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One measure that can transform your marketing strategy

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In today's digital world, performance metrics are essential to understand the efficiency and effectiveness of your marketing budget. However, they assume something about the customer that can have unintended impact on the business' profitability. This deck outlines how you can flip this to your advantage by overlaying one important measure.

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One measure that can transform your marketing strategy

  1. 1. A GUIDE BY
  2. 2. Businesses have to allocate their limited resources on a logical basis using a range of indicators to manage and understand customers. For example: impressions, click-throughs, sales, revenue, conversion rate, cost per acquisition and retention rate. These are relatively easy facts to measure in isolation and great for efficient use of budget, controlling costs, driving sales and helping to justify your budgets. The blind-spot, however, is that they assume all customers are equally profitable for a given product or service. This means you could be wasting your acquisition budget on easy to win, low-profit customers and missing better opportunities for value growth, without even knowing it. Big ticket sales don’t always contribute the most to profit and can erode your margin, particularly if they have a high cost of sale, service or maintenance. Similarly, you could be wasting your retention budget on saving low-profit customers and have nothing left to invest in the ones you really want to keep. In reality each customer is an individual and consumes your products and services in different ways so, will have different impact on business revenues, costs and margins. Measuring profitability at a customer level creates a common currency that helps your business understand which customers are profitable and which are costing you money across the organisation and through your external agencies. © Net Gain Ltd 2017 2
  3. 3. © Net Gain Ltd 2017 3 Today, the challenge is scale: Significantly more customers, data, products, channels, staff, scrutiny and regulation need consideration when understanding and managing customers. Until the mid-20th century, shop keepers intuitively managed their customers by profitability and personalised the tone and content of interactions. Personal contact meant they knew most by name, their circumstance and the environment they lived in. Observation of browsing and purchase habits meant they knew likes and dislikes, how much spent and when. This helped them know what other products or services to offer, when to do it and how best to go about it.
  4. 4. © Net Gain Ltd 2017 4 Customer profitability always changes because customer behaviour always changes. The important question is whether it is increasing or reducing, and by how much? Knowing the profitability of each customer means the business can see which have higher value and contribute most to overall profitability, and which are lower value or eroding margin. Increasing the value of customers is the cornerstone of customer relationship management (CRM), but merely knowing the value of a customer isn’t going to magically make more high value customers appear or enable you to retain them. So, what would you do differently if you knew the profitability of each customer? It’s a powerful tool that should be used to make smarter and more rational decisions on prioritising resources to create competitive advantage. For example, it can be used to set customer development objectives and strategies, and inform product and service propositions and capability investments.
  5. 5. It enables better decisions on how much to spend on acquiring the right customers and retaining the best ones to ensure commensurate returns on the investment and effort you put in. It also encourages better proposition design that is focused on meeting customer needs and enhancing profitability, and helps measure the effectiveness of customer engagement strategies, whether through digital or offline media and across the entire customer relationship. However, measuring and using profitability at an individual customer level is sometimes perceived as something that is too difficult, complicated, intimidating, or inaccessible to end-users. There are many reasons for this, but these are barriers that can and should be easily overcome so that the strategic benefits of knowing customer level profitability can be realised. © Net Gain Ltd 2017 5 It gives credibility to investment strategies and puts marketing right at the centre of decision- making in the organisation, which has been justifiably missing in most businesses.
  6. 6. We should first define a customer as a consumer of your products and services. This may seem obvious, but is it as clear cut as that in your business? Do you include non-active or dormant customers? What about retail and commercial customers? Is a joint customer considered 1, 2 or 3 different relationships? There can be many different ways to define a customer, even within the same organisation. Some definitions are by design, e.g., it is sometimes advantageous to report all unique product holders as customers, whereas at other times only those that actively consume are counted. Other definitions can be a result of legacy system integration, or caused by inaccuracies in identifying customers between transactions, purchasing at different times, across channels or across brands. Having a common definition of what constitutes a customer ensures the measure of value can be understood and applied consistently across the organisation. © Net Gain Ltd 2017 6 customer profitability n., a common currency that measures the value of the customer to the organisation based on how much cash flow they generate over the duration of their relationship with your business.
  7. 7. Lifetime Value is a forecast of the cash flows expected over the lifetime of the customer. Cash flows normally include revenues, costs to serve, costs of managing the relationship, costs of administering the product and the business’ fixed costs. This cash flow is adjusted according to the expected lifetime of the individual customer and, as a forward-looking future value, is usually calculated as a discounted net present value. The expected lifetime is how long the customer is likely to continue doing business with you. This is sometimes governed by a contract or the customer’s continued need for your products and services, or their satisfaction with your service, or their ability to continue paying for it. It’s also dependent on the business’ ability to continue satisfying those needs and retain the customer over the course of a reasonable payback period, e.g. 12 months, or 5 years. The length of this payback period will depend on the type of product or service, and the organisation’s attitude towards, and confidence in, long term forecasts. © Net Gain Ltd 2017 7
  8. 8. The actual definition will depend on the business’ objectives for CLV, the type of products and services, availability of data, the business’ attitude to using certain types of information and the confidence in each. Some definitions can include a view of historic, current and forecasted customer profitability, whereas others might just include current and forecasted information. Similarly, the definition of CLV might only refer to the products and services the customer has actually purchased, whereas other definitions might also include the potential value of all products that the customer could purchase from you. There is often a preconception that any low value customer can be turned into high value one through cross- and up-selling. Every customer is different and many may have no further need for your propositions or have needs that your business is unable to satisfy, making it difficult or very costly to try and increase their value. In addition to CLV, measuring a customer’s potential value (PV) provides an estimate of the additional value that might be realised from a customer through, e.g., increased spend on a product, upgrading to a better product, taking additional services, or referring friends. © Net Gain Ltd 2017 8 Customer profitability is often referred to as Customer Lifetime Value (CLV) or Lifetime Value (LTV), but its definition varies from business to business.
  9. 9. © Net Gain Ltd 2017 9 up-sell cross-sell prospect growth : Prioritising cross- and up-sell activities, loyalty and reward programmes, and driving affinity or content deals acquire Product bundling strategies, up-selling recommendations and prioritising manual decisions conversion Offers and incentives, pricing strategies, quotations and prioritising lead follow-ups targeting Proposition design, search engine ranking, best-buy ranking, ad placement, lead scoring, win-back strategies and segmentation serve Prioritising service, service- levels and claims handling churn Prioritising customer ‘save’ incentives, and debt collection strategies retention Prioritising proactive retention and reinvestment pricing levels Purchase / usage Prioritising promotions, offers and incentives
  10. 10. Which customers should we target? How much to invest in retention? Where to focus proposition development? What proportion of budget should be allocated to each media? What level of risk vs return? What should we cross-sell to each customer? Which customers should we reward or delight? Which engagement strategies are adding or eroding profit? © Net Gain Ltd 2017 10
  11. 11. Probably because it can seem complicated, inaccessible and intimidating for marketers and end-users. © Net Gain Ltd 2017 11 Defining and calculating CLV typically involves lots of historic data about financial transactions, business profitability and customer profiles and behaviour. This is examined using sophisticated statistical and predictive analysis by data scientists and financial wizards to create a formula for calculating the customer’s value. A further complication is the formula could be different for each product and service. Some organisations can get obsessed with trying to create the perfect definition of customer value or get stuck trying to agree how best to allocate the revenues and costs to individual customers. For example, how should the organisation attribute fixed costs that cannot be directly influenced through customer profitability? However, there is typically less debate about historic profitability than about future predictions and forecasts. Luckily, the definition doesn’t need to be perfect. The output must merely be differentiated enough to enable a comparison between customers so that rational and smarter trade-off decisions can be made.
  12. 12. As an example, we can use Customer Lifetime Value and Potential Value in a simple matrix (at left) to create a segmentation showing the CLV, PV and relative base size. The most profitable customers today are in the right column, whereas those with the most potential are on the top row. The differences in the measures show the scope for investment and opportunity to guide objective and strategy setting This is a simplified example that could be extended to consider other factors such as customer dissatisfaction, churn, arrears, fraud etc., and whether the customer is currently subject to any formal activity programmes, such as collections or on-boarding. In addition, there may also be a noticeable change in a specific customer’s behaviour or circumstance that could indicate an opportunity to add value to the relationship and trigger an immediate reaction. © Net Gain Ltd 2017 12 This ensures the service and treatment of your customers is consistent and commensurate with their likely profit potential.
  13. 13. © Net Gain Ltd 2017 13 It could reveal needs, preferences, behaviours, demographics and attitudes etc., to help personalise engagement strategies, content, propositions and messages. E.g. these could be families and couples in lower income groups that are less digitally savvy, price led and don’t relate to the brand on an emotional level. We could design our propositions to make it harder for them to leave, but easy to stay.
  14. 14. For example, we may have the option to communicate a cross-sell offer by email; a prompted upgrade during a service call; a behavioural trigger that informs the customer by SMS; personalised newsletter content; a reinvestment value for reactive retention; or a prompted offer when logged in. Calculating the likely change to the CLV for each possible communication option would make it easier to select the one with the best outcome. So, if profitability is our segment objective then we could calculate the potential incremental CLV for each option and compare the results across all communication options and select the one with the greatest incremental profit. However, if we are taking a more holistic view of our customer base, then we could consider whether it’s better to trade-off a small amount of profit today to gain additional sales to customers that may also have greater potential value tomorrow. This would mean selecting the option that has the greatest chance of success, but with the least trade- off in potential profitability. © Net Gain Ltd 2017 14 CLV can also be used to guide individual customer activities.
  15. 15. Businesses are used to making top- down resource allocation and budgeting decisions. Profitability is usually reported at a company, business unit or product level as a periodic statement of fact about the past and sometimes a forecast of revenues and costs. However, CLV uses historic financial data and predictions at a customer level to create a forward looking value calculated on a frequent basis. This requires a reconciliation of accounting and timing differences between how business profitability is reported and CLV is calculated. Embedding CLV into the organisation is, therefore, likely to represent a significant transformational change to the business’s operating model. Senior sponsorship is essential to prioritise and align resources to ensure the benefits are fully realised. In addition, stakeholders must be signed up to the implications on people, processes and propositions. A question that is commonly asked is how long until the benefits of CLV are realised? There is no single answer to this, but it will depend on availability of people, data and knowledge, organisational capabilities and readiness, stakeholder consensus and level of resources. © Net Gain Ltd 2017 15 The advantages of CLV are realised when the organisation refocuses its resources and efforts on those customers that have the greatest value and potential.
  16. 16. © Net Gain Ltd 2017 16 Different areas of the organisation may have different views on how CLV should be calculated and applied. All are equally valid, but a common view must be sought where all stakeholders are equally convinced of the validity of a single, consistent definition and how the results will be used. CLV developed independently can be met with resistance from other business areas. They may caution use of certain data or raise concerns about how the results impact plans, which can raise roadblocks, waste effort and hinder benefits. Involving these other areas as stakeholders would help avoid these setbacks and ensure alignment. Regularly reinforcing the purpose and benefits of CLV and progress, collaboration and consensus to stakeholders maintains positive vibes for the programme. This is particularly important in the early stages when tangible or visible output is often scarce. It also ensures there are no surprises, helps avoid potential roadblocks, raises awareness and ensures the business is prepared for when it becomes available. Consideration should also be given to ensuring appropriate levels of communications are used across the organisation, e.g. the level of disclosure to stakeholders will be significantly more open than to a customer-facing team.
  17. 17. © Net Gain Ltd 2017 17 Create a dedicated project team Delivering CLV needs broad sets of skills, capabilities, deep knowledge and experience. This may already exist within the business, or need to be developed, acquired or hired, which can create a dilemma of whether to use existing, internal resources and backfill their roles, or to source external subject matter experts (SME) for the project. Both approaches have pros and cons, with the former improving business buy-in to the concept, whereas the latter helps achieve best practice. Ideally, have a mix of both. Adopt an agile approach Agile is commonly used on IT projects, but it can be used in CLV developments because its learn-as-you-go approach helps manage expectations and prioritise activities to deliver benefits quicker. For example, the business could start with a simple definition in, say, one area, with subsequent ‘releases’ evolving the definition and rolling-out to other areas. Protect sensitive commercial data CLV needs data that is usually considered commercially sensitive and restricted to certain areas of the business, such as finance. However, other parts of the business may be better skilled to profile and model customer behaviour. Consequently, a project team comprising specialists from each area would combine relevant domain knowledge and skills, whilst maintaining control of information. It may also need to be desensitised for operational use by customer-facing teams, e.g. as a segment code. Operationalise the CLV calculation Systematically calculating CLV is often a complex process involving multiple, disparate systems and processes that may not be possible or, at best, difficult to implement with existing operational capabilities, which may need to be enhanced. However, it is better to have some understanding of CLV than have none at all so, it is advisable to start with rational assumptions and then refine over time whilst these deficiencies are addressed. Integrate the result into BAU processes Business processes such as campaign management and content management need to be enhanced to incorporate the personalised strategies for customer acquisition, growth and retention strategies. Once these new strategies have been implemented, they should be tracked, measured and monitored, which means any automated reporting and BI systems need updating to incorporate and report on CLV changes so that the information can feed back into the process of refining the strategies. Embedding CLV into the culture The end-users of CLV need to be aware of what it represents and what is expected of them so, briefings and training are required to help them prepare for its use. For example, customer facing staff need to know what CLV and PV reveal, where to find them and how it should influence what they do. Insight analysts, BI reporting teams and operational marketing teams need to know where to find the CLV output for use in their analysis.
  18. 18. CLV is only as good as the better decisions that can be made from it and businesses can waste time and effort trying to create an all-encompassing, perfect definition of CLV that ends up never properly being implemented. It is better to start with a simple definition of CLV that can be quickly adopted, reconciled and properly embedded into the organisation to prove its benefit before embarking on a programme to evolve or refine its definition further. CLV is not a replacement for all other measures - they still help you diagnose what’s going on in a specific area. So, you might be getting great response rates from that killer retargeting campaign, but the question that should be asked is, are the customers you’re acquiring going to be as profitable as they need to be? Overlaying customer-level profitability is a common currency that makes it significantly easier to demonstrate how your strategies directly contribute to business success, and that’s a good thing, right? So, what are you waiting for? Time to start focusing on the customers that really matter to your business. © Net Gain Ltd 2017 18 In a word, yes.
  19. 19. Net Gain helps B2C companies make sense of and optimise their customer relationships. We work with businesses that need that something extra to help them go faster and achieve more from their data, insight, tools, processes and teams. www.NetGainLtd.co.uk Jeremy Williams is the founding director of Net Gain Ltd. He’s worked in senior positions for Santander, Virgin Media and Experian, and around the world with 100’s of leading brands as an agency consultant across financial services, digital TV, broadband, mobile and business-to-business. Jeremy has 25+ years’ real-world experience in Customer Relationship Management and data strategy. He has deep understanding of how to accelerate customer engagement initiatives and harness the unique mix of people, data, analytics and technology that organisations already have. We’re based in the middle of the UK (i.e. not London), but we do have passports. Whether you’re just starting out, looking to improve, or just want to find out more, we’d love to hear from you and the journey you’re on. We can help you guide and implement any of the areas outlined in this document, from inception to fruition, wherever your business is on its journey. All images are under CC0 licence. No statistics were harmed in the making of this document.

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