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Peppers keynote: Get a piece of the ROC

Barney Beal

ATLANTA -- The world of CRM and IT may already be overflowing with acronyms, but Peppers & Rogers Group says there's one you likely aren't paying attention to -- and you should be.

During the keynote address at the Smart CRM show Wednesday, Don Peppers, partner in the Norwalk, Conn.-based consultancy, urged organizations to measure ROC -- return on customer.

Customer equity -- or the lifetime value of all current and future customers -- is analogous to capital and should be gauged as such, Peppers said. The way to do that is by measuring ROC.

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Every man- agement decision should be made, in part, on how it affects customer equity.
Don Peppers, Peppers & Rogers Group

Peppers, and the Peppers & Rogers Group in general, have maintained that true CRM success relies on creating a dialogue with customers and dealing with each customer individually.

"We think customer equity is the right metric," he said. "Every management decision should be made, in part, on how it affects customer equity."

Management decisions that do not take into account customer equity can be counterproductive, Peppers said. Consider a marketing campaign that goes out to 1 million customers at a cost of $1 per solicitation, receives a 1% response rate, and generates $1.25 million. The net profit is $250,000. Yet, if non-responders are just 0.5% less likely to respond to the next offer then, with each campaign, customer equity decreases by more than the profit returned, Peppers said.

Peppers offered a "quick and dirty" method of evaluating customer equity: Take a random sample of customers dating back at least five years and track their transactions. Replenish the sample each year, adding new customers in proportion to actual acquisitions. Companies can then make judgments on historical patterns and project that to the baseline.

"This is not perfect, but it's something you could do with a calculator in the back room in two days," Peppers said.

Armed with that information, an organization can then measure the return it is receiving on its customers and the value it's creating.

"To get value from customers, you have to give value to them," Peppers said.

Additionally, ROC has implications for pricing, sales force organization, distribution channel management, product and service deployment. Companies can use it when considering new ventures and business combinations.

Peppers offered three leading indicators of a change in ROC: customer attitude, overall satisfaction levels and a willingness to recommend the company to others; changes in the customer's actions, profiles, sales and referrals; and lifetime value components, such as churn rates, frequency of purchase and account penetration.

Maximizing ROC first involves creating a relationship and earning customers' trust, so they are willing to do things like supply personal information, Peppers said. Organizations then need to look at lifetime value, benchmarking it through customer equity. Finally, businesses should assign employees responsibility for specific customers. Peppers suggested portfolio managers who segment and serve customers individually.

Measuring CRM performance was one of the concepts Gladys Figueroa, continuous improvement leader with Colgate Palmolive Co. in New York, came to Smart CRM to learn more about.

"It's something new but worth pursuing," Figueroa said. "It gives a real sense of how we can sell the [CRM] message to the rest of the organization."

Yet the use of ROC may be difficult for others to incorporate.

"I'm an IT guy, and for me to calculate something like that would be a little impractical, but I can see how it makes a lot of sense for our sales and marketing guys," said Carmen Capuzutto, IT director of the Bernard Egan Co., a Fort Pierce, Fla., fruit distributor.

TechTarget is the organizer of Smart CRM and owner of the family of Web sites that includes SearchCRM.com.

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