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Customer Value is a Key Marketing and Business Measure

Create a Customer Value Metric

Marketers as value creators. We’ve been talking about this particular group of marketers for the past few years. These are the folks who earn the highest marks from the C-Suite for being able to prove their value, impact and contribution. What does it mean to be a value creator?

Create a Customer Value Metric

Let’s start by clarifying the term value creation. Value creation entails the development, delivery that will be adopted by your customers and products and derive an appropriate return for your organization. Value creation is the primary aim of any business entity. Ken Favaro of the Marakon Commentary declares that “understanding where, how and why value is created within your company and your markets is the best, most objective way to identify which of your activities and assets are distinctive enough to provide a platform for sustainable and profitable growth.”

Value creation extends beyond an economic calculation the amount a customer is willing to pay in the marketplace, in exchange for your good or service. Value creation isn’t about reducing costs or increasing productivity. Yes of course, value creation is about selling more of something that you didn’t have or sell before or increasing the sales of something because you made it better or more valuable to customers. The difference is that value creation from this perspective is not determined by the company, it is determined by your customer. It is your customer who determines the value. Customers purchase products and services ONLY when they perceive they will gain value by acquiring the products or service. Therefore, you have to know what your customers consider to be of value; the value will most likely be more than the functionality, features and price point.

Why Customer  Value is a Good Metric

This keen understanding of what is of value to the customer, is what distinguishes Marketers as Value Creators from their colleagues. These marketers emphasize innovating customer-focused products and customer-relationship processes to grow value. To join the ranks of the value creators, one of the first things you need to do is define how you currently bring value to your customers and then ask, what could you do better or differently to create more value.

Ultimately, you will need a way to measure value creation. Most companies have come to accept that customers drive shareholder value. It’s not surprising that customer metrics have become a key component of the CEO’s report card. If we work from the perspective that value is determined by the customer and that value creation focuses on customer-relationship, then we can posit that one metric may be customer relationship value. Not to be confused with customer lifetime value, customer relationship value measures whether your interaction with a customer moves the relationship forward or backward.

If we believe that the customer is a key driver of shareholder value, then questions about customer mix, defection rates, relative profitability of each segment, average new customer acquisition costs come to front and center. Often Marketing doesn’t have the answers to these questions. Marketing all too often focuses on measuring performance on the front-end (such as leads, conversion rates, etc.) and less  time on the back end (converting current customers to lifetime repeat customers). It seems rather obvious to suggest that customers who buy more often, buy more than one product, and buy in larger volume are valuable customers. To formulate a customer value metric you will need to be able to answer these four questions:

  1. Which of our existing customers buy repeatedly and how often?
  2. What do our customers breakout by frequency, volume, and number of products owned?
  3. What is our customer defection rate?
  4. What is the ranking your customers by likelihood to buy again?

The answers to these questions may take some digging and maybe some research. It is a worthwhile investment because the answers yield valuable actionable metrics that enable you to make better decisions about your customer investments.

Three Variables to Create Your Customer Value Metric

Customer relationship value is an essential leading indicator. Once you have the data you can create a customer relationship value metric. Four data points most commonly used for this metric include:

  1. Revenue per customer
  2. Profits per segment
  3. Lifetime value
  4. Satisfaction as it ties to intent to repurchase

Start with these three variables;

  1. The set of all customer interactions between your customers and your company,
  2. The cost of each of these interactions
  3. The degree and direction of each interactions impact on moving the relationship forward or backward

In addition to creating a metric for customer value, you may want to develop a Customer Value Index. An Index provides a way to evaluate customers  against a specific set of variables. You can then use the index to decide whether and how you want to continue to invest and engage with this customer.

An Index Provides an Apples-to-Apples Comparison

An Index Provides an Apples-to-Apples Comparison

Seven Variables for Your Customer Value Index

An index is a type of composite measure that summarizes and rank-orders several specific variables to represent a general dimension. Essentially, an index is an accumulation of scores from a variety of individual items. The value of index is that it allows you to have a systematic and consistent way to make evaluations.

For our purposes, the general dimension is customer value. Consider incorporating these seven individual variables into your formula for creating the index:

  1. Total purchases over their lifetime
  2. Average purchase value
  3. Purchase frequency
  4. Number of products/service purchased
  5. Time between each purchase
  6. Referrals generated
  7. Overall length of time as a customer
Create a customer value index

A customer value index serves as an excellent Marketing performance KPI.

You can take a number of approaches to create your index for customer value using these seven variables. The simplest approach is to create a means for “adding up” the values for each variable and then establishing an index score.  This will require you to have a common way to “rate” each variable, for example using  1-10, with 1 being a low score and 10 being a high score.  For each of these, you would then create a multiplier based on the weight of each variable, for example, a 1-5 multiplier with 1 being a low ranking and five being higher ranking.

Once you have your “model” in place, you can evaluate each customer using the same approach. Those customer above the index will be higher value and those below the index lower value.

This takes us to the idea of customer asset value.

Create a Customer Asset Value Score

Customer Asset Value is an important customer metric

Calculate Your Customer Asset Value

Like any financial asset you want to be able to understand its value in terms of an expected stream of future profit. By determining the expected future stream of profits minus costs (such as costs to serve and support, etc) you can determine a specific customer or a set of customers asset value. When the expected stream of profit increases, new net value is created.

Few companies have unlimited resources so it is important to be able to focus and prioritize. Customer asset value can serve as a good way to differentiate customers. A number of variables can be used to determine customer asset value, including current revenue, recency and frequency of purchase, referral rates and the percentage of the business the customer has with you compared to competitors (share of wallet) as well as potential future revenue. In this way you can create an objective value score for each customer.

Once you calculate customer asset value, assign different customers to different value tiers and prioritize your resources accordingly. You can use the value score to help profile the ideal customer. Measuring customer asset value should be an important metric for any company regardless of whether you have a small or large set of customers.

Let’s talk about how to establish your customer value metrics.

 

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