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Marketing and sales interaction processes, driven by analytical CRM, shape business results and link customer asset management with shareholder value.

The Focused Executive Desiring Customer Value

The 20th Century management focus was centered on market entry, market share, sales, revenues, and business growth. Most firms developed activities toward these well-accepted KPIs or major business objectives. Unfortunately, the first era of the Internet investments uncovered the major change in business’ new challenges. No longer were these premises satisfactory by themselves. Shareholders were rebelling, and management is learning a new criterion of "success."

Clearly, the financial markets have shown there are three new overarching focus points that are required for firms to succeed in the 21st Century. The first is profitability (short- and long-term), the second is the management of "relationships" (which include customers, suppliers, partners, franchisees, agents, intermediaries, and even competitors), and the third is the foundation of a base of significantly detailed and long-term information, or a "knowledge" base. Additionally, new and provocative challenges voiced to business executives everywhere is this area of relationships using knowledge to create profitability, accentuated by the recent thought leadership in the fields of marketing and CRM: "Investors have a right to know how many customers you have, how much you’re earning per customer, how well you’re treating your customers, and how fast you’re growing the value of your customer franchise."¹

The challenge is clear: Executives need to understand and be able to articulate — in detail — precisely what their customer assets are worth and how their business is managing customer relationships to grow shareholder value. For many senior managers, this new expectation may come as a surprise, but it shouldn't — a firm's market value can change as quickly as consumer behavior and preferences shift.

The Marketing Science Institute (MSI), a professional association of business marketing thought leaders from academic and corporate practice, has published material affirming the rising importance of market-based asset management (which includes customer relationships) as key determinants in a company's market value and shareholder equity:²

"There is a quiet revolution in the way that marketing activities are being viewed by some marketing professionals, by enlightened senior managers, and by innovative managers in other functions, particularly in finance. Inviolable assumptions about the purpose, content, and execution of marketing are slowly giving way to assumptions that more accurately reflect how it is practiced in leading organizations. … Market-based assets (including customer relationships) can potentially influence every driver of shareholder value and this includes accelerating the receipt of cash flows — plus lowering a firm's cost of capital."³

The alignment between financial objectives and marketing objectives was demonstrated at an MSI conference presentation by University of Michigan Professor Claes Fornell, one of the world's leading experts on customer asset management. Professor Fornell showed how "maximizing shareholder value results from maximizing customer asset value" and strongly recommends the following decision rule: "Unless an action is likely to increase both capital efficiency and the value of customer assets, don't do it."⁴ As this and other similar studies gain momentum and visibility in the public domain, it seems likely that Patricia Seybold's assertion will manifest — and "company executives will need to report their customer relationship management performance to investors."

The Foundation as the Value Engine

The good news is that all of the information about customer asset status and growth that investors may wish to see can be converged into a usable customer knowledge center (known today in the technology arena as an enterprise data warehouse or EDW).

Using analytical CRM technology and processes, a firm can focus on its customers’ needs and can manage and increase customer value. Moreover, the power of analytical CRM raises the value of customer assets by increasing profitability and customer satisfaction while reducing churn and the cost of marketing. This has been documented at a myriad of companies in many industries.⁵

Several recent publications focus on the issues and the opportunity: "Today's computing technology now makes precise customer asset management possible. Companies can now efficiently obtain and process the information they need to understand customer equity."⁶ Moreover, the authors have added to this thought stream by setting forth what they call organizational imperatives for customer equity management. These imperatives may well represent senior executive hot spots as well as action-items for marketers to accomplish and continuously document:

1. Know your customers
2. Measure the asset value of each customer
3. Manage acquisition
4. Manage retention
5. Manage add-on selling
6. Balance acquisition, retention, and add-on selling
7. Manage customer portfolios
8. Tailor the marketing mix

As marketing becomes ascendant in the business constellation, it becomes arguably the main driver of customer equity — and shareholder value. The support for this view is growing. The MSI report makes the point. "Increasingly, top management is demanding that marketing view its ultimate purpose as contributing to the enhancement of financial returns."⁷ This widens the scope of what is expected of marketing. However, the scope of marketing is already expanding by leaps and bounds, because another new skill-set requirement has emerged for marketers — the need to be savvy in the use of technologies, especially analytical CRM. Thus, the "quiet revolution" gains momentum as technology evolves, and enlightened senior managers and marketers learn the power and promise of analytical technology tools. Soon, the new golden rule of business will be: Whoever understands and manages customer equity best, wins.

Customer equity optimization (CEO) is quickly becoming a popular concept. CEO is founded on the use of analytical CRM technology systems to improve the value of a company's customer relationship assets — and in turn generate higher shareholder value.

Marketing as a Technology

Regis McKenna, author and consultant known as the father of relationship marketing, many years ago advised us, "Marketing is becoming a technology".⁸ He adds: "Technology is the greatest catalyst for change in marketing. Technological innovations have had such a huge effect that anyone would find it hard to overstate their repercussions on the business of marketing." McKenna also writes that "software is the most significant technology for marketing executives to understand, for the simple reason that software automates producer-consumer relationships. ... Just about all of today's marketing innovations are in the software area."

Current technology is proving capable of enabling, accelerating, and optimizing the entire marketing process, performing highly complex and detailed analytical tasks, advising companies when to go to market, how to go to market, and how to decide on which channel and even the words to use to communicate with individual customers. Technology is providing marketers the tools to manage and grow customer value. Thus companies are focusing now on analytical marketing as a high-ROI value investment.

Naturally, software is powerless without marketers who are trained to use it to best business advantage. This means marketers must not only know and become fluent in analytical tools to understand market dynamics, but must also have the training in analytical marketing to apply their knowledge scientifically and thus fully leverage the technology. Using analytical models should be an iteration. Your marketing team (and everyone else’s) needs to do everything possible to learn to optimize market-based assets to cultivate ever-higher customer equity. So, when the business looks for short-term, positive results and rapid ROI, they now expect their marketers to:

• Accelerate and enhance cash flows
• Generate cost reductions while growing revenue
• Increase individual customer value streams
• Establish business differentiation in the marketplace
• Identify new opportunities and exploit existing ones
• Identify optimal channel strategies for individual customers
• Apply and master technology to drive rapid ROI
• Measure and report detailed impact of marketing on the business

Marketers are already tasked with a tremendous workload: They must acquire, cultivate, grow, retain, and optimize the value of the customer base using hundreds of tools, processes, and systems. They must try to decode the DNA of thousands or millions of individual customers — and leverage the insight to produce ever more cash and earnings. And they do this as millions of consumers or business customers continuously evaluate and shop around, over dozens of channels.

Yet with every activity they undertake, marketers must still ask themselves what likely impact their actions will have on individual or segmented customer relationships. Moreover, as their role escalates in the greater context of the enterprise and its shareholders, they will also need to ask the related question: "What will the impact of this particular activity be on the company's customer equity?"

Marketing as a Science

Not only will marketers need to think more like CEOs, they will also need to think like scientists — choosing from a variety of methods and technologies to create and leverage systematic knowledge in pursuit of effective practices that will achieve desired business outcomes.

According to accomplished marketing expert and author Sergio Zyman, "Marketers are going to have to take a scientific approach to doing their jobs ... making assumptions, debating them until an agreement or understanding is reached, and make a plan based on those assumptions. Then, soon after the project is launched, analyze the results and, without hesitation, understand unequivocally whether the assumptions were right or wrong, and change them if necessary."⁹

This scientific marketing focus is increasingly going to become the rule rather than the exception, as the value of customer relationships is understood as the key driver of a firm's market value. The analytical processes provide the intelligence for the interactive channels to be more knowledgeable and also more effective in their communications.

Figure 1 - Formula for maximizing shareholder value by maximizing customer asset value.

Experts in the field of customer equity underscore the critical nature of customer equity in determining a firm's market value — and thus shareholder value. MSI continues to focus on this important valuation subject: "The customer-based valuation approach may be a more stable indicator of intrinsic firm value than market capitalization."¹⁰

Today it is marketers who are anxiously looking for ways to create shareholder wealth — using scientific methods. In fact, understanding and practicing CRM as a science is becoming a key area of marketing competency. So marketing is, one could say, in the business of continuously optimizing its competencies — primarily in the innovative use of high-speed analytical technology. Today's new marketers must think, plan, segment, analyze, execute, and learn faster than the competition — to out-market, outsell, and outperform.

Relationship management analytical processes and the iterative learning process, combined with the customer knowledge center, thus support and enhance a marketer's ability to optimize customer value and equity. These systems and tools are now more critical than ever. What are these tools? Call them analytical applications, analytical CRM, or customer analytics. They can't substitute for human ingenuity and creativity, but they can certainly accelerate and enrich the process, by adding new capabilities that spot opportunities and discover customer behavior and affinity patterns. They enhance the ability to learn from previous campaigns while adding the element of speed — thus optimizing customer communications and relationships.

Judy A. Bayer, a Teradata CRM Practice Partner, has put it well: "The secret of generating rapid ROI and meeting the tidal wave of business demands is this: that the benefits, the rewards, and the ROI come from ‘going deeper’ into your rich resources of customer data. Yet marketers need to know where to look — and which are the right tools to do it."¹¹

Defining the Types of CRM

Before getting into specifics about the analytical tools, it is important to contrast the two basic types of CRM: analytical and operational. To generate intelligence for optimal customer equity management, you need analytical CRM.

According to META Group, a consulting organization specializing in IT and CRM: "Operational CRM is the automation of horizontally integrated business processes involving front-office customer touch points across sales, marketing, and customer service via multiple, interconnected delivery channels. Analytical CRM is the analysis of data created on the operational side of CRM and through other relevant operational data sources for the purposes of business performance management and customer-specific analysis."¹²

In fact, the role of analytical tools has become so critical that companies could find themselves out of the game without them. One observer has said: "CRM analytic applications help companies gain the comprehensive understanding of their customer interactions necessary to provide insights into how to increase the lifetime value of their customers ... and CRM implementations that lack an analytic component are failing to provide significant improvement to their customer relationships."¹³

In other words, analytical CRM refers to the methodologies that create and exploit knowledge of a company's current and future customers to drive business decisions, processes, and strategies. Again, analytical CRM is a relevance-creating process.

For example, an effective way to initialize, implement, enhance, and grow a firm's knowledge would be to facilitate a CRM analytical framework to represent six integrated groups of business functions:

• Analysis
• Modeling
• Communication
• Personalization
• Optimization
• Interaction

The analysis group provides marketers the functions to slice and dice the entire customer asset base virtually any way they want to look at it: customer value, customer spending, product affinities, interaction behavior, percentile profiles, and segmentation techniques. The modeling group facilitates the use of analytical segments and builds statistical models that identify opportunities to cross-sell, upsell, and grow customer relationships. Part of the modeling process also should include scoring of customers on a variety of criteria. Primarily, the marketer should learn who is most likely to buy what product or service. This allows for creating propensity models (attrition, buying, credit, risk, fraud, pricing, functionality, delay action, multipurchase, etc.)

The communication group is the core of analytical CRM planning, development, and relationship management across all channels, product lines, and business units. Using the opportunities identified by event detectives and analysis, this group helps marketers execute the best communication tactics for segments or individual customers. This process group could launch single or multiple waves of communication. It is also a major part of the effectiveness evaluation activity.

The personalization group requires software, which empowers marketers to personalize messages and offers by creating custom rules and templates. The relationship optimization group ensures that marketers are communicating in timely and effective ways with each customer, plus prioritizing messages based on resource availability within a particular time window. Finally, the interaction group should manage customer interaction activity across all channels and touch points such as direct mail, kiosks, POS, the call center, Internet B2B, Web sites, and email. Customer engagement should be set up to occur in real time, thereby enabling marketers to respond immediately to opportunities and serve customers in real time.

Optimizing Relationships

A company optimizes its relationships by understanding what its many customers value and how each one perceives value — then, communicating this value more relevantly and effectively. The intelligence required to do this comes from the vast data that is continuously pumping through the arteries and capillaries of the enterprise.

Analytical CRM makes this intelligence "actionable" and thus beneficial to the business. It involves tracking and evaluating data, examining highly complex patterns and trends. It expands on traditional data mining by applying statistical and reporting techniques and tools to information culled from customer contacts, often within seconds or minutes of the customer interaction, which is called "real-time" analytics.

In addition to marketing opportunity identification, analytics can lead to more accurate marketing predictions — revealing potential upward and downward shifts in customer value. In the present tense, it makes CRM execution more effective as a result of the new, actionable insights and perspectives it provides.

CRM analytics include segmentation studies, customer migration analysis, cross-sell and upsell analysis, new customer models, customer contact optimization, merchandising analysis, customer attrition and churn models, credit risk scoring, and more.

For example, most marketers promote to customers based on their current value. But customer value changes. With advanced CRM analytics, a company will be capable of predicting which direction and how quickly specific customers can reasonably be expected to move. A company could then take action to modify customer movement in a mutually satisfying direction. Customer migration analysis, for instance, can help companies better communicate and market to its customers in ways that move them up the value chain. With advanced CRM analytics, marketers and business analysts can:

• Segment customers by business value. Next, model them to predict their migration into a spectrum of value segments. Then, simulate and predict customer-buying behavior based on a variety of promotion strategies.
• Perform a marketing influencers analysis to identify which customers can be influenced in their value migration — then communicate to them in ways that move them in the right direction.
• Make accurate assessments of each customer's affinity to a message, timing, your product, or your services.
• Manage frequency of customer contact — and learn and re-learn which channel you should use for specific messages as times and offers change.
• Perform detailed customer value analysis to include: market basket analysis, product structure analysis, cross-product correlation analysis, multiple campaign response models, customer growth models, and churn and attrition models, to spot profit opportunities.
• Build/use a knowledge system that encompasses continuous learning and abilities to derive value from customer relationships by knowing the lifecycle, business cycles, project affinities, payment actions, and satisfaction criteria.

Figure 2 - Analytical CRM in Action: Step-by-Step Cusomter Lifetime Value Campaign

Customer Value and Relevance

The one thing that customers must perceive from business offers and messages before they will pay any attention, the starting point for all customer relationships, is relevance. Gartner, a top IT and strategy consulting firm, has made the point: "It is relevancy that leads to value for the customer."¹⁴

Products, services, and communications to customers must be relevant to their individual needs, interests, and preferences. What's required is rapid line of sight to your detailed customer information — where the relevance resides. Invest in your technology and data infostructure and you are investing in relevant offers and messages to your individual customers. A relevance-generating knowledge infostructure, by necessity, includes an enterprise data warehouse — which provides an integrated decisioning environment — for an authentic customer-centric business model.

Of course, it is critical that your systems capture and centralize data streams across all channels and customer touch points — so that the marketing knowledge base delivers a holistic and integrated view of customers. A holistic view includes everything — customer transactions, interactions, service history, profiles, interactive survey data, click-stream/browsing behavior (from tracking systems), references, demographics, psychographics, and, in fact, all available and useful data surrounding that customer.

This includes data from every department -- and from outside your business in some cases. Excellent examples of the centralized creation of the data warehouse foundation has been achieved by 3M, SBC, E*TRADE, Burlington Northern Santa Fe, and Travelocity.com.

Based on a holistic approach, your company's different departments — sales, marketing, service, finance, and operations — can conduct business sharing the same view of each customer. As a result, each individual customer experience with the company is consistent — and customer equity can be more effectively managed and measured.

Investors’ Right to Know

Your entire extended business constituency of employees, customers, partners, and shareholders is evolving and learning more about your business and its key drivers — at a rapid pace. You need to stay ahead of them — and their questions. All of us are aware that a business is only as healthy as its customer relationship assets — and that its future prospects are a calculated extension of the collective current net value of its customer relationships. Having said this, all constituents, including shareholders, will be ever more curious about the health of a company's customer base.

The challenge issued at the beginning of this article by Patricia Seybold says it all: investors will soon be asking tough questions about customer asset management, and tomorrow's senior managers will need to know how to articulate the response. Executives whose companies survive and flourish tomorrow will need to:

• Lead the marketing evolution in their business environment by making shrewd investments in CRM analytics that will optimize customer equity and drive shareholder value.
• Invest in the education of the marketing and services people to maximize competencies and insight into the management and optimization of customer equity.
• Ensure that the company's technology systems represent a flexible, integrated decisioning environment with a clear process that links corporate strategy and marketing tactics.
• Collaborate closely with IT/CRM vendors to manage and achieve a solid balance between quality customer experiences and positive business results.
• Document the progress in customer equity optimization. Ultimately, "marketing is a navigation tool that reinforces the market sensing and opportunity recognition abilities of CEOs."¹⁵

As investors or stakeholders allocate their resources to partner with a firm for profitability of both parties, it becomes increasingly important that the assets of the firm generate the most value to all parties. As we enter the new century, customers are also becoming "somewhat stakeholders." Many customers now depend on the providing firms to establish, grow, protect, and nurture the relationship and the supply or flow of products or services. FedEx is an example of this stakeholder dependency as part of the extended enterprise.

Leadership teams working to grow customer equity are creating customer value. The marketing game has converted to the life-courtship process. The sales contract is more than just a transaction, it is the culmination of the interactions, and as we learn about relationships, CEOs drive new profitability, satisfaction, and trust.

The future holds great promise and success for firms that develop and grow their own information and knowledge assets — about their customers, suppliers, channels, franchisees, and partners. The new CEO role may just well become a role of customer equity optimization and fostering the asset of knowledge management. The future is here, and the knowledge opportunity is upon all of us. 

Endnotes

1 Patricia Seybold, The Customer Revolution: How to Thrive When Customers Are in Control, Crown Business, 2001, www.psgroup.com

2 Marketing Science Institute Web site: www.msi.org

3 Rajendra K. Srivastava, Tasadduq A. Shervani, and Liam Fahey, "Market Based Assets and Shareholder Value: A Framework for Analysis," MSI Working Paper Series Report No. 97-119, 1997.

4 Claes Fornell, "Customer Satisfaction, Capital Efficiency and Shareholder Value," Marketing Science Institute Conference, Report No. 00-107, 2000.

5 Ronald S. Swift, "The New Economic Opportunity for Business: Creating Increased Profitability Through CRM," www.CRMproject.com, 2001 and Accelerating Customer Relationships, Prentice Hall PTR, 2000.

6 Robert C. Blattberg, Gary Getz, Jacquelyn S. Thomas, Customer Equity: Building and Managing Relationships as Valuable Assets, HBR Press, 2001

7 "Market Based Assets and Shareholder Value: A Framework for Analysis," MSI Report No. 97-119

8 Regis McKenna, Total Access, Harvard Business School Press, 2002

9 Sergio Zyman, The End of Marketing As We Know It, Harper Business, NY, 1999

10 Sunil Gupta, Donald R. Lehman and Jennifer Ames Stuart, "Valuing Customers," MSI Working Paper Series, Report No. 01-119, 2001

11 Judy A. Bayer, "Ten Ways to Generate Rapid ROI With CRM," Teradata White Paper, June 2002

12 Elizabeth Shahnam, "META Group Sees Continued Strong Growth for CRM Initiatives", META Group press release, May 12, 2000.

13 Rich Clayton, ‘Best Practices Insights for CRM Analytics,’ Hyperion/META Group press release, January 17, 2000.

14 W. Janowski and A. Sarner, Gartner Research Note, "Creating the Illusion of One-to-One", August 2001

15 George Day, "Marketing and the CEO's Growth Imperative", MSI Board of Trustees Meeting presentation, April 25, 2002