Customer from top to bottom - a fresh look at customer value
“Know your customer” is by now a motto supported by almost all commercial people. Customer centricity, customer focus, customer engagement and many more customer-related buzzwords have been adopted in the last 10-15 years. In practice customer knowledge is abundant in some areas and very limited in other areas. We register click behavior, we measure brain activity, we gather psychographic profiles, we register buying patterns. At face value many companies know almost everything of their customers.; often described as a “360 degrees view on the customer”. In this article we will present the need to look at your customers from another angle; to look at your customers from top to bottom.
A topline view on customers
In B2B environments the individual revenue of customers is known from the financial system. These days the revenue information can be analyzed in combination with all other sources of customer information, using a data warehouse. So relationships can be analyzed between revenue and e.g. demographic characteristics. The topline financial result of customers is known and can be analyzed. In certain B2C environments (think e.g. of banking an telecom) the same analytical exercises can be made. Sophisticated models are used to align sales, marketing and service efforts to the value of customers in terms of revenue.
A bottom-line view on customers
So far, so good. Until one poses the question“are your best customers in terms of revenue also the most profitable?” The most probable answer is “we think so”. Very seldom that answer can be supported by facts, because there is simply no information registered on individual customer costs. In other words ‘customer profitability’ as a metric cannot be used. It is a staggering observation, because the company’s profit is the sum of the individual profits and losses of individual customers. As long as the company’s bottom-line is positive nobody seems to care. The loss-making customers are compensated by the profitable customers.
A balanced view on customer relations
We often tend to forget that there is also another, darker, side of customers or as we say, liabilities. We often seem to forget that customers do not only incur costs, but there are financial risks involved in doing business as well. In the worst case, customers may be a source of future losses. For example:
a. Customers who pay late or do not pay at all.
b. Customers that cost a lot of time, effort and resources to maintain, which may go at the expense of profitability and/or other - more productive - customers.
c. Customers who talk about your products or services in a bad way (negative referral).
In other words, customers are both a source of revenue as well as a source of costs and a source of risk. In this chapter we will take a closer look at the financial side of customers.
A balance sheet can be a convenient tool to describe the two sides of customer value:
a. customer assets (debit / left side, direct and indirect revenues)
b. customer liabilities (credit / right side, direct costs, indirect costs and financial risk).
By using the customer value balance sheet, we will get a better view of the value of the customer or the profitability of a single customer relationship.
Time for a change
There are at least two reasons to develop a better, more balanced view on the value of customers.
In the first place: there are more and more companies that do not show a healthy profit any longer. So knowing which customers to focus on from a profitability point-of-view is crucial.
In the second place: companies that still write black figures could perform much better, having knowledge of individual customer profitability.
It provides a better basis for the allocation and attunement of marketing, sales and service investments than customer revenue.
Bring finance and commerce together
How can we realize the proposed change? The key is to bring commercial and financial people together. Commercial people tend to look one-sided at the bright side of customers, as a source of revenue. Financial people on the other hand tend to look at the dark side of customers, as a source of costs and risks. Only by merging these perspectives a solid measure of customer profitability will be possible. A close cooperation between commercial departments and finance is not common practice, but a necessary mental and cultural change to be brought about.
Customer profitability as key metric
One should not underestimate the effects of using customer profitability as key metric. Think for instance of the personal sales practice in B2B environments. A more integral view on a customer relationship is implied. Just bringing in a revenue contract would no longer be the basis for bonuses, but projected profitability of a customer. It will imply a radical change in sales practices. The same is true for marketing. No longer will marketing be rewarded for bringing in new customers that were attracted by promotional campaigns. A type of customers that leave as soon a better deal comes along, and in the meanwhile no real money is made on them. All in all the implication is that more focus need to be given the total quality a company delivers to their customers, since that will be a more binding factor than e.g. price discounts. In the end using customer profitability as a key metric will result in doing more productive business, leading to happier customers, happier employees and happier shareholders.