New Thinking About Customer Value Metrics, Part 2

In our last installment, we discussed how customer lifetime value (CLV) — the measure of potential income streams and costs over the lifetime of a customer — has become increasingly less relevant in the hyper-competitive, fast-changing, global electronic marketplace. We acknowledged that CLV is still perhaps best used to measure the relative value of customers and customer segments based on current and short-term income streams and cost bases.

In this second installment, we’ll examine how changing attitudes and new reporting requirements have created a new category of metrics that could replace, or at least supplant, CLV as a benchmark for measuring customer value.

Development No. 2: Corporate managers are realizing that customer relationship management (CRM) is a competitive necessity, not an option.

For an increasing number of companies, the issue surrounding CRM isn’t whether to do it, but how to do it.

Instead of engaging in CLV measurement to justify investment in, or determine the feasibility of, a CRM system, companies are simply looking at current customer profitability. They then use these metrics to invest in value-added services to help acquire and retain high-value customers and prospects.

As a March 2001 Gartner Group research report points out, industry “leaders” don’t waste their time developing detailed financial analysis to determine whether they should undertake CRM. These types of companies are skipping that step and going directly into measuring how to implement CRM, what strategies they should use, and what customers they should target.

According to this same report, it is only risk-adverse industry “followers” who require the detailed financial analysis to garner internal management support and conviction to undertake CRM (a competitive disadvantage, which no doubt helps explain why these organizations are followers, not leaders).

Development No. 3: Customer metrics have become a critical part of the CEO’s report card.

In terms of economic theory, it is the consumer’s mindset — her attitudes and beliefs about a brand and its ability to satisfy needs — which ultimately determines buying decisions over time and thus determines the economic success or failure of an enterprise.

Theory doesn’t always translate into practice. Although many business people are increasingly convinced that customers drive shareholder value, their ability to track this value has been limited at best. Conventional financial and managerial accounting practices were never designed to capture and track the value of “customer mindset.” The best metric we have is something called “goodwill” — a number accountants back into by subtracting the book value of acquisitions from their purchase price. It is a stopgap attempt to reconcile industrial-age accounting practices to cope with the realities of today’s information and knowledge economy.

A new set of metrics is taking center stage at CEO presentations to Wall Street analysts. The metrics have nothing to do with financial accounting items found on income statements or balance sheets. Ironically, it’s the CEO who has been responsible for creating these new metrics. For some time, CEOs have been crowing to Wall Street analysts about “realigning operations around customers” and “placing customers at the forefront of business strategy,” often in connection with justifying major capital expenditures in CRM systems and associated corporate restructuring changes.

Now those claimed capabilities are coming home to roost. Having been sold on the concept of the customer as the key driver for shareholder value, equity analysts now ask CEOs about customer mix, defection rates, relative profitability segmentation, average new-customer-acquisition costs — questions the CEO must answer.

Organizations are realizing that the ability to attain customer knowledge is much more important to their business strategy than measuring customer value.