In the current economic environment, many organisations seek to become more customer-focused, and this requires fresh, detailed high-quality data. Silos of customer information slow down the progress toward becoming a customer-savvy company – resulting in a fragmented view of the customer and individual departments that struggle to be effective in customer contact. There is no silver bullet for customer focus. It’s a long process that will likely involve changes to business processes, company culture and technology. However, there is a common starting point that is shared by many of the organisations that have successfully embarked on this journey – the measurement of customer profitability and lifetime value as the foundation for a Customer Equity Optimisation strategy. Years ago Gartner* reported that “Customer Relationship Management (CRM) refers to the concept of moving ownership of the customer up to the enterprise level and away from individual departments and channels. These departments are responsible for customer interactions, but the enterprise is responsible for the customer.” Customer centricity has to be an enterprise level strategy. Frontline employees and departments have their own specific responsibilities and priorities. It is the enterprises’ responsibility to provide an environment – culture, technology and information – that enables employees to serve their customers in a way that acknowledges the customer as a whole. Companies which are now practicing enterprise-level customer management are enjoying dramatic success. Many have put Customer Equity Optimisation at the heart of their efforts. Their executives understand, track and articulate the value of their customer equity and know how their business is optimising customer equity. It all starts with an executive commitment to increasing the value of each customer relationship to the business with every interaction – while also increasing the value of the business to select customers. This commitment must be backed by accurate and timely information. Enterprise profitability analytics encompass every dimension of customer management including behaviours and transactions as well as expenditures and business activities across the enterprise. By integrating customer lifetime value calculation tools with analytical CRM there are tremendous opportunities to understand and grow customer equity. However, only with an effective and comprehensive customer profitability model and analytics can a company understand which of its customers are contributing, how much and why. Customer profitability should not be viewed as a gauge of the customer’s value; instead, it is a measurement of the value of a company’s customer-business interface – how well a company understands, informs, serves and profits from its CRM efforts. To effectively interact with each customer at any given touchpoint you need to understand what customers actually value. From a humanistic standpoint, successful firms understand customer needs and desires and meet them with relevant and timely offers. Analytical CRM can provide an understanding of the economic drivers and variables in each relationship and, therefore, useful clues to customer needs. It was not until recently that technology tools were developed to measure and optimise customer equity at a deeply detailed level on an enterprise scale. Working together in the late 1990s, the Royal Bank of Canada (RBC) and Teradata developed a data warehouse-driven value engine which accurately measures and tracks customer profitability. Since then RBC has used profitability analytics and event-driven customer relationship management to optimise customer equity and increase shareholder value. RBC had already been experimenting with customer profitability measurement. The key lesson learned was that truly useful customer profitability models had to begin with detailed, accurate, account or customer level activity-based costing information. A substantial challenge as it required close cooperation between Finance, Marketing, and IT, however all parties recognised the value of the effort.The bank found that profitability rankings changed by at least two deciles for 75% of customers, highlighting the improved accuracy. Further, RBC realised that customer profitability calculations were not enough. It came to understand that customers can be both profitable and have the potential to be profitable, and that the bank needs both kinds. Customer lifetime value tools, using historical profitability information, enabled RBC to determine which customers had high potential to be profitable in the longer term. Once the bank had the tools and processes in place to determine customer profitability and lifetime value, it included those measures when making customer decisions. This encompassed customised marketing campaigns, alignment of pricing discretion and service levels based on relationship depth (products held) and potential (lifetime value). The insights gained from RBC’s deep access to detailed customer information are used to guide organisational strategy and structure as well as daily decisions made by thousands of customer-facing employees. RBC is uniquely successful among customer equity-optimising companies because it incorporates a deep understanding of customers into all of its day-to-day operations. Employees are given the freedom and latitude to use the value of customer focus in nearly all their actions. This ‘scientific’ marketing focus is increasingly going to become the rule rather than the exception, as the value of customer relationships is understood as the key driver of a firm’s market value. The practice of Customer Equity Optimisation is important for more reasons than its impact on shareholder value – but that in itself is certainly good reason to take the approach and put it to the test.* Gartner Research Note, Ferrara and Nelson, June 4, 2001
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