Focusing on Customer Equity - The Unrealized Asset
With the buzz these days about the importance of managing customer relationships, you'd think the customer is one popular new kid on the block. In reality, that customer is more like an old friend who's been taken for granted - until now, that is. The emerging global and electronic economy has turned tradition on its head and placed the customer firmly in the control seat. Reacting to this turnabout, companies are rushing into implementing Customer Relationship Management (CRM) solutions. In fact, our research1 indicates that by the year 2002:
83 percent of companies will implement data warehouses.
70 percent of companies will revamp their customer processes.
53 percent of companies will aim to use electronic commerce to transform relationships with customers.
49 percent of companies will organize by customer type.
Amid this flurry of activity, however, the end objective of improving the customer relationship is often obscured by individual missions to improve specific channels or implement new technologies. The result is a set of disconnected initiatives that fall short of creating real value. Ultimately, both the company and the customer end up disappointed.
Customer
Equity - The New Measure of Value
What's needed is a clearer picture of the desired outcome. Companies must start
thinking about a new measure - one that reflects the value of their customer
relationships and the contribution it makes to future growth prospects. The
new measurement of value is customer equity." Customer equity consists of two
key components: brand equity and relationship equity.
Building brand equity is hardly a novel concept. Traditionally, companies have invested in their brands to portray, in the eyes of their customers, an image of consistent quality tied to the physical attributes of the product or service and specific emotional attributes or benefits. The brand differentiates a company in the marketplace and in the minds of customers. At its core is the commitment to deliver against the promise of value made to customers. Actively managing and reinforcing this promise is vital to remaining relevant to and valued by customers. The effect of these investments is to create, over time, predictable patterns of customer purchase or usage.
Relationship equity is the value of the individual customer experience, derived from interactions with the company. In essence, it is the way the company demonstrates its commitment to the customer and fulfills its brand promise. At each and every point of contact - whether visually, verbally, or in written form - the company has an opportunity to demonstrate this commitment. If the individual experience produces a set of consistent attributes that the customer comes to value, and the emotional attachment with the experience is positive, then relationship equity will also contribute to producing consistent patterns of purchase intent.
Relationship equity is tangible and measurable. As the equity builds, the customer's attachment and loyalty to the company increases. The likelihood of the customer switching allegiance to the competition diminishes and the company's sales inevitably increase. In other words, the company has strengthened the ties that lock in its customers and thereby generated potential growth. Conversely, when a company's promises to the customer go unfulfilled, the brand and its value are corrupted, ultimately diminishing customer equity.
But what should come first? The brand equity or the relationship equity? In fact, it isn't an either-or situation. Some companies have focused on building strong brands, but they face challenges in creating relationship equity. Others have successfully built relationship equity before establishing a strong brand. Long-term, future success depends on maximizing customer equity by creating both brand equity and relationship equity, ideally in parallel.
Consider the approaches to creating customer equity by companies at opposite ends of the evolutionary spectrum - the successful and relatively new dot.com start-ups, exemplified by Amazon.com, and the well-established Fortune 500 companies. Each has focused on one aspect of customer equity before moving on to the other. Amazon.com first created strong relationship equity before having an established brand on which to draw. It did this by creating and reinforcing a unique relationship over the acquisition, usage and service cycles, including identifying innovative ways to sell more products to all new and existing customers. This unique relationship became a key element of its positioning, thus linking Amazon.com to specific brand attributes and subsequent brand equity.
In contrast, many of the long-established Fortune 500 companies have focused primarily on capturing market share by building broad public awareness of a brand image that provides consistent quality and specific customer benefits. However, to ensure that future market share growth is achieved with an increasing number of high-value customers, these companies should invest more in better understanding the customer and building that relationship. With the addition of relationship-based equity to their already strong brand, these companies are well positioned to create long-term loyalty and to substantially strengthen customer equity.
Measuring
Customer Equity
Customer equity, therefore, is the intrinsic value represented by a company's
brand and its customer relationships. So, how is it measured? By taking the
aggregate value of:
-
Market Share - increasing the number of high-value customers
-
Customer Share - selling more to each of those customers
-
Customer Lifetime Value - extending the length of each customer relationship
In short, customer equity is the new measure for valuing the long-term compatibility between a company and its customers, and the profitable growth this relationship is likely to generate for the company.
From
"Inside-Out": The Seller-Driven Enterprise...
The barriers to building customer equity for many companies lie within their
own four walls. Their operations reflect an "inside-out" approach to managing
customer relationships, one that is primarily driven by the seller and, as a
result, delivers a highly fragmented customer experience. At seller-driven companies,
practices and processes have evolved piecemeal and are now likely to be managed
and measured separately. Customers have no obvious single point of contact,
and every department within the company thinks it owns the customer relationship.
Customers are handed from one department to another, and priceless customer
information lies dormant and largely unused in functional silos. The net result
is that customers are frustrated and dissatisfied.
What's more, the inside-out approach tends to focus on the wrong performance metrics - for instance, measuring how quickly a particular process or function is performed rather than measuring how accurately the process delivers on the customer need. Research2 reveals that, even among those companies that focus on measuring customer satisfaction, less than 22 percent regularly involve customers in the development of those measures. The implication is that most commonly used measures may not even be relevant to the customer and likely do not accurately reflect the customer's true level of satisfaction.
To "Outside-In": The Customer-Driven Enterprise
To maximize customer equity, companies must reverse their thinking and adopt
an "outside-in" perspective — the customer-driven approach. This means
intentionally choosing the "right" customers, and then taking a far more holistic
view of delivering the total customer experience. The aim is to create an end-to-end
view of valued customers that transcends functions and departmental silos and
gives a complete, coherent picture of all the interactions the company has with
each customer. Thus, customer-driven companies deliver a consistently differentiated
customer experience, regardless of what the customer buys or how the customer
chooses to interact with them.
Many companies already have set their sights on the customer as the key revenue generator for delivering sustained and profitable growth. However, not all customers will contribute equally to the long-term profitability of the organization. Some customers are better than others, and precious few make the difference between winning and losing in today's highly competitive marketplace.
While the traditional approach to viewing customer relationships and identifying attractive customers uses inside-out-oriented measures, such as cost-of-contact, the outside-in approach requires companies to view their relationships through the lens of the customer. This means measuring the relationships using criteria important to the customer such as: the customer's perceived value of the relationship, and the customer's level of satisfaction with products, pricing, delivery and support (see Figure 1.0).
Having viewed and measured relationships in this new way, a customer-driven company can develop plans to build the body of "advocates" from those customers who already value their relationships and are satisfied with the products. Also, plans to reduce the number of "saboteurs" must be implemented. These plans may include practical steps, such as developing new products or low-cost channels to better align with customer needs, or even having the courage to fire those saboteurs that drain scarce resources and contribute little or no profitability to the company.
The
Capability Connection
Adopting a customer-driven approach to managing customer relationships requires
companies to build a set of integrated CRM capabilities that can deliver real,
bottom-line results. Research3 conducted
with hundreds of executives in six industries clearly indicates that CRM capabilities
have a significant impact on a company's financial performance. In the communications
industry, for example, the research reveals that CRM performance accounts for
50 percent of the variation between average- and high-performing companies as
measured by return on sales.
Five major groupings of CRM capabilities are key to transforming customer relationships - and ultimately driving customer equity (see Figure 2.0).
Customer
Insight: Know Customers Better
than They Know Themselves The transformation to a customer-driven enterprise
hinges on developing strong customer insight capabilities. Customer insight
allows a company to define its most valuable customers - and high-value potential
customers - and determine how to work with them to maximize mutual value.
Building customer insight starts with the continuous aggregation of data, gleaned from multiple sources, such as externally purchased data, company customer data, and Web-based, "click-through" data. Using analysis and modeling, a unique, fact-based understanding of customer needs and future preferences can be developed, enabling a company to move customers very quickly from the anonymous to the familiar. Insights can now be applied to discrete customer segments or individual customers to help differentiate the offers, design the content and marketing campaigns, and personalize the interactions.
This is a million miles away from the age-old concept of gathering a sampling of historical customer information and placing it solely in the hands of a few people who guide critical business decisions. In the customer-driven world, the flow of continuous, real-time information drives tactical decisions at the customer level, enabling companies to get closer to the one-to-one customer experience. Supporting technology makes historical and dynamic transactional data available throughout the organization, giving everyone access to a very specific view of each customer's needs, behaviors and intentions.
Customer
Offers: Give Customers What They Want ... Not What You Want to Give Them
To create value in the eyes of the customer, companies must develop highly relevant
customer offers — bundles of products and services tailored for individual
customer needs — that are better than competitive alternatives. Drawing
on customer insight for direction, leading companies focus on:
Crafting compelling value propositions
Building strong brands
Developing new products and services that are coveted by the customer
Managing the product/service mix
In a customer-driven enterprise, offerings are dynamic and innovative, constantly validated and measured, and easily configured to meet customer needs.
Take, for example, the online network of iVillage.com: The Women's Network. Considered the leading online women's brand, iVillage.com provides relevant, targeted information and tools to women between the ages of 25-54. iVillage.com is organized into branded communities that focus on issues of importance to women and provide interactive services, peer support and online access to experts across 16 content channels, and several shopping areas. By creating innovative sponsorship and commerce relationships with leading companies, iVillage.com has created a network that matches the needs of iVillage.com members for relevant information and services with marketers interested in reaching women.
The iVillage.com site is also being used by industrialists to gain insight into a valuable - and increasingly influencial - segment of their customer base. Ford Motor Company, for example, is accessing it to gain consumer guidance on car design.4
This is a million miles away from the age-old concept of gathering a sampling of historical customer information and placing it solely in the hands of a few people who guide critical business decisions. In the customer-driven world, the flow of continuous, real-time information drives tactical decisions at the customer level, enabling companies to get closer to the one-to-one customer experience. Supporting technology makes historical and dynamic transactional data available throughout the organization, giving everyone access to a very specific view of each customer's needs, behaviors and intentions.
Customer
Interactions: Personalize Each Customer Experience — Every Time
Companies today are obsessed with doing business on the Internet — for
good reason. Every second, seven people from around the world plug into the
Internet for the first time5. However,
even the fanatical Web user will connect with a company in multiple ways. A
customer may select a self-service channel in one instance, yet require personal
assistance in another. Ultimately, it is the customer who chooses the channel.
Take the banking industry's experience, for example. Contrary to the banks' expectations, the addition of call centers and ATMs did not drive most customers away from human tellers. Certainly the convenience of ATMs led to some substitution. But mostly, transaction patterns just changed and the total number of transactions increased. In addition to dropping by the neighborhood branch for a weekly visit, a customer may now make an ATM withdrawal on Monday, contact the call center on Thursday, and check the account online over Sunday morning coffee6.
The key, then, is to consistently provide high-quality service and personalized interactions, irrespective of the channel the customer chooses. Two internal obstacles typically undermine companies' efforts to provide personalized customer interactions. Companies either fail to develop the skills and technologies to enhance the various interaction channels (for example, Web, phone, direct mail, or field sales force) that are preferred by their customers, or they fail to knit the various channels together to provide a consistent customer experience.
To overcome these obstacles, companies must seamlessly integrate all customer interactions across multiple channels to offer anytime, anywhere access - a critical component of competitive differentiation.
High
Performing Organization: Win the War for Talent
In the new customer-driven world, one of the most valuable and scarce sources
of "capital" will not be financial or structural, but human capital. Human capital
is the value of an organization's human assets in terms of employee competence,
motivation and satisfaction. Successfully developing, empowering, and rewarding
employees will influence the customer relationship positively and favorably.
However, of all the capability areas, creating the high performing organization is the most critical. Unfortunately, it is usually the last to be addressed, because it is the most difficult to build. It takes vision, top-level executive sponsorship, and a willingness to change organizational processes and operations to focus on the customer.
Delivering a positive customer experience consistently all comes down to the individual. You can have the right brand image, really understand your customer needs, and design your interaction channels for the customer. But it always comes back to the one-to-one exchange - how each employee conveys the commitment and fulfills the promise, and how the individual customer perceives the total experience.
Consider the reputation of service-obsessed Southwest Airlines. Year after year, they have the fewest customer complaints of any airline. Do they ever make mistakes? Of course they do. But they rely on their empowered front-line employees to resolve any customer service issues, quickly and professionally. Of course it is easy to identify companies like Southwest Airlines that are frequently heralded in the marketplace for their extreme customer focus. The problem is that companies that consistently deliver a positive customer experience are few and far between.
To make a significant change toward a customer-driven culture, a company must attract the right talent, compatible with its values, and then ensure that employees are well trained to deliver against these values. Yet, it is a fact that employees only retain about 20 percent of what is taught through traditional training techniques. This means they are learning the lion's share of what they need "on the job" with the customer!
New training techniques can be used to move employees more swiftly up the learning curve. Given the measureable benefits of these techniques, it is a mystery why the majority of companies fail to invest sufficiently in their human capital — a shortsighted strategy given the proven power of the capability to deliver on the promise and build customer equity.
Enterprise
Integration:
CRM Is Not an Island
To help deliver on its commitment to the customer, a customer-driven enterprise
depends, not only on excellent CRM capabilities, but also on seamless integration
across its organization. This "intra-enterprise" linkage is critical for success.
Field sales people, for example, can not promise ship dates that can not be
met. Likewise, the supply chain must deliver to agreed upon schedules. Without
this integration, only two things can occur and neither is positive - costs
escalate and customer satisfaction declines.
More than ever, companies need to provide complete solutions to continually increase customer share and lifetime value. This means going outside their own four walls and forging "extra-enterprise" connections to deliver on customer commitments. The race to find the right partners and the ability to deliver a consistent experience to the customer will place even greater emphasis on the organization's ability to identify, assimilate and manage a portfolio of alliances. In highly competitive industries, such as communications, the need to slash time-to-market, and develop new products and services rapidly, relies on the formation and successful execution of multiple alliances. Equally essential is the need to use technology to quickly link the different systems and operations of alliance partners.
Assessing
the Value of CRM Capabilities
Executives intuitively know that all of these capability areas are important
- but they do not know specifically where to invest to reap the highest return
or how to justify those investments. How can they strike the right balance between,
on the one hand, making the investments and changes needed to attract and retain
customers while, on the other hand, meeting their commitment to shareholders?
The answer lies in indentifying the investments and implementing the changes
that will have the greatest impact on customer relationships.
Until recently, in the absence of reliable financial data, investment decisions relating to CRM capabilities have been founded on intuition and experimentation. Now, however, new research7, based on interviews with hundreds of executives across six industries, clearly shows which CRM capabilities have the most impact and how much they can contribute to the bottom line.
The research reveals that companies can deliver tremendous value if they excel in CRM. Top CRM performance within each industry studied statistically explained 28 percent to more than 60 percent of the variation in business unit return on sales (where ROS defined as earnings before interest, taxes, depreciation and amortization, divided by sales). And, it does not take massive change for a company to reap the rewards. A modest improvement of 10 percent across all important CRM capabilities can add up to a $35 million benefit to a typical $1 billion business unit. More aggressive companies that move from average to high performance can add approximately $100 million to their ROS.
The top 21 capabilities that emerged as important and common across all industries studied revealed some surprises (see Figure 3.0). Customer service and incenting/rewarding people were the top two capabilities identified as delivering the greatest impact.
The research also revealed a pattern: the top performers excelled at capabilities in all five of the areas studied. When interviewed, executives acknowledged that superior performance in specific capabilities was of high value to their organization but, before reviewing the research findings, they had not been able to put a specific number on that value.
The total customer experience — as delivered by these integrated capabilities — brings customers back, locks them in, secures their long-term loyalty — and creates customer equity.
Customer
Equity
Realizing the Value
Customer equity is set to be a powerful performance indicator - the new currency
of business accepted by the market and analysts as a meaningful measure of company
value. Indeed, we contend that share price increasingly will reflect not only
the performance of physical assets, but also the expected returns on the customer
asset.
Leading companies already have set their sights on this huge, and virtually untapped, source of sustainable growth. The rest are certain to follow.
However, companies aspiring to create a truly customer-driven enterprise and realize the full value of customer equity, must make a fundamental "U-turn" in mindset and approach. In the future, the mindset will not be on Customer Relationship Management (i.e., the company managing the customer), but on "Customer Managed Relationships" (i.e., the customer managing the outcomes). This will be the mantra for companies determined to exploit the growing power of the customer and build customer equity.
Success will come to those companies that build an integrated set of customer-facing capabilities and cultivate a dynamic culture, which genuinely places customers at the center. Ultimately, every individual action, communication, customer touchpoint, new product development or service enhancement has to reinforce the commitment to the customer — and consistently deliver the promise of value.
Fail to make this transformation and the fickle customer, who is only a mouse click away from defecting to the competition, will go elsewhere and likely never return. Become a customer-driven enterprise and your customers could just click their way to your prosperity.
Footnotes
1. Managing Customer Relationships: Lessons from the Leaders, The Economist Intelligence Unit in cooperation with Accenture, 1998.
2. Ibid.
3. How Much Are Customer Relationship Management Capabilities Really Worth? What Every CEO Should Know, Accenture, 1999.
4. Chemical Week, Knowledge Management: Hearts and Minds Connect Online, January, 19, 2000
5. International Data Corporation
6. Channel Surfing, Accenture, Outlook Magazine 2000, Number 1
7. How Much Are Customer Relationship Management Capabilities Really Worth? What Every CEO Should Know, Accenture, 1999.
