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Customer Equity - Building and Managing Relationships as Valuable Assets. by: Robert C. Blattenberg, Gary Getz, and Jacquelyn Thomas. The following book review was prepared by: Bradley E. Hosmer. It is scheduled to appear in the next issue of the "Journal of Management Consulting." What are our customers worth? Do we manage them to optimize their value? If so, the authors of this book say we're on the cutting edge. If not, they advise catching up before more astute competitors leave us behind. Robert Blattenberg is a professor at Northwestern's Graduate School of Management in Chicago. Gary Getz is a Managing Principal at Integral, Inc. where he leads the firm's market and customer strategy practice. Jacquelyn Thomas is a professor at Emory's School of Business in Atlanta. Customer Equity is the value to us of our customer relationships throughout their life cycle. Understanding three central ideas helps us build more value into those relationships. The first big idea in the book is that customers fall into one of four life-cycle phases and behave differently in each phase. These phases are prospects, first-time and early repeat-buyers, core customers, and defectors. Each customer has a present and future value to the firm. Core customers provide the most profit, and should get most of our investment. Prospects and defectors have a lower value, and should be allocated a smaller share of sales, marketing, and business development resources. First-time and early-repeat buyers are the most likely to defect, so great care should be taken to invest enough (but not too much) to be sure that our products and services meet their expectations. We should invest in a combination of special pricing, additional services, and extra attention to help build loyal core customers. Since some will not become core customers, we must track these customers to measure how much additional customer equity we create. Obviously, the increase in customer equity must exceed our marketing cost, including special pricing and services. If it doesn't, we are not spending wisely. We can test different spending levels and combinations of programs, and by tracking the results find the combination that maximizes customer equity. Customers in different phases have different wants and needs. A prospect may want or need a lower price, better value, or more intense customer service. First time and early repeat buyers need ease of purchase, value, product uniqueness, and ease of exit. Core customers generally want consistent quality and service. Defectors sometimes are won back with a concerted effort to resolve product or service problems. The second big idea in the book is that we should tailor our marketing programs for each customer to build customer equity. Marketing has three essential missions -- customer acquisition, customer retention, and add-on selling. Each mission involves different tasks and a different way of thinking. Therefore, the authors recommend organizing marketing departments around each mission, and I agree. Regarding customer acquisition, many firms analyze their customers, but few analyze their customer-acquisition efforts. It's impossible to optimize customer-acquisition programs without detailed knowledge of both new customers and those who do not buy. Detailed information helps us determine the value of prospects, optimize acquisition programs, and build customer equity. For example, it may make sense to use low introductory pricing to attract prospects who are likely to become core customers. These customers will produce customer equity. It makes no sense to use low price to attract customers that are likely to defect. If we understand our customers, we can tell the difference in advance. Regarding customer retention, and contrary to popular notions, the authors claim that we can increase total customer equity by not trying to retain all our customers. Some customers are simply not worth retaining, as their expected value is less than the cost of retaining them. For example, some customers buy on price. Unless the firm meets or betters the price offered by the competition, the customers will defect. At some price-point, the value of such a customer exceeds its worth. Another myth is that customer satisfaction always increases customer retention and leads to higher profits. The authors say that unfortunately this is not always true. For example, in the U.S. auto industry, 90 percent of the car buyers report satisfaction, but only 30 to 40 percent of car buyers repurchase the same brand. So, it's important to analyze repurchase data, to predict customer equity, and manage our marketing programs accordingly. What does retain customers? Foremost are the many components of customer service, including functions many forget to include, such as accounting, logistics, and engineering. We need to ask three questions: What customers will this service retain and for how long? What is the potential value of those customers? And, the key question, does the customer-equity created exceed the cost of service? The authors present four tactics that also boost customer retention -- rewards (such as frequent flier miles), free gifts, special services, and add-on selling. Add-on selling is both a tactic and the third of three essential marketing missions. It is not the same as cross-selling. Cross-selling is simultaneously promoting related products such as computers and printers. Add-on selling is selling unrelated products to the same customer. An example is AT&T's Universal Card -- although it was marketed to current AT&T customers, it had no relationship to the other products and services offered by AT&T. In my experience, most firms do a fair job at customer acquisition. Most do a reasonably good job with customer retention, generally using customer-service as their main retention strategy. Few make any effort to implement add-on selling. And almost none gather the information needed to quantify customer equity. That brings us to the third big idea in the book -- and the big opportunity for building our own customer equity and helping our clients do the same. That idea is that we can devise new ways to measure the value of customers, and, with that information, invest our resources better to produce more value. The authors provide a detailed mathematical formula for calculating customer equity. Here's my non-technical version of how it works. First, you estimate the profit from first-time customers. Here's how the authors say to do it. Take the number of prospects contacted and multiply by the probability of acquisition. Then multiply by the margin that each sale will generate. From this total margin, subtract the cost of acquiring those customers. This includes the cost of the marketing program, sales expense, samples, etc. This produces a customer equity value for newly acquired customers. Next, estimate the profit from future sales to these newly acquired customers. Here's the formula: Multiply the rate of retention in each future period by the profit obtained from customers in that period. Then multiply that value by the discount rate to convert future profits into current dollars. Ideally, customer equity should be calculated one customer at a time. However, most of us and our clients do not have complete enough information on individual customers to do that. Nevertheless, we can begin with a simple "back of an envelope" approach using available information on groups of customers. Later, we can consider ways to create powerful systems capable of analyzing customer equity, right down to the individual customer. Two present and future realities help make customer equity management more doable. The first is the continual decline in the cost of computing power and storage. This makes it financially feasible for many, if not most, firms to build and maintain databases of customer behavior. The second reality is the emergence of high-powered, low-cost database-management software. These programs enable easy and fast crunching of the data needed to analyze customer acquisition, customer retention, and add-on selling. A third reality, however, is a barrier to implementing customer equity programs. That is the lack of skilled statisticians who can work with data and develop the models and tools needed to implement these programs. The authors hint that expert systems may someday help solve this problem. Overall, this book introduces some new thinking about marketing, customer retention, and the present and future value of customers. It contains many ideas we can apply to our own consulting practices, and to our clients' efforts, as we all struggle to meet the challenges of dynamic and changing markets. I recommend the book to you without reservation. Bradley E. Hosmer CMC (bhosmer@betacg.com and www.betacg.com) heads The Beta Consulting Group, Inc. in Concord, NH (USA). His specialty is helping clients resolve dilemmas presented by changing markets. |
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