Meter Readers: Evaluating E-Commerce Projects

Value Methodology

The loyalty value added (LVA) methodology from software vendor eLoyalty uses a probabilistic analysis methodology. LVA generates a "probability distribution" of net present values for a given project, rather than offering a single (and unrealistically exact) number. LVA also takes advantage of real options valuation to calculate the impact of internal business investments. Using LVA, Wisconsin Gas could weigh the cost and benefits of different initiatives by customer segments (in this case, by age groups) and determine which projects would yield the most revenue per customer. The method also let Wisconsin Gas adjust the intrinsic values of a project for changing costs and benefits associated with delaying its implementation.

With deregulation looming, Wisconsin Gas was looking for ways to secure customer loyalty through more customer-focused services that would differentiate it from the competition. "There are many unknowns and uncertainties in the utility industry," says Jeffrey Morrow, e-commerce manager for Wisconsin Gas. "But if we continue to provide excellent service and find ways to improve service, our company will be poised to compete with the changes that occur." According to Morrow, maintaining long-term relationships with customers goes hand-in-hand with initiatives that raise the level of brand recognition. The utility could then build on these relationships to introduce new products and services and increase revenues.

Wisconsin Gas, the state’s oldest and largest regulated natural gas distribution utility, is a subsidiary of publicly held Milwaukee-based Wisconsin Energy Corp. Founded in 1852, the utility serves 536,000 customers in more than 531 communities. The company also engages in several unregulated, nonutility business activities, including leasing commercial water heaters and selling emergency backup generators under the PowerNow brand.

In addition to bolstering existing customer programs, many areas of the company began pursuing e-business projects as a way to improve business processes and make it easier for customers, suppliers and partners to do business with the utility. After extensive discussion with business unit staffers who work closely with customers, Wisconsin Gas’s e-commerce team proposed a lengthy list of initiatives that it felt would cement relationships with the company’s customer base.

In order of presumed importance, the list of projects included (first) an online sales-call scheduling system, (second) an online installation and service scheduling system, (third) an online questionnaire system for customer feedback, (fourth) an extranet for contractors to check heating equipment service logs, (fifth) an online financing program for customers purchasing new equipment and (sixth) a remote monitoring system for residential backup generators. All of these initiatives afforded some value to the company, from increased sales and lead generation to more cost-effective business operations and better customer service that would enhance the company’s image in the marketplace.

Trying to hammer out the most effective e-business strategy became difficult as team members argued for their preferences. Should Wisconsin Gas pursue projects that promote customer self-service to reduce operating costs? Should projects that augment revenue be given greater weight than projects that have the potential to generate more leads? "Basically we were at a loss as to what to do to prioritize these projects," says Morrow. "We were using a project management tool that focuses on net present value [NPV] analysis." But consensus among team members was that the e-business strategy needed to focus on value added for customers.

Wisconsin Gas decided to pilot the loyalty value added (LVA) methodology from Lake Forest, Ill.-based eLoyalty to help the utility determine which e-commerce customer relationship management (eCRM) initiatives would be most profitable to pursue in the next fiscal year. "We needed to step back and look at a methodology that would rank them all based on customer value [how profitable each customer is to the bottom line]. And that’s when we got eLoyalty involved," explains Morrow. According to Morrow, LVA met his team’s needs because it provided the crucial balance between NPV analysis of the company’s bottom line and analysis of customer groups for the best combination of customer value and cost savings. Timeliness was an issue too. Morrow says he didn’t want to go through a lengthy request-for-proposals process with many vendors.

Looking for a quick hit—two weeks of analysis that could lead to a fast decision—Wisconsin Gas chose its PowerNow business unit as the test case. "Our focus was to study one business unit, evaluate its [profit and loss] statement along with the [proposed] e-business projects and prioritize those projects to improve the company’s bottom line," says Morrow.

The list of proposed eCRM initiatives for PowerNow, a year-old marketer of backup generators to home owners, represented a typical cross-section of ideas held by other Wisconsin Gas business units.

What’s a Customer Worth?

The first step in the LVA analysis was for Wisconsin Gas to examine PowerNow’s profit and loss statement and determine what customer segments the business unit was targeting. The utility’s executives looked at the following questions:

  • What is the value of the customer base that each eCRM project is attempting to protect or enhance?
  • What is the optimal amount of capital that would most efficiently protect or maximize the customer value base?
  • Which of the projects under consideration would provide the greatest return in protecting or enhancing customer value in the shortest amount of time?

LVA is a measure of customer profitability derived from customer-centered operating metrics. These financial levers include revenue generated per customer, the probability of retaining each customer, the cost of retention and the cost of acquiring customers. Through them, a company can measure the value of different customer segments to a company’s bottom line.

With the LVA analysis, Wisconsin Gas began taking a closer look at the revenue streams for PowerNow. More than half of PowerNow customers came from the 50-and-over age bracket. In retrospect, it made sense. A backup generator is a high-ticket item ($8,000 or more, depending on size and options), and the age group to which it appeals—snowbirds who spend half the year in a second home in a warmer climate—generally has more disposable income to make such a purchase. Further analysis revealed that a large segment of that population came to be PowerNow customers through word-of-mouth referrals. Just knowing that the primary audience for any eCRM initiative would fall into this age bracket made Wisconsin Gas rethink its list of projects.

LVA helped Wisconsin Gas focus on the loyalty levers that drew customers to PowerNow. Discussions with company sales reps and marketers revealed that maintain-ing a sense of security was an important issue for this age group. A backup generator provided customers with the peace of mind that their homes would be safe from power outages even during their extended absences. It was clear that Wisconsin Gas needed to focus on eCRM initiatives that would further enhance that peace of mind, improve customer satisfaction and thus lead to more customer referrals.

Project Costs Versus Project Payoffs

Pursuing any eCRM initiative is a matter of weighing the cost of the project against the projected revenue it will generate. LVA analysis helped Wisconsin Gas estimate the potential investment range for each of its eCRM projects by looking at the potential return on investment. For instance, while the e-commerce team might have felt that online scheduling was a hot project, analysis proved otherwise. First, it would be a relatively costly project to implement. Second, it would have to be offered as a free service, a convenience to the customer, so it wouldn’t serve as a revenue generator. Third, market analysis demonstrated that the largest market segment for PowerNow was also the least likely to use such a service given this age group’s resistance to interacting with the Internet in the depth required (sharing personal information and making online payments) by an online scheduling system.

"What came out of the analysis is that we flipped our original ranking [of proposed eCRM projects] from top to bottom," says Morrow. "Remote monitoring [of backup generators] with Internet access became one of the most positive things we could do with that business unit." First, it provided Wisconsin Gas with an additional revenue stream, as an added option to the PowerNow preventive maintenance agreement. Second, the cost of implementing it was low compared with creating an online scheduling system. The remote monitoring system uses a small unit attached to the generator that can be wired to the telephone, allowing Wisconsin Gas to gather the data and post it to both Internet and intranet sites that the service department and customers can access through passwords. Third, it satisfied a customer service concern, namely anxiety over whether or not the backup generator was cycling properly in case of a power outage at the home in the owner’s absence.

Mapping Projects onto an LVA Scorecard

LVA can be used to identify the top-performing eCRM projects with the greatest returns, based on customer-centered metrics. Wisconsin Gas began the process by separating its initiatives by their intended goals: cost reduction, cost avoidance, revenue protection and revenue enhancement.

For instance, the purpose of online scheduling would be to replace call center staff. But it became clear that given the current volume of business generated by PowerNow, it was still more cost-effective to man the phones than to undertake the expense of software development. This cost analysis, when combined with feedback from sales and marketing that the service would have to be offered for free, dropped the initiative in the rankings.

"Because the older age group is less apt to do the online scheduling, that dropped [the LVA score] of that initiative," says Morrow. "More people across all segments were interested in remote monitoring, and we can actually create a revenue stream from that initiative."

While remote monitoring won the No. 1 slot, an extranet for contractors to check heating equipment service logs ranked a solid second. "The online service log [is key in] making sure that the generators align properly and that site visits are thorough, so that we’re not repeating site visits because someone’s missed something in the history of working on that unit," explains Morrow. The two eCRM projects closely interlink in providing customers with the peace of mind that PowerNow is doing everything possible to make sure their units are going to work. According to Morrow, the extranet indirectly adds to the bottom line because customers who perceive that PowerNow is a company that really cares about its customers are more likely to spread the word among their friends.

Morrow is quick to point out that as PowerNow matures as a business unit, the demographics of its customer base are likely to change as well. While the utility proved it could pilot a quick analysis with concrete results, analysis of financial levers over a longer span of time may uncover a shift in customer segmentation and factors influencing loyalty. For example, as the utility’s younger customers mature, their comfort with Internet transactions may change the LVA score of future eCRM projects and cause Wisconsin Gas to redirect its resources.

On April 26, 2000, Wisconsin Gas parent company WICOR merged with Wisconsin Energy Corp., placing the state’s largest electric utility, largest gas utility and second-largest gas utility under the same holding company. While the merger had no impact on Wisconsin Gas performing the LVA analysis and moving forward with its pilot, most corporate activities focused on combining utility operations. The new organization will review the LVA methodology to gauge its effectiveness on evaluating customer service initiatives to be offered online. Morrow says he and his team will continue to advocate its use with top executives who are aware of the valuation method.

"People are starting to look at it," Morrow says. "The people who have purchased us realize the need for a tool such as this. And now our next step is selling it and moving ahead."

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