My very first business job which was in the in the financial services industry, my title was customer relationship manager. This was long before the emergence of customer relationship management (CRM) tools. My boss at the time was four decades ahead of the mainstream thinking articulated by Phil Kotler in his 2017 article, Customer Value Management, a company’s job is to create superior customer value in the mind of the customer.” Looking back, I’d say a more accurate title would have been customer value manager because my job was less about the customer experience and increasing customer satisfaction and more about employing data to identify customers from whom we could create and extract more value. This is the focus of customer value management.
Peter C. Verhoef and Katherine N. Lemon, defines customer value management (CVM), as the optimization of the value of a company’s customer base. CVM expands on customer relationship management. CRM focuses on how a company manages the interaction with current and potential customers with an emphasis on developing long-term customer retention. Relationship management emphasizes satisfaction and uses measures such as NPS or Gallup’s customer engagement metric. CVM focuses on aspects of the relationship such as commitment and trust and seeks to use and analyze customer data explicitly to increase customer value. Gautam Mahajan, president of the Customer Value Foundation reinforces this idea when he says, “CVM focuses on creating value for customers.”
Many companies are embracing and investing in customer value management. To achieve CVM, you must know what customers value, which can vary greatly among customer segments. You must discern what customers perceive as important, why they buy, why they prefer one company or product over another, and what benefits they believe the product or service delivers. An example of trying to surmise customer values can be illustrated in the traditional car purchase. If you’ve ever been in a conversation with a car salesperson, you may have heard this common question: “Which is more important to you, how much you pay a month or the loan rate?” Different customer segments value different benefits – such as return policies, warranties, service level, and as this example shows, financing options.
How to Create a Metric to Determine Customer Value
Customer value reflects the economic value of the customer relationship to your organization. To create and extract customer value you need to know what is truly important to the customer in the buying process, the relative importance of price and benefits, and the associated attributes in relation to the value you provide and the value you derive.
Customer value management relies heavily on data and analytics to build long-term relationships and expand share of wallet without increasing the cost of acquisition and cost to serve. You will need data related to value attributes, tenure, share of wallet, recency and frequency of purchase, cost to acquire, and cost to serve. Fortunately, advances in data management and analytics are making it possible for organizations of all sizes to cost-effectively acquire this data and employ it to measure customer value. To support this work, we’d recommend you classify your customer data into four different categories:
- Customer firmographic data (name, company, title, contact info, location info, industry, initial date of acquisition, etc.)
- Customer transaction data (recent purchases, frequency of purchases, products purchased, quantities, pricing info, etc.)
- Customer interaction/engagement data (behavioral data such as touches, channels, service tickets, content consumption info, etc.)
- Customer financial data (cost to acquire, lifetime value, profitability data, rate of consumption, etc.)
As you gain insight into what customers value, you can use this data to determine which customers are of the most value to your organization. Use the data to evaluate customers in terms of:
- lifetime value
- transaction value
- referral value
- influencer value
- market share contribution
- customer profitability
This type of analysis enables you to identify and decide which customers to invest in and how to allocate your budget across customer segments. You can also use this analysis to identify what services and capabilities your most profitable customers leverage. It will also help you reap the value of your investment in CVM. Armed with the data and analysis you can create a customer value metric. To create a customer value metric, check out this companion post on a measure that provide insight into customer value. If you’re just getting started, a book I often recommend on the topic is Bradley Gales’ Managing Customer Value.
Customer Value Management as a Competitive Advantage
Every business must create value for customers to survive and thrive. When you see creating customer value strategically, you can develop the infrastructure, culture, strategies, and programs that optimize every opportunity to positively impact how customers perceive the value offered.
We can turn to three points emphasized by Art Weinstein in his book, Superior Customer Value: Strategies for Winning and Retaining Customers, to ensure a company builds a competitive advantage in a climate where value reigns supreme:
- Design strategies that provide superior customer value.
- Focus on excellence. Customers will not pay more than a product is worth.
- Build a customer-centric culture throughout your organization and mandate providing outstanding customer value.
Today’s customers are smart and have access to more information and choices than ever before. In such a market, your company must create maximum value and solve relevant problems. The ability to determine and extract customer value is a competitive advantage that reflects the degree to which your customers perceive your organization as more valuable than the alternatives. CVM helps you determine whether your brand is important to customers and what about it they value most. While customer value management requires a bit more effort than customer relationship management, it provides excellent guidance as to who and what to invest in.
Customer value is not something you can create in one day. To sustain it, you need to combine service quality, product quality, and innovation into a strategy.