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Know the True Value of Customers

By Mohanbir Sawhney

January 15, 2003 — CIO —

A fundamental tenet in customer relationship management is that companies win by attracting and keeping their most valuable customers. This is a simple concept if you know who your most valuable customers are. But many companies take a simplistic view of measuring customer value. To really understand what your customers are worth, you need to think broadly about the ways in which customers add value to your company. And you need to create more sophisticated approaches to quantifying the value of customer relationships. Knowing the true value of your customers will lead to better decisions about how you deploy your technology resources in offline and online sales channels.

The most common way to measure the value of a customer is the Customer Lifetime Value. Customer Lifetime Value is defined as the net present value of the revenue stream from a customer relationship. It measures how much business the customer is expected to do with your company during the lifetime of your relationship. But few large companies know how much business they do with a customer today, let alone how much they expect to do in the future. Customers may buy several different products from different business units within a company, but the silos that separate divisions don’t allow for accurate accounting of the total value of each relationship. For instance, Procter & Gamble found that many households spend almost 50 percent of their consumer packaged goods dollars on P&G products. However, P&G doesn’t know which customers are buying what because the company is organized around brands, not customers.

Know Customer Potential and Profitability

Even if you knew the customer’s lifetime value, you may be missing an important point. The measurement focuses on the value of current revenue from customers and ignores the option value of your customer relationships?how much business you potentially could do with a customer. Included might be potential revenue from products and services you could offer in the future, as well as additional spending by customers on existing product lines. Consider how Amazon.com has relentlessly expanded the number of product categories and services it offers. Each new category creates new revenue streams and increases the potential lifetime revenue from a customer. Despite initial concerns about Amazon overextending itself, its approach to becoming the "Wal-Mart of the Internet" seems to be paying off. It has become more profitable recently, and its stock price doubled between January and November 2002 in a terrible market. Similarly, brokerage firms that value customer relationships based on the current size of their assets may miss the fact that younger customers may be just getting started on their peak investment years. For that reason, Fidelity Investments considers young professionals under 35 among its "core customers" with the most future potential.

 

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