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Article : How To Weigh Up The Value Of Your Customer Relationships

Today, most organizations have a philosophy about how they interact with their customers and more, their customers' customers. We have finally reached a point where CRM is not only considered in isolation, but is practised holistically, so that all of the divisions of an organisation, from production, to marketing, are able to add value to an approach designed to endear the customer to the company. When you consider the importance of understanding and meeting the needs of the customer, and doing it well, it is easy to understand why CRM has become an essential component of the corporate strategies identified by most senior executives.

Interestingly, out of 550 CEOs surveyed in a Conference Board study, 45 per cent identified customer loyalty as their key strategic issue, putting it first among all of the issues that were raised. However, another study by analyst firm Meta Group of the 50 largest end-users in the CRM market, demonstrated that 90 per cent of these CRM users were unable to measure a tangible return on their CRM measurement. This has become a key issue in appropriately deploying CRM initiatives and deciding a suitable level of investment in them.

Sarah Faux

Some of the key questions that executives need answers to include:

  • What is the value of the customer base that certain CRM initiatives are protecting and/or enhancing?

  • What is the optimal amount of capital that would most efficiently protect or maximise the customer value base?

  • Out of the many CRM initiatives under consideration, which provide the greatest return in protecting or enhancing customer value in the shortest amount of time?

  • How would the prioritisation of these CRM initiatives change over time, given a change in the key drivers of customer value?

  • What single metric can all parts of an organisation utilise to measure their progress in enhancing customer value?

In their quest for good measurement metrics, companies have traditionally used financial metrics such as Internal Rate of Return (IRR), Net Present Value (NPV), Return on Investment (ROI). All of these techniques have obvious merits and could be easily used to relate to a CFO's requirements for hard figures. Unfortunately, they also require the use of an equation, which looks at the company in its entirety. This assumes that the company enters a fixed end state and has little reference to the impact of the company's action on its customer segments. Valuing CRM initiatives requires an iterative methodology, as the end-state is not always known in beginning of an assessment of those initiatives. Most of the traditional metrics do not accommodate the unknown factors associated with customer relationships and thereby may provide misleading information regarding the financial returns from a CRM initiative.

From my experience, a better method of evaluating CRM initiatives would be to measure their impact from an operational, customer and shareholder value perspective. The airline industry is currently a very good example of a sector that has a very comprehensive approach in using CRM to segment and manage its customer database. Customers can be moved up and down segments, and earn varying amounts of upgrade points depending on their frequency of flight, choice of airlines etc. This market is also a good example of where a customer can then be locked into a relationship with a specific company, as once you had earned a significant amount of upgrade points with one airline it is unlikely that you would switch to economy class in another. If the metric employed utilised the latest advances in corporate financial theory, then it would also need to be coupled to a practical set of tools and techniques to implement the CRM evaluation programme. The goal of any such evaluation programme should be to provide a company's management team with a common language for evaluating their CRM activities in both the planning and actual implementation of those initiatives

In order to meet this need in organisations, executives are in need of a methodology that evaluates, prioritises, selects and tracks specific CRM initiatives and the incremental value contribution to the various customer segments of the enterprise. For instance, a company with a discrete budget for CRM initiatives or with a tight timeframe in which to achieve certain results (e.g., increased customer profitability or decreased churn rate), could utilise a specific type of programme to identify those projects with the greatest return in the shortest amount of time. Also, such a programme should be flexible enough that it can double as a scenario-planning tool to rearrange the initiatives as economic and competitive market factors change.

Critically, I believe that it is also vital that any measurement tools employed by organisations should be able to assess the "time value" of a CRM initiative. The results of this full evaluation thinking can then be used in calculations to help executives make a decision on whether to execute their CRM initiatives. Essentially, this should enable a company to estimate the tradeoffs associated with executing an initiative immediately, as opposed to delaying implementation for a period of time. This ability to "weigh-up" the alternatives could identify the projected return from CRM initiative by translating customer-related operating and performance metrics into a quantifiable financial impact that could then be used to measure the incremental customer value contribution from those initiatives. A good example of this is when organisations trial a variety of different communications channels, such as email and SMS. Because of the nature of these mediums, it would be relatively easy for a company to be able to track the returns that they receive from this, and to reliably estimate the effect that these communications have on the customer relationship - meaning that the organisation can choose the most cost-effective method.

An underlying assumption relates to a company's ability to identify and isolate its key CRM drivers, enabling executives to identify those key drivers and factors that provide the greatest incremental value. This measurement should be based on financial levers derived from the operating variables of specific CRM initiatives, based upon those that a company would use to enhance customer loyalty. The inter-relationships among the various factors used to identify the progress of projects should be matched with the traditional measures of financial valuation, such as IRR, NPV and ROI. The principal drivers of the metric should include the revenue from customers, the probability of retaining those customers as well as the costs of acquiring and retaining those customers.

The objective of an analysis of an organisation's CRM initiatives is to measure the profitability of the company's customer segments and to calculate the extent to which identified CRM initiatives add incremental value to the targeted customer segments. As an example, it is likely that a company looking to evaluate its CRM programme would go through some - if not all - of the following stages:

  • Initially an enterprise would need to organise its customer information into appropriate segments. Once those customer segments are identified, baseline profitability measures for the various segments would need to be established

  • Next the enterprise's strategy, strengths and weaknesses relative to best-in-class performers would need to be examined in order to determine the maximum potential return from investments in the customer segments and the minimum investment that would be required to protect the most important customer segments

  • The identified CRM initiatives would then be prioritised according to the customer-centred financial metric. In order to capture the volatility associated with deferring decisions on these CRM initiatives, a follow-on analysis of the initiatives should be conducted to determine the impact on the profitability of the customer segments as a result of deviations in costs and benefits due to timing

If you can convince senior management to conduct a full analysis of its CRM programmes, they are likely to experience many benefits, including: being able to establish the value of customer segments targeted by certain initiatives and compare the incremental results from the initiatives against the baseline value; and through the quantification of business drivers, the analysis could establish several alternatives for investment in initiatives with the goal of preserving and enhancing customer value. In addition, a flexible customer-centred metric could be utilised by the Marketing function as a scenario-planning tool to rearrange project priorities when factors affecting the individual projects change. The analysis could be utilised to measure the contribution from different customer segments and estimate the incremental impact of CRM projects on overall shareholder value. This ultimately will enable many companies to put a return on that which, up to now, many believed as being completely in-quantifiable. But, as markets continue to become more competitive and consumers become increasingly fickle in their choices, companies have little choice but to continue in their efforts to develop their relationships. This means that CRM is here to stay, so its time for businesses to focus on this, quantify their results and ensure they are getting the maximum return on their investments.

About Sarah Faux:
Sarah joined Datapoint in July 2002 as chief executive officer, after five years as Senior Vice President at eLoyalty Corporation. During her time with eLoyalty, she launched and managed eLoyalty Ventures, a venture capital fund backed by eLoyalty Corporation and three co-investors to identify and invest in the next generation of Customer Relationship Management (CRM) companies. Additionally, Faux has over 10 years experience in CRM and has spoken at many international events on developing customer loyalty solutions.

About DataPoint:
Datapoint specializes in extracting value from call centres by making them work commercially, operationally and technically. The company is known for its honest and straightforward approach towards protecting current and future investment in call centres. Datapoint has 20 years experience in call centres and during this time it pioneered a number of solutions: for example, telephone banking, (First Direct), an expert agent selection system, and the Computer Telephony Integration (CTI) enabled dialler (BT).

Today's Tip of the Day - Network Based Contact Center?

Read today's tip or listen to it on podcast.

Published: Tuesday, October 19, 2004

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