Editor’s note: Mark Haller is an advisory partner at the Chicago office of New York-based professional services consultancy PwC. This is an edited version of a post that originally appeared on the American Marketing Association’s blog under the title, “How much are your customers really worth?”
The best companies don’t just serve their customers well. They serve them in a way that also creates maximum value for the business. Pouring money into improving the customer experience is a crapshoot at best – and at worst, a fool’s errand – if the investments aren’t linked to an understanding of the impact on profits and value.
Many companies still struggle to find the right balance between service and profits, largely because they have trouble determining the true “value contribution” of their customers. Traditional profit and loss calculations don’t dig deeply enough into the individual customers or segments that create – or destroy – profits. P&Ls owned by a business unit or a function such as sales, marketing or logistics typically are not explicitly aligned with understanding which customers are delivering the most to the company’s bottom line.
As a result, efforts to improve individual P&Ls don’t necessarily lift customer profitability because their efforts aren’t coordinated. If a logistics manager reduces air freight by 40 percent to meet an internal cost savings target, but the cuts affect the business’ ability to serve a segment of customers who were willing to pay a higher price for expedited shipping, you could be leaving money on the table – and possibly losing customers, as well.
In other words, you may win the functional P&L battles (securing leaner logistics, for example) but ultimately lose the war by destroying overall profitability.
But there’s hope. The rise of digital channels and advances in data-mining provide marketers with much more information about customers’ transactions, activities and interests. Developing a 360-degree view of customer profitability, and embedding this perspective into the very fabric of a company’s operations, can help uncover previously hidden opportunities to better serve customers in a way that drives sustainable profits.
A single source of the truth
A 360-degree approach requires complete visibility into all of the elements that factor into customer profitability. It’s important to understand not just how much you charge certain customers (list price), but how much you give back to them through promotions, rebates or other discounts.
In addition to direct price incentives, examine the costs to serve each customer by knowing which delivery channels they use, how often they call the contact center and how many warranty claims they make annually – all of which contribute to the “pocket price.” Digging down to the transaction-level DNA of each customer can give you almost unlimited views into the drivers of profitability.
Of course, pulling this information together is half the battle. The data often reside in a myriad of sources and formats across the organization, not just in ERP or CRM systems but in financial spreadsheets, on a sales rep’s hard drive or in call logs from the contact center. It takes a fair amount of grunt work to consolidate this information, but it’s a critical step.
However, the availability and quality of data should never be used as an excuse for delaying efforts to quantify customer profitability. You can get quite far with the data that you have at your disposal. Basic analyses of existing data typically will point the way to the gaps and other areas of improvement, which helps build a business case for additional data and analysis. As the value of the analytical effort moves beyond the hypothetical stage, you can improve decision-making and uncover additional opportunities.
Myth-busters and team-building
Creating a single source of the truth does more than reduce the time spent in meetings arguing about whose spreadsheet is better. When everybody starts believing in the same set of data, they’re more likely to align around the steps required to improve customer profitability.
The insights that you discover may begin to dispel long-held beliefs about the activities and segments that truly drive profits. Customers who are considered highly valuable because they sign large annual contracts actually might produce negative margins after accounting for the true costs to serve them. Or a segment that historically has attracted little marketing or sales resources might prove to be highly profitable through low-maintenance digital channels, leading to reallocation that can drive margin improvements for specific products, channels and customers. Finally, long-standing discount and promotion programs that fail to effectively link that investment to customer behavior and results are laid bare.
Even small adjustments can lead to quick and quantifiable improvements. Experimenting with minor price increases, bundling, cross-selling or segment-specific service policies can give you rapid feedback about which levers drive true profitability.
Coming to grips with a fact-based reality that is contrary to long-held beliefs can be painful, but the process eventually should lead the entire organization to rally around this new “truth”: Driving more cross-functional cooperation and connection leads to serving customers more profitably.