Every company wants to get a real sense of how profitable their customers are. While everyone knows that it’s important to ‘delight’ a customer and most of us want to ensure that the level of service received is high enough to drive repeat business or loyalty, we must also focus on serving customers in a way that creates maximum value for the business.
Improving the customer experience is only a good idea if we can understand that the investment is linked to an impact on profits and value.
Most companies struggle to find the right balance between service and profits because they fail to understand the true value contribution of their customers.
Traditional profit and loss calculations don’t dig deeply enough into individual customers or segments that create or destroy profits.
As a result, efforts to improve individual P&Ls don’t necessarily lift customer profitability because their efforts aren’t coordinated. If a logistics manager reduces air freight by 40% to meet an internal cost savings target, but the cuts affect the business’s ability to serve a segment of customers who were willing to pay a higher price for expedited shipping, we could be leaving money on the table—and possibly losing customers, as well.
In other words, we may win the functional P&L battles (securing leaner logistics, for example) but ultimately lose the war by destroying overall profitability.
But there’s hope.
The rise of digital channels and advances in data-mining provides marketers with much more information about customers’ transactions, activities and interests. Developing a 360-degree view of customer profitability, and embedding this perspective into the very fabric of a company’s operations, can help uncover previously hidden opportunities to better serve customers in a way that drives sustainable profits.
Finding the ‘Truth’
This 360-degree approach requires complete visibility on all of the elements that factor into customer profitability. It’s important to understand not just how much we charge certain customers (list price), but how much we give back to them through promotions, or other discounts.
In addition to direct price incentives, it’s important to examine the costs required to serve each customer: which delivery channels they use, how often they call the contact center and how many “issues” need resolving with extra staff and other resources they make annually—all of which contribute to the “pocket price.”
Digging down to the transaction-level DNA of each customer can give us almost unlimited views into the drivers of profitability.
Of course, pulling this information together is half the battle. The data often resides in a myriad of sources and formats across the organization, not just in the CRM systems, but also in financial spreadsheets, on a sales rep’s hard drive or in call logs from the contact center. It takes a fair amount of grunt work to consolidate this information, but it’s a critical step. Marketing automation can help.
However, the availability and quality of data should never be used as an excuse for delaying efforts to quantify customer profitability.
We can get quite far with the data that we have at our disposal. Basic analyses of existing data typically will point the way to the gaps and other areas of improvement, which helps build a business case for additional data and analysis. As the value of the analytical effort moves beyond the hypothetical stage, we can improve decision-making and uncover additional opportunities.
Working more collaboratively
Creating a single source of truth does more than reduce the time spent in meetings arguing about whose spreadsheet is better.
When everybody starts believing in the same set of data,
they’re more likely to align around the steps required to improve customer profitability.
The insights that we discover may begin to dispel long-held beliefs about the activities and segments that drive profits.
Customers who are considered highly valuable because they sign large annual contracts actually might produce negative margins after accounting for the true costs to serve them. Or a segment that historically has attracted little marketing or sales resources might prove to be highly profitable through low-maintenance digital channels, leading to reallocation that can drive margin improvements for specific products, channels and customers.
Finally, long-standing discount programs that fail to effectively link that investment to customer behavior and results can be laid bare.
Even small adjustments can lead to quick and quantifiable improvements. Experimenting with minor price increases, bundling, cross-selling or segment-specific service policies can give us rapid feedback about which levers drive true profitability.
Coming to grips with a fact-based reality that is contrary to long-held beliefs can be painful, but the process eventually should lead the entire organization to rally around this new “truth”: Driving more cross-functional cooperation and connection leads to serving customers more profitably.
For assistance sourcing capable, revenue-focused marketers within the technology space, contact Melvin Day on 01932 253352 or email at mday@marketingmoves.com.
