Increase the Value of your Customers through Customer Value Insight Philip Reschke Senior Business Consultant Global Business Advisory

Copyright © 2011 SAS Institute Inc. All rights reserved.

“

150% of your profit comes from 20% of your customers

”

Geoffrey Colvin Fortune Senior Editor-at-Large

§  To grow profitably, you need to: §  Find the most profitable growth opportunities §  Take the best marketing actions §  Maximize cross business impact

2

Copyright © 2011 SAS Institute Inc. All rights reserved.

It takes discipline, understanding & the ability to predict which are the right customers to focus on §  The challenge: §  Millions of customers §  Changing behaviors §  Segmentation strategies are too simple

3

Copyright © 2011 SAS Institute Inc. All rights reserved.

Solution: Understand customers’ value & needs - and prioritize your efforts accordingly §  Customer value represents more than §  Current revenue level §  Historical profit margin §  Traditional Customer Lifetime Value

§  Includes §  Social activity, customer DNA, potential value, long-term view 4

Copyright © 2011 SAS Institute Inc. All rights reserved.

Preview …

§  Understand your customer §  Customer value insight §  Long-term investment in customers

5

Copyright © 2011 SAS Institute Inc. All rights reserved.

Understand your customer

6

Copyright © 2011 SAS Institute Inc. All rights reserved.

Driving value from customer relationships is getting increasingly complex Customers & Prospects

Offers, Services & Pricing Channels & Business Functions

Web

Email

Mail

Mobile

Print

Social

Phone

Branch

ATM

Advisor

TV

Radio

Service Finance Collections

Risk

Risk

Fraud

Fraud

Products

7

Copyright © 2011 SAS Institute Inc. All rights reserved.

For many a change of mind is required...

From product focus … to customer focus ?

We have one specific product which we want to sell. To whom should we offer it?

?

There is a customer in my branch to whom I would like to offer something. What should I offer?

Bank Product

Customer

Selection of the customers with the highest probability to buy this product

Selection of the product(s) for which a specific customer has the highest probability to buy

Customers

Bank Product

= Campaigns

= Next Best Product

§  for product campaigns §  for higher customer numbers §  for customers with high product affinity

§  as sales support §  for the 1:1 contact §  for every customer 8

Copyright © 2011 SAS Institute Inc. All rights reserved.

Managing customer relationships in a customer-centric organization

Identify

Differentiate

Interact

Customize

customers as unique addressable individuals

by value, behavior, sentiment and needs

more cost efficiently and effectively

some aspect of the company’s behavior, offerings, or communications

Customer Insight

Customer Experience

(Analytical CRM)

(Operational CRM)

9

Source: Managing Customer Relationships by Martha Rogers

Copyright © 2011 SAS Institute Inc. All rights reserved.

Identify customers

Identify and recognize a customer every time he/she comes back §  Know and remember each customer §  Behavioral data (buying habits, website usage, channel interactions, language used, share of wallet, product use), §  Attitudinal data (product attitudes such as satisfaction level, brand preferences, social and personal values, opinions), §  Demographic data (age, income, education, material status, household income, gender, home ownership)

§  Organize your information into a customer specific view 10

Copyright © 2011 SAS Institute Inc. All rights reserved.

Differentiate customers

Different customers have different values and different needs §  Values §  Some customers are worth more than others §  Value tells you where to focus

§  Needs §  Individual customers have different needs §  Customer needs drive customer behavior §  Customer behavior drives customer revenue and cost §  Needs tell you how to win 11

Copyright © 2011 SAS Institute Inc. All rights reserved.

Differentiate customers

The goal of value differentiation is not a historical understanding, but rather a predictive plan of action

12

Copyright © 2011 SAS Institute Inc. All rights reserved.

Customer value insight

13

Copyright © 2011 SAS Institute Inc. All rights reserved.

Understanding customer value

Shareholders care about two types of customer value §  Actual value §  Based on what is currently known and predicted about the customers’ future behavior – business as usual

§  Potential value

4.4

5

§  What the customers’ asset value can be worth if you can change the customers expected trajectory

4 3

2.1

2.4

2

1

1 0 Customer 1 Actual value

Customer 2 Potential Value 14

Copyright © 2011 SAS Institute Inc. All rights reserved.

Notes about customer’s actual value

Actual Value = Customer Lifetime Value (CLV) §  Actual Value = value of a customer as a financial asset §  NPV of future cash flows from that customer assuming business as usual

§  CLV is not a precise number §  CLV is a REAL financial number and every organization has an interest in understanding and positively affecting it 15

Copyright © 2011 SAS Institute Inc. All rights reserved.

Calculating CLV

A CLV model includes as many of the following data points as possible §  Repeat customer purchases §  Greater margin from repeat purchases vs. initial customers §  Indirect benefits from customer referrals or positive social media attitude §  Willingness to collaborate by sharing data or ideas for new or improved products 16

Copyright © 2011 SAS Institute Inc. All rights reserved.

Calculating CLV

A CLV model includes as many of the following data points as possible (cont.) §  Stated willingness to deliver future business vs. switch vendor §  Historical transaction records §  Customer master data §  Products and product revenue & costs §  Cost to serve/support by channel, type of communication, etc. 17

Copyright © 2011 SAS Institute Inc. All rights reserved.

Calculating CLV

A CLV model includes as many of the following data points as possible (cont.) §  Marketing and acquisition costs §  Response rates to marketing and advertising activities §  Company or industry specific information §  Expected life time

18

Copyright © 2011 SAS Institute Inc. All rights reserved.

Calculating CLV Future Value

Present Value

t =T

CLV k = ∑

Etk − Atk

t =0 ( 1 + it )

(

)

= Customer Lifetime Value of a customer k = revenue from a customer k = expenses for a customer k = customer k

Contribution by period

CLVk Et At k

t

= E0k − A0k +

E1k − A1k 1

( 1 + i1 )

+

E2k − A2k ( 1 + i2 )

t (t=0) T i

€

+ ... +

( 1 + iT )T

= time period (t=0, 1, 2, …) = today = predicted duration of a relationship = interest (discount) rate

€ € € € € € € € € € € Acquisition

2

ETk − ATk

Time

Churn 19

Copyright © 2011 SAS Institute Inc. All rights reserved.

Cost and Profitability Model (example)

The key is in structuring the model around actionable customer events Resources Overheads Staff etc

Costs & Revenue

Network Costs Direct Costs Handsets etc

Activities Who does what

Assets Values

Direct

Customer Events What is being produced

Process Logical Network Elements

How products are consumed

Channel How is the Network used

Ongoing Management

Network Products

Direct Costs Handsets etc What is being sold

100%

Acquisition

Multiple Segments

Tariff Life Style

Cost & Revenues

CLV

Life Stage

Retention

Age

100%

Disconnect.

100%

Expected Lifetime

100% 20

Copyright © 2011 SAS Institute Inc. All rights reserved.

Multiple sources contribute to building a detailed customer P/L – (bank example) Interest Income

680,000

Interest Expense

-80,000

Interest

Direct

Net Interest Income (NII)

600,000

Credit for Funds Funds

10,000 Base

-350,000

Charge for Funds Option Adjusted Spread Net Cost of Funds

Funds Transfer Pricing Calculation

-40,000 -380,000

Account Maintenance

Servicing Costs Non Interest Expense

-2,000

Direct Product

-100,000

Relationship Management

-50,000

Sales and Marketing Efforts

-50,000

Provision for Losses

-40,000

Total Non Interest Expenses

Advanced Costing Model

Expected Loss Model

-242,000

Cost of Economic Capital

-10,000

Net Contribution

-32,000

Economic Capital Model

21

Copyright © 2011 SAS Institute Inc. All rights reserved.

Calculating CLV

Several leading indicators affect the CLV calculation §  Lifetime value drivers §  Revenue, cost, expected lifetime – components affecting CLV)

§  Lifestyle changes §  (new job, kid is born, new car is bought, getting divorced)

§  Behavioral cues §  (no. contacts, product purchased, tweets about company)

§  Customer attitudes §  (satisfaction level, and likelihood of buying again, sentiment) 22

Copyright © 2011 SAS Institute Inc. All rights reserved.

If a CLV model is too difficult or costly to create, what then?

23

Copyright © 2011 SAS Institute Inc. All rights reserved.

Consider a proxy variable

The goal is to rank and prioritize your customers based on their relative worth §  A representation of a customer’s value §  RFM model »  Recency »  Frequency »  Monetary value §  Frequent-flier mileage

24

Copyright © 2011 SAS Institute Inc. All rights reserved.

Potential value

“What the customers’ asset value can be worth if you can change the customers expected trajectory”

§  Compare similar customers’ with lower-LTV to higherLTV ones; potential is at least the average high value §  B2C (similar family size, income level, neighborhood, etc.) §  B2B (sales volume or profit, vertical industry, employment level, etc.) 25

Copyright © 2011 SAS Institute Inc. All rights reserved.

Potential value

What to consider when assessing your customer’s potential value §  Mow much additional business can you capture if you change your treatment? §  What other products could you sell if you had them available? §  What additional value can you capture if you could prevent the customers defection? §  How can you identify the customer needs you do not know about? 26

Copyright © 2011 SAS Institute Inc. All rights reserved.

Potential value

What to consider when assessing your customer’s potential value (cont.) §  How much can you reduce cost-to-serve and still maintain the same level of customer satisfaction? §  How much could the customer be worth in terms of referrals or other non-financial contributions?

27

Copyright © 2011 SAS Institute Inc. All rights reserved.

Avoid the common misunderstanding

A customer’s “value to the company” is “potential value”, not “actual value” §  Most marketers §  Segment by actual value, and design strategies accordingly §  Overlook “potential value”

Retention Likelihood

High

Low

Up Sell

Cross Sell

Retain & Up Sell

Retain & Cross Sell

Actual Value

High 28

Copyright © 2011 SAS Institute Inc. All rights reserved.

Grow your “share of customer/wallet”

Alter customers’ trajectory to realize some unrealized potential value §  Unrealized potential value §  (potential - actual value)

§  Share of customer §  (actual value / potential value)

§  Increase customers business over and above what was otherwise expected 29

Copyright © 2011 SAS Institute Inc. All rights reserved.

Unrealized Potential Value

High

Categorize customers by value by combining actual and potential value Most Growable Customers

Super Growth Customers

Low

MVC of your competitor

Mostly very large B2B customers

Low Maintenance Customers

Most Valuable Customers

Streamline services and interactions toward cost-efficient and automated channels

Loss Making Customers

Low

Retention

High Actual Value 30

Source: Managing Customer Relationships by Martha Rogers

Copyright © 2011 SAS Institute Inc. All rights reserved.

Improve the value mix of customers Notes

Growth by increasing number of customers

• 

Number of customers

2 Growth by increasing value of customers

1 3

• 

Solely focus on the number of customers acquired results in a degraded mix as lowvalue customers by definition are easier to acquire A customer centric strategy will not acquire any customer; only higher-value ones

MVC’s

LMC

Customer actual value 31

Source: Managing Customer Relationships by Martha Rogers

Copyright © 2011 SAS Institute Inc. All rights reserved.

Realizing the potential

Setting financial objectives at customer level is only part of the job §  Customers trajectory must be altered §  Understand customers’ perspective and needs §  Appeal to those needs through a tailored dialogue delivering on the customer’s needs

32

Copyright © 2011 SAS Institute Inc. All rights reserved.

Perspectives on CLV

Not understanding the real dynamics of CLV often lead to short term focus §  A customer is a financial asset §  Value is CLV §  Changes in likelihood of buying changes future cash flow

§  Understand the value of long-term §  Long-term focus is big bucks! §  Reconciling the conflict between current profit and long-term value is a serious challenges faced by many organizations today

33

Copyright © 2011 SAS Institute Inc. All rights reserved.

Long-term investment in customers 34

Copyright © 2011 SAS Institute Inc. All rights reserved.

Shifting to long-term investing “Most sales people manage for short-term revenues (regardless of profits). … Going forward, we believe that companies will have to think beyond short-term revenue and profitability of today. They will have to take the long-term view and manage their strategic customer relationships as assets. They will attempt to maximize the net present value (NPV) of future profit streams from these customers, thus shifting to the enhancement of long-term Customer Relationship Capital.” Peter F. Mathias and Noel Capon Managing Strategic Customer Relationships as Assets, p. 2 Colombia Business School

35

Copyright © 2011 SAS Institute Inc. All rights reserved.

Shifting to long-term investing “Most sales people manage for short-term revenues (regardless of profits). … Going forward, we believe that companies will have to think beyond short-term revenue and profitability of today. They will have to take the long-term view and manage their strategic customer relationships as assets. They will attempt to maximize the net present value (NPV) of future profit streams from these customers, thus shifting to the enhancement of long-term Customer Relationship Capital.” Peter F. Mathias and Noel Capon Managing Strategic Customer Relationships as Assets, p. 2 Colombia Business School

36

Copyright © 2011 SAS Institute Inc. All rights reserved.

Long-term customer value measurement

Accounting rules don’t allow recognition of customers as a financial asset §  Customer Equity §  describes the effectiveness of customer strategies and implementation §  is the sum of all LTV’s of current and future customers multiplied by their likelihood of becoming a customer

37

Copyright © 2011 SAS Institute Inc. All rights reserved.

Customer equity

Example of a bank operating in “steady state” §  Environment: §  20% market share §  16% customer churn per year §  4% prospect conversion rate each year §  CLV of $100 for new customers §  Discount rate of 20% §  Total market of 1 million customers and prospects

Operates in “steady state” (20% * 16% = 80% * 4%) Copyright © 2011 SAS Institute Inc. All rights reserved.

38

Customer equity

Example of a bank operating in “steady state” (cont.) §  CLV of a prospect: §  Year 1: $100 * 80% * 4% = $3.2 §  Year 2: $100 * 64% * 4% = $2.56 §  Year 3: $100 * 51.2% * 4% = $2.05 §  Year 4: etc. §  Avg. CLV per prospect = $3.2 / 20% = $16

Our customer equity = $32,800,000 (1 million * 20% * $100 + 1 million * 80% * $16) 39

Copyright © 2011 SAS Institute Inc. All rights reserved.

Customer equity

Factors to positively affect your customer equity §  Acquire more customers §  Acquire customer likely to have a higher LTV §  Reduce cost-to-serve per customer §  Cross- and up-sell additional products and services §  Increase customers propensity to refer customers §  Reduce the rate of churn §  Improve likelihood of conversion 40

Copyright © 2011 SAS Institute Inc. All rights reserved.

Return on Customer

All value created by any business comes from customers §  Return on Customer = Total Shareholder Return §  Cash flow from operations comes from customers §  Current and future customers’ CLV added together equals total Enterprise Value

§  No positive shareholder return if e.g. current-period profit from a set of customers is less than the cost of capital

41

Copyright © 2011 SAS Institute Inc. All rights reserved.

Return on Customer

The paradox of balancing the shortand long-term efforts Company 1

Company 2

Company 3

Company 4

Company 5

Customer equity, beginning of year

$2,000

$2,000

$2,000

$2,000

$2,000

Customer equity, end of year

$2,300

$2,500

$2,050

$1,600

$1,800

Delta

$300

$500

$50

$-400

$-200

Profit for the period

$100

$-50

$50

$400

$100

Total customer value created

$400

$450

$100

$0

$-100

Return on Customer

20%

22.5%

5%

0%

-5%

Value Creators

Value Harvesters

Value Destroyer 42

Copyright © 2011 SAS Institute Inc. All rights reserved.

Summary …

§  Understanding your customers is key. It is the foundation for any good customer value model §  Customer value consist of: §  Actual value §  Unrealized potential value

§  Don’t only focus on the short-term. Focus on building your customer equity 43

Copyright © 2011 SAS Institute Inc. All rights reserved.

Questions

44

Copyright © 2011 SAS Institute Inc. All rights reserved.

Philip Reschke Senior Business Consultant Global Business Advisory [email protected]

Increase the Value of your Customers through Customer Value Insight Copyright © 2011 SAS Institute Inc. All rights reserved.