Measuring customer value is important, but measurement shouldn't be the end goal - ultimately it should be about increasing customer value. But how can you do this?
Determining customer value provides important insights into the health of your company. When customer value is out of balance, it's a sign that something is not going well within the organisation. Good insight into customer value ensures that you improve the predictability of your business and know what steps you need to take to increase your margin. Do you want to keep growing? Then your organisation needs to find the 'sweet spot' between value for the customer and value for your business.
In part one we learned how to measure the current customer value. But measurement is not an end in itself. It's about increasing customer value. In this blog post, we'll cover the most important tips for increasing customer value.
A quick recap: why determine customer value?
Most companies put a lot of energy into retaining existing customers. Often, the thinking is that satisfied customers automatically generate profit. However, research shows that this is not the case. When overall costs per customer are balanced against overall revenues, what often comes to the surface is that a large number of customers cost more than they yield. And that's why determining customer value is very important.
Customer value is what each customer actually delivers. In my previous post, we learned that customer value is about finding the 'sweet spot' between value for the customer and value for the company. Of course you want to keep customers satisfied as much as possible, but sometimes it costs a disproportionate amount of money to keep a customer onboard. At the same time, it's not smart to focus only on short-term profit. A satisfied customer who costs money now might stay up to five years longer, recommend three other companies, and eventually generate profit again.
That's why you read in part one that you should determine customer value based on several factors: financial value, predictive value, and soft value. Once customer value has been mapped, you can increase the customer value and adjust it in time to improve the predictability of your business and margin.
Take care of 'just' satisfied customers and fans
On the one hand, customer value is determined by the value you add to your customers. You want to deliver the highest possible value, so customers stay with you longer, spend more with you, and recommend you to others. On the other hand, the revenues have to outweigh the costs.
To add as much value as possible for the customer, 'just' satisfied customers are not enough. The aforementioned survey shows that a very high degree of satisfaction or dissatisfaction determines customer loyalty. Only very satisfied customers remain loyal and only very dissatisfied customers walk away. For the simply satisfied customers you can increase loyalty by improving their bond with your company.
So you want to turn 'just satisfied' customers into fans. Fans are loyal, less price-sensitive, and recommend you to others. That means fans provide a lot of value. 'Just' satisfied customers is what you get by keeping your agreements and meeting customer expectations. As you will notice in your contact with companies, this is sometimes difficult enough. Then, by exceeding these expectations, you create fans.
How can you increase customer value?
But how do you take care of fans and keep the investment in customers healthy at the same time? First, you need to know what your current customer value is, for which customers and customer groups the customer value is in balance and for which customers you need to improve the value.
You can then develop scenarios and test them in practice. Example: If I lower the service level by only providing email support, how many of my customers will opt out, and will that outweigh the cost savings? By building these kinds of test models and working out a best- and worst-case scenario, you can find the right customer value balance.
Tips you can look at and test with to increase customer value:
- Investigate what drives customer loyalty: The more loyal the customer, the higher the customer value. So investigate what drives loyalty. Many companies only do research on the Net Promoter Score (NPS). A much more interesting question is why a customer would or would not recommend you. Ask for different elements, like brand perception, the bond with your company, the quality of your product, the speed of service, the sense of added value, communication, and the price-quality ratio.
- Reduce unnecessary cost components: When you have mapped customer value based on financial value, predictive value, soft value, you'll have a good idea of the costs you incur to find and retain customers. Critically assess which costs you can reduce without compromising loyalty and revenue. Watch out for quick wins. Ultimately, a quick win can save money up front, but it reduces loyalty and therefore actually leads to long-term losses.
- Discover what increases frequency of sales: By analysing the customer value from part 1, you'll know which customers order more often. Find out what drives this purchase frequency. Is it certain marketing campaigns? Do they order more after you send out business gifts? Or is it related to satisfaction? By figure that out, you know which knobs to turn.
- Ensure good segmentation: Recruitment costs reduce the margins. That is why it is important to take a critical look at your recruitment process. Don't just approach the entire market randomly, but look at which customer segments deliver the most value and make sure you approach those customer groups.
More about increasing customer value
Would you like to know more about determining or increasing customer value? Or do you want more insight into the value of your customer base? Then read my previous articles:
- How to measure your customer value - and why you must do so
- Why insight into the value of your customer database is crucial - and how to measure it
- Three ways that the value of your customer base can be misleading
- How to keep the value of your customer base from shrinking
- How to couple your 2019 targets with the value of your customer base
About Mark Zwart
Mark Zwart graduated in Cognitive and Theoretical Psychology. He focused on imitating human behavior in neural networks. This led to his interest in a numerical approach to consumer behavior and the growth of customer value. For 15 years he has been passionately engaged in marketing intelligence for B2B and B2C companies and for charities. For example, he worked on projects related to customer lifetime value, the optimization of customer contact strategies, customer segmentation, the construction of data warehouses and dashboards, etc. He likes to share his expertise and experiences with others.