Managing Customer Value

One Stage at a Time

Dilip Soman, Sara N-Marandi

• Publisher: WSPC
• Year: 2009
• ISBN:
  9789814338462
• Topic: Business
• Subtopic: International Marketing
• Index: Business

How do you take individuals who have never done business with your organization and work on them till some of them eventually become the best possible customers that you have? How do you decide how much to spend on various marketing tactics? How do you think about the pricing decision with a view to optimizing the value of your customers as assets? Where do you start — what tools do you use — what heuristics are useful in making these decisions? This book attempts to answer questions such as these. The one-sentence summary of the answer, though, is simple — hold the individuals hands and walk them through a value chain, one stage at a time.

This book is written for an advanced student of business, as well as for the practicing manager, and presents an integrated view of the marketing function. In particular, it focuses on all the activities that a firm engages in to create and manage value, and not just the customer-facing activities. In that sense, it links the traditional views of customer value with the finance, accounting, human resources, organizational behaviour, information technology and operations functions. The content is meant to be prescriptive — it describes a process for value creation and management, yet analytical; theoretical, yet empirically driven. It urges the reader to think about the customer value function to be organized along activities that the firm would like the customers to engage in, not activities that the firm engages in. It presents a framework that is not only conceptually driven but also has a sound mathematical basis.

Contents:

• Managing Customer Value One Stage at a Time
• Value
• Decomposing Metrics
• Stages in the Customer Value Chain
• Customers as Gambles
• Loyalty
• Harnessing Customer Intelligence
• Pricing and Customer Psychology
• Aligning the Organization
• Customer Intelligence at the Trillium Gift of Life Network
• Octopus: Making Everyday Life Easier
• Get Smart

Readership: Graduate students and academics in marketing; business decision-makers; general public.

PART I

Chapter 1

Managing Customer Value
One Stage at a Time

How do you take individuals who have never done business with your organization and work on them until some of them eventually become the best possible customers you have?

This is the very question that this book sets off to address. We do so by proposing a different way to think about the above question — a new framework that is based on the concept of managing the tightrope between value that the firm creates for a customer and the value of a customer to the firm. Our framework is prescriptive; it gives the reader-specific guidelines on how to develop their best customer. By developing a customer, we mean the act of acquiring the customer for the first purchase, and then gradually adding more products and services to this customer’s basket such that these products not only create value for the customer, but also reflect in the increased profitability of the customer over time. The framework is intuitive, yet rigorous. Our framework is set out in a language familiar to most readers but is also backed up with the language of mathematics and statistics. The framework suggests that the discipline of creating value is a science as well as an art. For instance, there is an art involved in using customer level data to generate insights, and there is an art involved in taking those insights and developing customer experiences based on them. But there is a science associated with taking the resulting insights and attaching values to them and predicting success rates of marketing campaigns, and there is a science involved in institutionalizing the process of developing an insight and integrating it with the part of the organization interacting with the customer. The framework is based on customer activities, and not on firm activities. We organize our discussion (and indeed call upon firms to organize themselves) along the activities that we would like customers to engage in — for example, the activity of visiting stores, increasing spending, becoming more efficient and moving to cheaper channels, or increasing loyalty rates. We do not organize our thinking along the activities that firms engage in — for instance, we do not make distinctions between departments that design products and those that design services; or between sales teams and marketing teams; or between the merchandising manager and the pricing team. In our view, these different activities of the firm are not of as much interest to the manager tasked with managing customer value (MCV) as the customer activities they help create.

This is not the first book to address the important question of how to create and manage value over the life of a customer, nor will it be the last. Indeed, the very field of marketing ranging from the early work of Theodore Levitt and Philip Kotler to the more modern concepts of customer relationship management and one-to-one marketing addresses this question, albeit from different perspectives.¹ Marketing thinks about the four weapons in the arsenal of the firm — its products, prices, promotion, and places of distribution (the 4Ps of marketing) — and develops a framework for when these weapons could be used to enhance the firm’s market performance. It calls for an analysis of the 3Cs — the company, customers, and competitors — to augment the 4Ps in developing strategies and tactics to go to market with products and services.

This book is not about the 3Cs and the 4Ps. We do not apply the principles of mass marketing to a general group of customers with similar characteristics nor do we slice the market into pre-established segments of customers with similar needs. We are by no means challenging or disagreeing with the traditional approach. Instead, we are proposing an orthogonal approach to segmentation and the 4Ps of marketing. Our aim is not to provide an answer to the question “What marketers can do?” Rather, we aim to answer the question “What do we want the customer to do?”

In fact, this is not a book about marketing — as the term is used by marketing departments in organizations worldwide — at all. We concur that traditional marketing does a tremendous job of offering theories, techniques, and tools to assist marketers in effectively identifying and reaching their target audiences. However, in this book, we want to build a framework where theories, techniques, tools, and activities are focused on influencing customer purchase behaviour. This is achievable by capturing the right customer at the right time and by gaining an insight into customers’ purchase behaviour as they progress through different decision stages. These stages are simply a set of thoughts, experiences, and feelings that customers encounter when faced with a purchase decision. Going forward, we will refer to this framework as managing customer value (MCV).

The one-sentence response to the question of how to create the best customer from a new customer is simple — hold their hand and walk them through a value chain, one stage at a time. This calls for the firm to do the following:

(1) Understand the metrics of success they are trying to maximize. Is the firm in the business of maximizing short-term revenue or long-term value? Do they want to maximize profits or to maximize market share?

(2) Decompose these metrics into smaller, manageable metrics that the firm could tackle one at a time. For instance, the revenue earned from a customer in a supermarket could be decomposed into three distinct components, each of which can become activities that the firm should try to optimize. The first metric is traffic or footfall, the number of people who visit the store. The second metric is conversion rate, the percent of those visiting who then buy something. And the third metric is an increase in basket size — the total number of dollars spent in a given shopping trip. The firm can now be very specific about marketing interventions they use — discounts, advertising, sampling, new products, absolutely anything from the panoply of the 4P arsenal — to manage each of these metrics separately.

(3) Construct a value chain. Can the firm identify a number of discrete behavioural and attitudinal stages in the purchase decision — snapshots of customer behaviour as they make decisions to visit a store, to purchase a product, or to buy beyond the first purchase? We suggest that firms could, and should, document these stages in a value chain. This value chain can now form a guiding rail — the rails on which the locomotive of marketing interventions can push customers along.

(4) Model value as a function of each stage. Once the value chain has been constructed, the firm could use various techniques discussed in this book to estimate the value of the customer (VOC) at each stage. Note that we do not necessarily restrict ourselves to lifetime value as the underlying metric of success; the firm could just as easily use revenue or profit depending on what its objective is. Attaching a value to each stage will allow the firm to estimate the benefit of moving each customer from his or her current stage to the next one. Once this is done, the firm can use the tools discussed in our framework to prioritize those customers to focus attention on and to determine how much to spend on each marketing intervention.

(5) Develop strategies, tactics, and execution plans. The firm is now in a position to develop strategies and tactics to manage customer value and to develop plans to execute these strategies by harnessing customer intelligence (insights gained about customers through data-driven marketing systems), pricing interventions, and loyalty programs.

This framework is summarized in Figure 1.1 and described in more detail later in the chapter.

Why do we advocate yet another framework when there is clearly no shortage of books in marketing? We believe that our approach is different in the following specific ways.

First, a lot of the work in marketing has talked about what firms should do to add value for the customer. Recommendations include “satisfy and delight,” “the customer is always right,” and “live and die by the customer.” We do not disagree. But we also posit that adding value to customers is worth it if and only if the customer will eventually add value to you, the firm. This tension between creating value for the customer and growing value from the customer is central to our approach.

Figure 1.1 Steps in the MCV framework.

Second, because we propose an approach in which we decompose customer activity into discrete stages and advocate the use of customer intelligence to identify and track customers over time, we have the ability to direct marketing interventions that are very specific — that is, they are designed to move the customer to the next stage of the value chain and do no more, and very directed — that is, they can be delivered only to those customers whose behaviour you would like to change and to no one else. The result — efficiency in the use of marketing dollars!

Third, we develop a series of simple mathematical models to complement the framework. The models are intuitively very simple and we encourage the reader to develop a mastery of the intuition and not necessarily of the computational details. These models help the manager answer basic questions for which they have had little analytical support in the past: How much should I spend in trying to acquire a new customer of given characteristics? Which is more effective given my present objectives — a sales promotion or an in-store display? What is the value of increasing the life of a customer from three years to six years? What is the value of a 10% increase in loyalty rates?

Fourth, our view of the marketing function is integrative. In particular, we make a distinction between the marketing department (comprising people whose business cards feature the word “marketing”) and the “customer value” function (comprising all individuals that directly or indirectly are responsible for value creation and value management, presumably a vast majority at m...

Table of contents

• Cover
• Half title
• Title
• Copyright
• Dedication
• Contents
• Preface
• Part I
• Part II
• Name Index
• Subject Index