates with different investors’ expectations about those cash flows • But investors look at other variables too

8. Value Measures from a Previous Century(Cont’d.) • Activity-Based Costing (ABC) • More accurate than traditional, total-cost accounting • Focuses on many indirect costs, such as overhead and infrastructure • But ABC has disadvantages: • Doesn’t account for cost of capital • Ignores investment expenses and allows capital to be diluted • Economic Value Added (EVA) [registered TM of Stern Stewart] • Focuses on maximizing shareholder value • Incorporates cost of capital and accounts for capital dilution • Looks at business-unit level and above • Historical measure • Can be used by medium and large businesses

9. What is “Return on Customer”? • Customers are the scarce resource for a business • ROC measures true economic return on this resource • Consider the ROI on a portfolio of securities • Tally up dividend and interest income during the period • Then add in any increases or decreases in the value of the underlying securities • But what if you only counted the income? • A company is like a portfolio of customers who • Buy things currently (current-period profit), and • Go up and down in value (changes in customer equity)

10. The Goal for a Business: Organic Growth • Same-store sales increases • Account penetration • Increased share of customer • Margin protection and improvement • Churn reduction • New customer acquisition • New products and services for unmet needs

11. In Contrast to Purely Financial Growth… • Today’s company executives are much more wary of acquisitions and business combinations • Best examples of financially grown conglomerates are also “house of cards” empires with little lasting value: • Enron • Tyco • Vivendi • WorldCom • New U.S. accounting guidelines impose more discipline on use of mergers as a tool for top-line revenue growth • Much less “pooling” allowed • Stricter amortization of good will • Constant re-evaluations (and write-downs) of acquired assets

12. Customer Equity is the Right Metric • First, it is a matter of common sense: • The firm is engaging its customers in customer-specific interactions and activities, therefore: • Our objective must be to increase the long-term value of each customer engaged! • But second, management needs an accurate way to evaluate its own actions: • Resolving conflicts and prioritizing actions requires an over-arching set of guidelines • Customer equity “stands above” these conflicts • Every management decision should be made based on how it effects customer equity

13. Choosing the Right Accounting Treatment • “Rolling up” LTVs to get customer equity • Should LTV be based on marginal financial contribution? • Or, should it be calculated from fully allocated profit? • Recognizing capital costs • Use a strict cash flow analysis? • Or, add CRM capex and back out CRM depreciation? • How customer equity is calculated will change based on the purpose of the analysis • Is it to decide whether to launch a new business? • Or are we cutting service costs?

14. Actions That Increase Customer Equity • Acquiringprofitablecustomers • Retaining profitable customers longer • Eliminating unprofitable customers • Up-selling additional products in a solution • Cross-selling other products to customers • Referral and word-of-mouth benefits • Reducing the cost of service for customers

15. Enterprise Creates Value Two Ways • Profits are harvested, and… • Customer equity is created or destroyed. • Needed: A metric to capture the effects of both types of value creation. • Customers are the scarce resource. • So what is the rate at which a company creates economic value from its customers? Return on Customer

16. ROC: A Speedometer for Organic Growth • ROC measures the efficiency of a firm’s true value creation with customers • Return on Customer has important implications for • Pricing policy • Sales force organization • Distribution channel management • Product and service development • Supply-chain automation • ROC should also be used to evaluate new ventures and business combinations • Customer equity of the combined entity should exceed the sum of the entities’ individual customer equities…

17. Warning: “Marketing” can destroy value! • Example: Start with a million customers • A marketing campaign generates a 1% response (10,000) • Cost is $1 per solicitation, or $1 million total • Each response generates $125 in LTV profit, or $1.25 million total • So each individual campaign is successful, with a $250,000 profit • But suppose non-responders become just 0.5% less likely to respond with each solicitation Then with each campaign customer equity decreases by more than the “profit” harvested!

18. What Customer Strategy is not… • It’s not just the technology. • Technology is an important first step, but not the only step • It’s not just some personalized e-mail. • It’s not just more sophisticated “segmentation.” • It’s not just a more efficient call center. • It’s not just the job the “marketers” do. • It’s not just a new sales training approach. • It’s not just good customer service – “random acts of CRM” that can’t be remembered the next time we see this customer. • We will not build customer equity with better targeted harassment!

19. And What Customer Strategy is… • Building shareholder value by increasing the value of the customer base. • Using information about each customer to make each customer more valuable to the firm, and the firm more valuable to each customer, while decreasing the cost of servicing each customer. • Enterprise-wide. • Applying more resources to more valuable customers, and more resources to keeping valuable customers rather than acquiring new ones of unknown value.

20. And What Customer Strategy is…(Cont’d.) • Deliberately increasing customer equity through every decision, every day, and holding key company leaders accountable for that increase. Counting the increase, or return on customer, as revenue minus the customer equity used today to get that revenue today. • Treating different customers differently to build ROC.

21. What if we could, and did, measure how much today’s decisions really cost? • What if account managers, and CEOs, were penalized for the customer equity they have to spend today to achieve this quarter’s revenues? • What if Wall Street analysts held companies accountable for customer equity (as the best measure of enterprise value) as well as current revenue?

22. Starting Now, Customers are our Business • And aligning our interests with the customers’ makes the most sense • Otherwise we will be irrationally self-destructive • Managers do not behave badly because they are bad • They behave badly because they are in the dark • And the little guidance they get drives them in a direction at odds with the interest of the only value their firm will ever have: Customers

23. Starting Now, Customers are our Business (Cont’d.) • Product expertise can be duplicated • Products will come and go. • We can’t prevent a competitor from knowing what we know about these products. • Customer expertise is competitively defendable, unique and permanent • What advantage can you get from information? • Customers are the only reason we have a business • Thus, measuring the value of the customer base and using that to make managerial decisions is imperative • We call it “customer equity”

24. Maximizing the Value of the Customer Base Means: Treating Different Customers Differently Relationships are the vehicle for customer-specific actions

25. Learning Relationships are All Around Us • 20th Century: Competitive advantage came from product and brand and service • 21st Century: Competitive advantage comes from information

26. The Information Advantage: Kingsway • Shopping bags are a commodity. • How to break out of lowest-bid trap? • Use information about each customer to extend the definition of the business and build ROC. • Kingsway charges up to 7% more than competitors. • Now Kingsway is in the inventory-movement business. • What business are you in?

27. The Information Advantage: Tesco • Groceries are a commodity. • How to break out of lowest-price trap? • Use information about each customer to extend the definition of the business. • Ten years ago: the discount grocery business. • Now: The household’s needs business. • What business are you in? • Relationships are the tool to build value.

28. Treating Different Customers Differently What if we increase the value of the customer base by managing the mixof customers?

29. Share of market 2009 Share of market 2004 2009 customers Share of customer MVC's $0 Visualizing an increase in customer equity This necessarily implies customer-specific objectives and strategies Relationships with individual customers become the vehicle Number of Customers Profitability (estimated LTV in $)

30. The Nature of a “Relationship” • Interaction is required, both ways between two parties • Interactions drive a change in behavior • Relationships arereciprocal • Relationships are iterative by nature • A context develops over time • It gets easier and easier to continue the relationship • There is an ongoingbenefit to both parties • Each party wants to recover from mistakes • Every relationship is different • Relationships aremeasurable

31. Successful Relationships Generate Trust • Trust is the engine of all commerce • When I trust the company I deal with: • I can share my personal, private or sensitive information • I trust you to make recommendations and act in my own interest • You’ll help me even in areas outside of your main business • Earning and keeping the trust of customers is equivalent to taking the customer’s point of view • Trust is inversely related to the amount of “self-orientation” a customer perceives in a company • The opposite of self-orientation: “the principle of reciprocity”

32. “Ladies and gentlemen serving ladies and gentlemen.” “The Schwab philosophy: Your needs first.” Creating a Culture of Customer Trust “Treat the customer the way you would want to be treated if you were the customer.”

33. More Than Numbers and Processes • Both parties have to be willing to engage in a relationship • The customer must trust the company • The parties must becommittedto having a relationship • There must be a mutual benefit andalignment between the parties • So don’t be misled by economics and equations • True success only comes from seeing your business from your customer’s perspective To get real value from customers, first deliver real value to them

34. Customer Relationships Protect Unit Margins and Reduce Churn • Better customer service or satisfaction • At lower cost • What we learned from the hotel chain • Margins are the “flip side” of learning relationships • If it’s in the customer’s interest to stay loyal • Competitor’s discounts will have less appeal • You will spend less on acquisition expenses • Loyal customers cost less to serve • Higher margins…less churn

35. Making it Practical • Maximize Return on Customer by breaking customer base into portfolios • Evaluate managers based on portfolio’s ROC. • Value creation at the molecular level. • But changes in customer equity must now be predicted from current actions • Otherwise, how will managers be evaluated? • So what are the “leading indicators” of customer equity change?

36. Three Types of Leading Indicators • Attitudinal indicators • Willingness to recommend, customer satisfaction, brand preference, level of trust and confidence… • Behavioral indicators • Changes in account profile, interactions, sales, referrals, returns, complaints… • LTV components • What variables go into the company’s LTV equation? • Churn rate, frequency of purchase, share of customer, service contract, account penetration level…

37. Behavioral Indicators • Financial services firm • A fall-off in transactions indicates increased risk of attrition • Credit card firm • Married couple each using a jointly held card increases loyalty dramatically • Automotive firm • Customer buying on referral is more likely to be satisfied longer and to buy additional products and services • Electronics retailer • Customer enlisting for e-mail newsletter more likely to return to store for future purchases

38. ROC is Qualitative, Not Just Quantitative • Gaining customer trust involves both culture and capabilities • Up to now, the best examples of ROC success have been from companies not tracking it formally • Ritz-Carlton, USAA, Charles Schwab, Peter Jones • What any company can do: • Even without financial tracking mechanisms • See things from the customer perspective • Act in the customer’s interest, to solve customer problem • Employees want the capability to behave this way • But companies are hesitant to push customer service without the metrics to hold costs down • Now, with ROC, a company can measure costs and benefits accurately

39. Building Customer Equity • Short-term and long-term return. • Revenue enhancement and cost reduction. • To pay off, investments to build the value of the customer base must be: • Measurable • Reportable • Manageable • Impactful • “The value of the customer is critical. How do you measure that?”

40. Examples All Over the Globe • Tesco • National Australia Bank • Hewlett-Packard • BMW • Bentley Software Systems • Zane’s Cycle Shop in Connecticut

41. Why are companies doing this? • In order to “make sense” to their customers • Remembering customers from one transaction to the next • Behaving in an outwardly rational manner • Customers demand this kind of treatment • To eliminate waste and duplication of effort • Using computers to work faster, more efficiently • To improve the long-term value of the enterprise • Increasing the value of the customer base • Getting, keeping and growing customers…

42. We Know What a Memorable Customer Experience Could Be • You’re a very frequent flyer on Northwest, so you get frequent free upgrades to first class. But instead of treating you like all platinum flyers, they know what matters most about first class to you, and you always find a bottle of water on your seat in first class. • You walk into your doctor’s office and all of your data is available, your prescription order is e-mailed to the pharmacy, which checks for interactions, and sends your medicine to your home. Your insurance forms are automatically filed and the difference, once you approve, is deducted from your checking account. • Your dry cleaner gives you plastic bags with bar codes which tell who you are, how you like your starch, and your preferred method of delivery and billing. They keep track of your buttons and make repairs as needed.

43. What experience should I expect if I’m your customer? • What will make me want to buy more, rather than merely to buy now? And buy it from you? • What do you need to do to make it happen?

44. Industry events Information tools Promotion Managed programs 1to1 = Meeting More Needs Enhanced Customer Need Set • Add-on marketing services, publishing (Reed Elsevier) • Anticipating needs • Recording contact data • Recording interaction data • 365 virtual customer TDCD • E-commerce • Customer collaboration • Value streams • Community knowledge • Alliances/resources • Delivering increased ROC Product-Service Bundle Billing, invoicing, cost control Service packaging Core Product Customer strategy Promotion, communication Service operations

45. Eneco • Dutch seller of natural gas • Many “green house” customers • Customization: maintaining the green house’s complete environment • Temperature • Humidity • CO2 content • Using remote monitoring • What business are you in?

46. How much will you spend on CRM? More than 25% of U.S. firms will spend more than $500,000 over the next two years, for a total of $8.7 billion in 2006 Led by financial services, retail and telecom -- Jupiter Media Metrix

47. Value-building relationships are certainly not easy • Survey of more than 100 CRM technology implementations • Implemented on time 55% • (median implementation time 8 months) • Implemented on budget 63% • Achieved all goals 31% • No meaningful results 32% Source: Journal of Customer Loyalty

48. Why so many CRM failures? • The strategyproblem • Ready, fire, aim! • What do we need our customer strategy to do? • How do we measure and report? • The information problem • Understand the whole value and need of each customer. • The adoptionproblem • Many different players at the firm are involved in a CRM implementation, and critical to its success.

49. Ask Yourself: What Is Your Firm’s Most Unique, Non-Replicable Asset? • Products? • Brand equity? • Sales staff? • Merchandise? • Stores? • Computers and calling centers? • Marketing programs and tie-ins? • Or customers?

50. And Who Manages Your Most Valuable Asset? • You have product managers, regional managers, operations managers, Web master, promotions manager, department managers, sales territory managers, call center managers, help desk managers, merchandise managers, campaign managers, etc. • Who’s responsible for managing customerrelationships and growing customer equity for each of your customers? • How do you measure that? • How do you reward it? • How will you build the value of the customer base?