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What is a customer?

Managing value exchanges with your customers as a strategic process is just as relevant now as it was when CRM was first touted as the next great thing. What Customer profitability adds to the mix is an understanding of what pays and what doesn't. We were once asked to revamp the compensation program for a commissioned sales force. At the time, the or so sales people were generating a substantial negative net present value to the company.

The solution we developed was to retarget the sales on which commissions were paid: the rate of commission was built on a sliding scale related to the profitability of the business generated. The result was a turn-around from loss to profit to the tune of several million dollars a year NPV.

How to Sell Services More Profitably

At the heart of the analysis was an understanding of customer profitability. Situations like this occur across many different industries where customers negotiate prices. Sales effectiveness is best monitored through a combination of activity measurements and results measurements. Activity measurements are needed to promote productivity and identify actions that can be taken to improve individual performance.

As management guru Tom Peters would say, this is about "doing the thing right. Results measurement is needed to ensure that our sales people are doing "the right thing. As measurement of customer profitability has spread, we hear similar findings echoed in a number of different industries. It is quite clear that acquiring profitable customers is a key to managing the margin and the bottom line of your business. Without a disciplined analysis of the profitability of your existing client base it is very difficult to tell which types of customers you should be identifying for acquisition.


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All of the other target marketing information you presently use remains valid and useful: the difference is you learn which customers you want to acquire. Having knowledge of customer profitability enables your company to manage and compensate the sales function for delivering value to the organization, rather than revenue or unit sales.

Managing Customers Profitably - Lynette Ryals - Google книги

To avoid entering into a debate over the difference between sales and service, we will define service as providing fulfillment of the sales promise to your customers. Each industry is different in the way it provides service to customers but it is invariably an activity that provides value to your customers and cost to your organization.

One of the key issues in managing service is the allocation of costly resources to customer service rationally. For example, one Canadian energy services company established a policy of increasing the general level of reserved service "black-out" periods to create capacity. This enabled reallocation of their trucks and technicians to more rapidly service their best customers without increasing overall cost. Understanding customer profitability offers a myriad of opportunities to you for managing the effectiveness of the resource allocation decisions you make concerning service.

In Canada, many industries have a bias towards providing all customers with equality of service levels. While this is one of the cultural attributes that makes us Canadian, it is absurd from a business perspective. Not all customers offer the same value to our companies. Why then must we provide the same service to all customers?


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The answer may be complex in a regulated industry or one with a high public profile or public purpose, but in many for-profit corporations there is really no good reason that service differentiation cannot or should not be implemented. Service differentiation opens up the potential to treat your best customers better and to save money by reducing the levels of service provided to customers who contribute less to your company's well being. Altering service levels can take many forms. It may involve alterations in reward and recognition program premiums; call wait periods; access to privileged locations, times or content; face time with staff; fast-track processing or just about anything else you can think of that might be valuable to your preferred customers.

The key to affecting service level decisions is knowing two things: who you are affecting and how much change you can afford. Measuring customer profitability can help you to answer both of those questions with facts. Product management is as necessary a discipline in a customer centric organization as it ever has been.

Managing Customers Profitably

Product managers have usually been blessed with access to some form of product profitability measurement which informs their management processes and thinking. Consequently, we rarely see product managers emerging as the proponents of customer profitability in companies. We think this is unfortunate, as there is indeed opportunity lurking in this information for the product manager too. What the customer view brings to them is a deeper understanding of product interdependencies from a customer perspective. Management of customer value demands that we also consider which of our customers are using the products or services we are making these decisions about.

Where are the opportunities to optimize loss leaders for our preferred customers? Where can we create an opportunity for holistic relationship pricing? How much can we afford to give as discounts and to whom? Where can we raise prices without risking our key customers? What are the implications for new product development? These are the kind of questions our product managers need to be considering. Operations management is largely concerned with optimizing processes to achieve efficiency and effectiveness.

This management challenge inevitably results in substantial change as new technologies and practices are adopted. One of the several insights that customer profitability can provide is to highlight which customers are affected by changes and the risk that the organization is taking by implementing operational changes. This is critical when evaluating risk and when communicating to customers about changes the company is implementing.

Another important way that customer profitability can be used in operations is in the evaluation of which processes and procedures are adding value to the company. For example, processes which involve few of the higher end customers have lower value than those that support large numbers of high end customers. Ultimately operations processes can and should be measured in relation to customers and customer value.

In my years as a Financial Controller I was always amused by the budget setting process.

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It seemed to be a tug-of-war between the conservative projections of management and the Board which always demanded a far higher return. In the end, I always found the resultant plans to be somewhat dissatisfying, sort of like a cease fire called because we ran out of time for the war. Did we have the kind of information we really needed? It also gives a much clearer direction to management than traditional planning measures.


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  4. In our experience, customer profitability information has not yet taken on this level of strategic use in finance. This may be because the measures are relatively new, and adoption takes time. Nonetheless we foresee that this is where business planning is inevitably going to head, because the customer really is the central measurement basis for your company.

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    Your company's present value is the sum of the present values of your customers. Your company's potential value is the sum of the potential value of your customers plus a factor for net new business. In many business acquisitions these are now taken into account as critical factors in the valuation process.

    Knowing what these values are is central to understanding the real value of your business franchise. Customer profitability measurement is challenging to implement; it draws into question our understanding of who our customers are and how we make profit.

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    It can add powerful insights throughout your business, helping to focus decision making energies on doing what is right for your customers and your shareholders at the same time. By continuing to browse this repository, you give consent for essential cookies to be used. You can read more about our Privacy and Cookie Policy. Gee, R. Purpose — The purpose of the paper is to draw together the salient issues surrounding customer loyalty and customer relationship management CRM into a single coherent discussion. Various schools of academic thought are examined.

    The paper concludes with practical implications for managers. The paper allows managers to consider a wide range of material in the context of their business. Findings — The need for businesses to retain customers is an important issue in today's global marketplace.