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Customer value: How to manage customers as investments

Learn through case studies and other examples how to estimate your customers' lifetime value.

 Managing Customers as Investments: Ch. 3, Customer-based Strategy

Customer Metrics
The customer approach focuses on customer value or customer profitability in contrast to share, satisfaction, or product profitability. A focus on customer profitability has several advantages. First, it inherently takes a long-term view, emphasizing that customers are assets who provide long-term returns and that marketing is an investment in these customers. This also shows how to assess the return on this marketing investment. Second, it recognizes that the value of customers may vary substantially. For example, in many business-to-business situations, it is not uncommon to find that while large customers are generally the largest revenue generators for a firm, they are not necessarily the most profitable because of the high cost required to serve them. Note, if a firm keeps track of profit at only the product level, it will never be able to uncover this. As we will discuss in Chapter 6, a focus on customer profitability may require a major change from product-based accounting to customer-based accounting to keep track of revenues and cost for each individual customer. In other words, this new metric is more than a mere difference in semantics. It will not only drive decisions in a different direction but it may also entail significant changes in organization structure.

As discussed in Chapter 2 and illustrated in Figure 3.4, customer profitability and the value of customers are primarily driven by three major components—customer acquisition (acquisition rate and cost), customer margin (dollar margin and growth), and customer retention (retention rate and cost). These three factors are the key metrics of the new approach. They not only provide tangible and measurable metrics but also make clear the inherent tension between growth and efficiency. For example, it is hard to simultaneously increase customer acquisition and cut total or average acquisition cost. Similarly, increasing the acquisition rate is likely to draw marginal customers and may negatively impact customer retention rates and margin per customer. Such tradeoffs are the essence of astute business decisions and the hallmark of profitable growth.

>>> Download the rest of this chapter on customer loyalty and value.
>>> Return to the CRM and call center bookshelf to read more excerpts.

 

This was last published in May 2005

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