Make sure you understand the value of customers and their profitability It is a fundamental rule that if you do not

know how much your customers are worth to you, you will not be able to understand how to serve them. Some organizations take a short-term view of a customer's value, per transaction, others take a longer view. If an activity costing is carried out it will be clear that although customers appear to make a profit in the short term they may not once all the costs are allocated directly to them. There are four ways to approach calculating the value of a customer: 1. Acquisition cost This is the amount that needs to be spent to acquire the customer in the first place. It would include all promotion and sales costs. 2. Revenue stream This is the amount of money the customer pays you for the goods/service that have been purchased. 3. Cost stream These would include all the costs incurred to provide the goods and services to the customer. 4. Time Time is the length of the relationship between a customer and the organization. Customer value can then be calculated once an estimate of the revenue and cost stream have been calculated. The estimate can then be used to discount back to the present to get a net present value (NPV) estimate of expected profit during the time the customer is with the organization this is called lifetime customer value. In order to calculate lifetime value you will need to think about the following: 1. Decide who your customers are. 2. Estimate how you expect them to purchase (frequency, volume spend) over the period of time. 3. Estimate how much your costs will be to retain them. From this analysis you will be able to work out a marketing strategy that will enable you to target your most profitable customers. This method allows you to create a value based segmentation system. The right level of customer service can then be given to customers who represent a higher lifetime value. Note: Net present value calculations are covered in the module Management Information for Marketing Decisions. Table 6.1 Calculation channel Annual sales

per

customer/trade Comment Sales for the last financial year (including

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Table 6.1 Calculation channel

per

customer/trade Comment after sales income) (Net sales after discounts cost of product + overheads but excluding costs to interface) Marketing, selling, distribution, service, administration, stockholding, customization, promotions etc. (allocated by customer)

Gross income Costs to interface

= Net customer profitability (NCP) Gross income costs to interface * Expected length of relationship How long will the customer remain loyal? = Discounted Customer Profitability NCP * expected length of relationship (DCP) (adjusted for internal cost of capital) Source: Charles Wilson (1996), Calculating Discounted Customer Profitability, Institute of Directors/Kogan Alan Mitchell points out, (Marketing Business, May 1999), that like most great ideas, implementing lifetime customer value is turning out to be more difficult than enthusiasts first predicted. Many companies still can't identify individual customers let alone individual revenue streams. Loyalty schemes have proved invaluable, but they only scratch the surface. Projecting how current revenues will pan out over a 'lifetime' involves a lot of guesswork, albeit data-driven, educated guesswork. Key account management portfolio analysis Portfolio analysis is simply a means of assessing a number of different key accounts, first according to the potential of each in terms of achieving the organization's objectives and, second, according to the organization's capability for taking advantage of the opportunities identified. Key account attractiveness is a measure of the potential of the key account for yielding growth in sales and profits. Business strength/position is a measure of an organization's actual strengths in each key account, that is to say the degree to which it can take advantage of a key account opportunity. Thus, it is an objective assessment of an organization's ability to satisfy key account needs relative to competitors. Ten steps to producing the key account management portfolio:

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Step 1 Define the key accounts which are to be used during the analysis. Step 2 Define the criteria for key account attractiveness and the weight for each. Step 3 Score the relevant key accounts out of ten on the attractiveness factors. Step 4 Define the critical success factors (from the customer's point of view) for each key account and the weight for each. Step 5 Score your organization's performance out of ten on each critical success factor relatively to competitors. Step 6 Produce the position of key accounts in the portfolio. Step 7 Position the key accounts on the box assuming no change to current policies. That is to say the forecast should be made of the current position of the key accounts (this step is optional). Step 8 Should redraw the portfolio to position the key accounts where the organization wants them to be in, say, three years' time. That is to say the objectives they wish to achieve for each key account. Step 9 Set out the strategies to be implemented to achieve the objective. Step 10 Check the financial outcomes resulting from the strategies. Communicate possible Planning Before embarking on creating your communication plan you will need to do the following. Define your relationship target/network In business to business marketing, protect your business with multiple contacts. Develop relationships with your customers by ensuring there are multiple personal links. Look at the interface between the two organizations as a network of exchanges so that personal contacts run between the organizations at many different levels. Think of it as networking into a spider's web. This will make it more difficult for frontline staff to take a customer with them if they leave the organization. Multiple linkages make relationships more difficult to manage as all the communication linkages will have to be monitored This needs to be thought through on an organizational level to ensure your communications are with customers and create relationships where

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integrated and ensure that these linkages are maintained and the messages are consistent. Analyze and define your relationships and networks so that you know who they are and the type of relationship you have with them. Refer to Gummesson's work Total Relationship Marketing to help you match them with the context in which the organization is working. A summary of the different types of relationships is shown in the unit 'Relationship marketing'. Create a database It is much easier if all marketing information is on one database. Examples are:

Trends, opportunities, strategic decisions such as calculating the value of customers, developing profiles and programmes for customer segments and analysing purchasing patterns can all be done more easily. Date triggered mailings can be made, responses to various promotions can be coded and respondents identified. Customer awareness can be increased by advising customers of special events or offers, keeping people up to date, rewarding customer loyalty and increasing customer loyalty. Customers can be monitored and followed up on an ongoing basis. Special customers can be highlighted in terms of their annual spend and special deals could be offered to them on the basis of their sales history by being able to match your offer with their needs more closely, encourage cross-selling. Reports can be tailored and analyzed on hard facts: such as number of responses, profit, key ratios, customer retention and so on.

Data can be obtained from internal sources:

Contact name and address and postcode. Frequency how often do they buy from you? Recency when did they last buy from you? Amount how much did they buy from you? Category what type of product or service did they buy? Promotion history when did you promote to that customer? Response history what was the response?

This information is needed to calculate the value of the various customer segments. Once these are classified they can be ranked and contact strategies devised. Tactical activities such as upgrading customers and crossselling can also be looked at. The customer database is a vital strategic tool which enables organizations to generate high levels of customer retention by using an individually tailored approach.

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The organization could also try and increase its database by organizing events in which potential customers provide their names and addresses. Set objectives Set your objectives. These will be quantitative and qualitative. Quantitative related to specific measures like the marketing objectives and communication objectives and relationship objectives, and qualitative related to how you want people to think, feel, experience and do with your offer. Objectives will change depending on various factors. For example, customers could be segmented in different ways and objectives will need to be related to market segments.

Whether they are past, new, existing, potential Where they are in the purchasing cycle before, during, after Where they are on the loyalty ladder Their purchasing history Their total sales, profitability Their geodemographics, demographics, motivational psychographic profile.

and

Information and response You will need to think through the type of information you want back from them. They may need certain inducements to reply. Confidentiality and security will need to be thought about. Response handling will affect the whole organization. Method The suitability of method will depend on the relationship/network targets, the objective and the scale of the response required. Time Target market, objectives, information and response, and method will need to be thought through in the context of time short, medium and long term. Organizational aspects The communication will need to be placed within the context of the organization as the response aspect will have an impact on the processes, systems and procedures. Building relationships with technology David Miller of Miller, Bainbridge and Partners Ltd, says that in what might otherwise be considered a delightful coincidence, the growth of the customer who demands to be listened to has gone hand in hand with the growth in

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technology, which allows brands to listen, understand and respond to customers. In fact, the move from mass marketing to mass customization is nowhere more evident nowadays than in the new communication channels which technology is opening. Integrating database, call centre and, increasingly, web-site technology means that as marketers, we are able to treat our customers as individuals albeit, on a mass scale. In the past, we used technology just to talk at people en masse television being the prime medium. Now we can use technology to listen to our customers understand what they are saying and respond accordingly. So suddenly, brands that had only a mouth, and therefore could only talk, have now been given a set of ears, so now they can listen. We now have the ability to move from talking at customers, to talking with customers. If brands at their best are commercial friends, then they now can begin properly to behave as friends. They can now listen, understand, as well as talk. Brands can now begin to come to life in a real way, which the customer can experience not just as a thirty-second commercial on TV. Impersonal selling is being replaced by personal relationship marketing.

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