Magazine article Management Review

Turn Customer Service into Customer Profitability; to Maximize Your Firm's Value, Think of Customers as a Business Asset

Magazine article Management Review

Turn Customer Service into Customer Profitability; to Maximize Your Firm's Value, Think of Customers as a Business Asset

Article excerpt

To maximize your firm's value, think of customers as a business asset.

How do you measure the value of your company?

Ask the chief financial officer and he or she will likely mention expected cash flow and stock price. An executive in production will cite technology and the assets in plant and equipment. Your human resources manager will no doubt point to the capabilities and competencies of the firm's employees.

Each of these measures is, of course, critical to the success of any business. Indeed, each is carefully tracked, evaluated and managed. Yet none fundamentally drives the value of a company in quite the same way as customer assets. After all, customers are your firm's only source of revenue and, ultimately, profit. In the final analysis, the stock price, the return on tangible assets and the productivity of employees are determined by how well the firm selects, nurtures and maintains its customer assets. Despite the pivotal nature of these relationships, very few companies have devoted the same time and effort to tracking and managing the value of their customers as they have spent on financial, plant and employee measurement systems.

Today, however, a number of leading-edge organizations are beginning to manage their customer assets as rigorously as they do their finances. This approach is called customer franchise management. In essence, the goal becomes to maximize the firm's value by focusing on the acquisition, development and retention of your most profitable customers.

Underlying customer franchise management is a very simple premise: A company can out-perform its industry's average by better managing its portfolio of customer assets.

Customer franchise management is emerging as an especially effective strategy in both mature industries and those undergoing tremendous structural change. As traditional franchise defenses such as tariffs, technology and regulation are eroded, companies are finding that they must build new franchises by understanding who their most valuable customers are and focusing their efforts on delivering what these customers want, when they want it and where they want it. To achieve maximum franchise value, firms must focus on customer profitability at all three points in the relationship cycle: acquisition, development and retention.

Customer Acquisition

Customer acquisition begins with a detailed understanding of your company's existing and potential customers. Who are they? What do they have in common? How do they make buying decisions? How much does it cost you to serve them? And, most important, how profitable are they to serve?

Probably no single factor has more influence on franchise value than effective customer acquisition. Ted Williams' advice on achieving a high batting average--"First, get a good pitch to hit"--holds for targeting customers as well. Despite the enormous amounts spent on market research and product testing, most companies find that only a small percentage of their overall customer base is truly profitable.

Even those successful at acquiring profitable customers usually find that their rates of retaining those customers are disappointing.

Upon close scrutiny, many firms find that about 20 percent of their customers account for almost 80 percent of profits. Imagine the leverage a business could achieve if it increased the representation of those high-profit customers in its portfolios by half?

The most attractive acquisition candidates are those customers that display a relatively high degree of preference for certain products and are likely to be profitable to serve. Those who display high-profit potential but low preference may be reached if the product is redesigned or repositioned.

Conversely, customers who are attracted to the product but likely to generate low profits will consume marketing resources without much return. For example, many cellular phone companies have found that broad-based, expensive customer acquisition programs featuring free telephones and minutes have attracted large numbers of low usage, unprofitable customers with high turnover rates. …

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