In order to get a good balance between customer value and value for the customer, you first need to know how to determine customer value. So what is customer value and how do you measure it?
You can probably think of one, a customer who is actually a mismatch with your organisation. They're just too big or just too small, so your organisation can't serve the customer well. The marketing department has already put a lot of time and money into recruiting this customer and account management is making a lot of effort to keep them satisfied. With those customers, all you have is costs at the end of the day and no profit.
If you have too many of these types of customers, your organisation will run into problems. So as an organisation, you want to find a good balance between customer value (what a customer delivers) and value for the customer (what you deliver a customer).
In this two-part series on customer value (also called 'customer value management') first you'll find out how to determine customer value. In part two, you will get tips on how to increase customer value.
What is customer value?
Customer value can be approached from two perspectives: on one hand, customer value is about the financial value of a customer for a company. On the other, you can see it from the customer's point of view: what does your organisation deliver to the customer?
- Financial value. If you look at customer value from the perspective of the company's financial value, you can see it as a sum of all that a company spends on a customer, what the customer yields in terms of revenue, how long they will (probably) stay, and how much revenue that generates.
- Customer focus. If you look at customer value from the customer's perspective, the customer will wonder to what extent your company delivers what it has promised. Or do you even deliver more than you promise? A customer will then think in terms of service, price-quality, and whether the solution meets expectations.
Logically, there is always a tension between customer value for the company and customer value for the customer. Of course you want to keep all your customers as satisfied as possible, but if you're employees are spending many hours of work in return, that can lead to a loss-making situation.
On the other hand, it is not just about the direct margin. If a customer costs money at the start, but stays with you five years longer because they're so satisfied, the final customer value and turnover increases. Customer value is the instrument you use to determine the 'sweet spot' between value for the customer and value for the company.
Why should you determine customer value?
Customer value offers an enormous amount of insight into how healthy your company is and what the expectations are for the future. A company that does not have a good balance in terms of customer value generates too little margin and ultimately ends up operating at a loss.
By determining customer value, you can make timely adjustments to improve the predictability of your business and future margin. The marketing and sales team can start thinking about this question: "How can we improve margins for customers in the long-term?
When customer value is out of balance, it's a sign that something is not going well within the organisation. It can also provide insight into whether you no longer need to serve certain customer segments. Insight into customer value also provides a lot of input for your business strategy.
Companies with high volumes of customers are already very familiar with determining customer value, but every organisation can actually benefit from that insight.
How do you determine customer value?
As mentioned above, customer value is the sum of all the costs you incur for a customer versus what a customer will deliver throughout their lifetime. But measuring the customer value is not easy. At some companies, I have seen customer value processes that took more than six months. The pitfall in this analysis is to want to include too many factors and costs. Watch out for this and draw a line somewhere.
Do you want to measure customer value? Then the best thing to do is to investigate customer value in three areas:
- Financial value.
- Predictable value.
- Soft value.
Step 1. Determine customer financial value
As a company, you can start by mapping the financial customer value based on turnover and costs.
- Turnover: See the average turnover per customer per year. If what you offer is an annual subscription, that's easy. If it's a product that generates turnover once every so many years, you need to spread the turnover.
- Marketing costs: What marketing costs do you incur to keep the customer satisfied? These are costs that you can directly attribute to the customer, like business gifts. Some costs will then have to be spread across customers, likes costs incurred for events, content and e-mail campaigns.
- Service and account fees: In addition to marketing, there are other departments involved in keeping the customer satisfied, too, like customer service, logistics and account management. How much attention does the customer need? For example, you can take a percentage of the salary of account and service employees.
- Recruitment costs: The commercial costs mentioned above are about keeping the customer. But you also incurred costs to acquire that customer. How did the customer come in? Through an advertisement? How much did that cost? And how many e-mails and calls were needed before the customer committed? If you have a marketing automation system, then you can probably figure out those costs reasonably easily.
Step 2. Determine predictable customer value
But measuring customer value isn't just about looking at current turnover. Because a customer who stays five years longer will ultimately generate more turnover than a customer who switches to the competitor after just one year. That's why you also have to map out future customer value. This is where you convert customer loyalty into hard figures.
One type of segmentation that can help is RFM segmentation. You divide your customers into groups based on their purchasing behaviour. Here we'll look at three values:
- How recently did the customer make a purchase?
- How often does the customer make a purchase?
- And what is the average monetary value of those purchases?
Based on that information, you can identify customer segments, for example customers who are recent buyers, average buyers, and customers who have not bought anything for a year or more.
You then analyse these customer groups. What kind of agreements do loyal, average loyal and less loyal customers have? You can then use that information to calculate their lifetime value, future value and churn. You also want to know: are these companies going to grow, are they financially healthy, and how big is the chance that they will decrease even more.
Step 3. Determine soft customer value
Although you can express some 'soft' customer values like satisfaction perfectly fine with 'hard' figures, it's still useful to map them out separately from financial value. Soft customer value is mapped by contacting customers.
- Customer satisfaction (NPS). More and more companies are mapping out the Net Promoter Score (NPS) and asking customers 'if they would recommend them'. But a much more interesting question is why they would recommend you. Is it the perception of the brand? Or is it because of the experience they had with the company?
- Customer experience. That certainly means qualitative and quantitative research with customers. How satisfied are they with the service, what do they think of the brand image, is there a sense of added value, do they get enough attention?
Beware of these pitfalls
As you can see, there is a lot of time involved in determining customer value. But measuring customer value is not an end in itself. Do you have a smaller organisation? Then take a good look in advance to see which variables you want to use for the costs. Not all costs have the same impact on customer value. The most substantial cost items have the greatest impact and are the easiest to identify.
Hopefully this has given you enough input to start the process of determining your customer value. In part two, I'll help you increase the customer value for your company. Would you like to read more on this topic? Then please read my previous articles:
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.