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New Thinking about Customer Value Metrics, Part II

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Posted July 25, 2001 By Arthur O'Connor     Feedback

eCRM expert Arthur O'Connor concludes his series on evaluating and measuring customer lifetime value (CLV).

In our last installment, we looked at how CLV (customer lifetime value) — the measure of potential income streams and costs over the lifetime of a customer — has become increasingly less relevant in the hyper-competitive, fast-changing, global electronic marketplace. We acknowledged that CLV is still perhaps best used as a means to measure the relative value of customers and customer segments, based on current and/or short-term income streams and cost bases.

In this second installment, we'll examine how changing attitudes and new reporting requirements have created a new category of metrics that could replace, or at least supplant, CLV as a benchmark for measuring customer value.

Development #2: Corporate managers are beginning to realize that CRM is a competitive necessity, not an option.

For an increasing number of companies, the issue surrounding CRM isn't whether to do it, but how to do it.

Instead of engaging in Customer Lifecycle Values measurement to justify investment in or determine the feasibility of a CRM system, companies are simply looking at current customer profitability. Then they use these metrics to invest in value-added services to help acquire and retain high-value customers and prospects.

As a recent (March 2001) Gartner Group research report points out, industry "leaders" don't waste their time developing detailed financial analysis to determine whether they should undertake CRM. These types of companies are skipping that step and going directly into measuring how to implement CRM and what strategies they should use, and what customers they should target.

According to this same research report, it is only the risk-adverse industry "followers" who require the detailed financial analysis to garner the internal management support and conviction to undertake CRM (a competitive disadvantage which no doubt helps explain why these organizations are followers and not leaders).

Development #3: Customer metrics are becoming a critical part of the CEO's report card.

In terms of economic theory, it is the mindset of consumers — their attitudes and beliefs about a brand, and its ability to satisfy needs — which ultimately determines buying decisions over time, and thus determines the economic success or failure of an enterprise.

But theory hasn't always translated into practice. While many business people are increasingly convinced that customers drive shareholder value, their ability to track this value has been limited at best. Conventional financial and managerial accounting practices were never designed to capture and track the value of "customer mindset." The best thing we have today is something called "goodwill" — a number which accountants back into by subtracting the book value of acquisitions from their purchase price. It is more of a bandaged attempt to reconcile industrial age accounting practices to cope with the realities of today's information and knowledge economy.

But a new set of metrics is taking center stage at CEO presentations to Wall Street analysts, and the metrics have nothing to do with financial accounting items that are found on either income statements or balance sheets. And ironically, it has been the CEO who has been responsible for creating this new class of metrics.

For some time now, CEOs have been crowing about "re-aligning their operations around customers" and "placing customers at the forefront of business strategy to Wall Street analysts," often in connection with justifying major capital expenditures in CRM systems and associated corporate restructuring changes.

Now those claimed capabilities are coming home to roost. Having been sold on the concept of the customer as the key driver for shareholder value, equity analysts are now asking CEOs about customer mix, defection rates, relative profitability segmentation, average new customer acquisition costs — questions that now the CEO must find answers to.

Thus, through one type motivation or other, organizations are beginning to realize that the ability to attain customer knowledge is a lot more important to their business strategy than merely measuring customer value.

What are your thoughts? Please write me at Arthur.oconnor@reuters.com.

Arthur O'Connor is one of the nation's leading experts on customer relationship management (CRM) and customer-facing IT systems and strategies. He's currently the national columnist for eCRMGuide.com and this year serves as the chairperson of the Institute for International Research's CRM Conference. Arthur has over 20 years leadership and management experience in the area of customer management, strategy and new business development, including 15 years as a senior corporate officer of two NYSE-listed inter national corporations, and over five years experience as an independent management consultant and Big 5 firm practice manager selling and managing large-scale IT engagements.

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