Return on Behavior Magazine
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Customer Experience

September 26th, 2009

Creating and Feeding the Customer Management Strategy

Businesses stand to reap massive rewards by regularly reviewing strategies that enable them to  create value for their customers.

This, by implication, requires employees to have a keen understanding of the actual and potential nature and value of existing and prospective customers.

Understand your current reality
It is crucial, before even attempting to develop a customer management strategy, that an organisation understands what customer management actually means. In addition, the organisation should understand its capabilities in practicing customer management. I have yet to come across a successful customer management strategy that hasn’t been preceded by some kind of ‘discovery’ or ‘evaluation’ session. It is important to determine what we know, what we don’t know and what we need to know. Think about it: how can you improve performance if you don’t know how well you’re doing right now?
This logic drives the conversations we initiate and thus the questions we ask in order to trigger insights that enable us to manage our own destiny.

Define current competence
By adopting a framework that helps to define your current competence in customer management, you will be able to create a strategy that balances customer focus with customer value optimisation.
Use of an assessment and benchmarking instrument such as the Customer Management Assessment Tool (illustrated) can help you understand exactly where you stand in the area of customer management, and what you need to do to improve your standing.

Four keys to maximizing customer value
In customer management, as with any value chain, value can be destroyed by the weak links more easily than it can be created by strong individual activities. For instance, value could be destroyed when an organisation that is good at acquiring customers does not have the practices and skills in place to retain them.
Quite simply, the only sources of business value to an organisation from its trading operations, other than financial asset management, M&A, accounting policy, etc., are the four ‘hard-nosed’ business levers or drivers of profit that, when applied, will help maintain strong links in the customer value chain. These drivers are: Retention, Efficiency, Acquisition and Penetration – also referred to as the REAP levers.

1. Retention
The retention of good customers is one of the most cost-efficient ways of driving profit in an organisation and the first step in effective customer relationship management. This means moving away from providing random customer experiences to consistent, positive experiences.
Bearing in mind that not all customers or interactions are alike, you should focus primarily on the highest value or highest potential value customers. Manage all customers in the same way and you run the risk of over-delivering to lower value customers, thus losing money, and under-delivering to higher value customers, possibly losing them to your competitors.
The process of managing retention – and, indeed, the entire customer management framework – starts with people: recruiting and retaining the right people; empowering staff to make quick decisions and resolve service issues; and monitoring and managing employee satisfaction.
It is essential to look at how you welcome and get to know your customer along the entire journey, from customer involvement and rewarding of loyalty, to effective management of dissatisfaction, all the way to the final attempt to retain the customers you are at risk of losing. Identify what drives competitive advantage and drive forward with these initiatives.

2. Efficiency
Efficiency, particularly in terms of the cost of service delivery, is critical to making a profit, even from customers of minimal apparent value. Efficiency considerations include activity-based costing, the cost to serve markets and the cost of poor quality.
The acquisition and retention of customers cannot be carried out at any price. Remember, good customer management is all about achieving the right balance between meeting customer needs and business profitability. If the cost of the activity exceeds the value delivered to the organisation, profitability will suffer.
However, if the conflict between meeting service promises and meeting the objective of cost efficiency is such that the customer experience would be compromised, the organisation should deliver against its promises.

3. Acquisition
Pay attention to targeting good quality new or former customers and managing the relationship with them from their first expression of interest, right through to acquisition and beyond.
Equally important is the management of enquiries and sales leads as well as looking for measures to prevent low value or high-risk prospects becoming customers.

4. Penetration
The ability to develop more value from existing customers through cross-sell and up-sell activities is critical. An investment in enhancing the value of service delivery to current customers can deliver much more value than the same investment in winning new customers.

Strategic benefits – a working example
It helps if an organisation looks at customer management according to these four separate, but related ‘drivers.’ It usually makes considerable financial sense to do so as it helps focus the organisation on specific issues.

Let’s take a look at an example of the application of this thinking by a top European financial service provider to illustrate this.
The company kicked off by performing a relatively simple analysis of customer profitability and commitment, by calculating the current value (CV) and net present value (NPV) from predictable income (e.g. from committed revenue streams such as loans and mortgage payments planned). Combining CV and NPV of current customers, a decile analysis (ranking customers by profitability or revenue and splitting the customer base into tenths) showed that 77% of profits came from 20% of customers. This helped value the customer base, and was the starting point for the development of retention, penetration and exit encouragement programmes. It also enabled the identification of segment profiles for acquisition, retention and development planning.

The company also conducted research to determine customer commitment and share of spend and found that top customers could become more committed, resulting in slightly lower attrition, higher share of spend and higher advocacy. While the research indicated that a 100% share of spend was unlikely in any decile group, commitment could be increased by improving the dialogue with top customers and making adjustments to their customer journey. To balance this increased investment it reduced dialogue and introduced more efficient processing to lower decile customers.

This framework can be used by any company. However, our experience indicates that fewer than 20% of companies will be able to complete it, because the majority of organisations are not sufficiently mature when it comes to understanding the end- to-end nature of customer management. Also, many organisations haven’t conducted decile analysis (as simple as it is) and are not cohesive enough to treat different customers differently.

This exercise revealed that, initially, the company’s strategy was not geared to attracting quality customers and that a change in recruitment strategy and a gentle encouragement of top customer advocacy was necessary to alter the acquisition profile.
This example further demonstrates how, by changing the way a company acquires, retains and develops customers, through a managed, differential cost to serve, profitability can be doubled in two to three years.

“Written by Doug Leather of REAP Consulting (Pty) Ltd (www.reap.co.uk) and republished with permission from CustomerThink.com (www.customerthink.com).”


About the Author

Doug Leather

Doug Leather is the CEO of REAP Consulting (Pty) Ltd in Johannesburg, South Africa and a director of REAP Consulting Ltd in London. REAP are global Customer Management experts specializing in the development of programmes that build business health by optimizing Customer Management.

 

Leather is an accomplished Marketing and Customer Management specialist with over 25 years experience in business and acknowledged as a leading expert and thought leader in customer centricity. He has deep insights into customer management competency assessment, best practice application, customer experience and business performance improvement, helping enterprises understand how they can conceive, plan, develop, manage, drive and/or repair customer management programmes. The primary focus of his client work today is built upon his detailed understanding of the practical application of customer management in different geographic territories, markets and industries.
Leather’s background is diverse with engineering and commercial qualifications. He has personally experienced the challenges of small entrepreneurial business as well as large corporate.
Leather facilitates the South African Chapter of Customer Futures which is a Customer Experience thought leadership forum, has hosted a radio talk show and published numerous articles in the field of Customer Management. He is an International Speaker, developing customized talks dealing with the broad topic of Customer Management and Marketing Efficacy. He holds Professional Membership status with NSASA (National Speakers Association of South Africa) and is a member of the US based CustomerThink Corp advisory council.

Doug says of himself:

Great Customer Experience is the very essence of Customer Management. The market today is characterized by increasingly competitive pressures and increasing commoditization. The only way for organizations to build sustainable competitive advantage today is through deep understanding of the value and need of the customer. Customers are not all created equal – let’s face it. I am passionate about working with organizations that recognize these facts and are willing to embed and operationally the principles of Customer Management within the DNA of the organization. Sustained, Superior Business Performance is largely the result of an organization that displays competence in effectively managing its Customers and Prospects.

Contact:

REAP Consulting (Pty) LtdP O Box 68520, Bryanston
2021
M: +27 (0) 83 3271010
T: +27 11 4694274
F: +27 11 4690595
Email: dougl@reap.co.za
Website: http://www.reap.co.za






 
 

 
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