Article, February 2009

Times hard? Dial into your customers to dial up your returns.

Here's a thought. We believe those organisations that arm themselves with a clear view of the value and returns they get from their customers will have a better potential to survive and thrive, whatever the economy.

Why do we believe this? Because such organisations are not only talking about putting customers at the heart of their business, they are acting on it. By understanding their investment returns at a customer level, they are giving themselves a major competitive advantage because it is unlikely their competitors are doing so.

Customers are the lifeblood of business.

Before we get into this, take a few minutes to consider the following questions:

1. Do you segment your customers based on value measures?

2. Do you know how many customers you retain each year and how retention rates vary by segment?

3. Do you know how much it costs to serve your customers?

4. Do you measure customer satisfaction, or even better - customer commitment?

5. Do you know what share of wallet you have with each of your customer groups?

According to Professor Frances Frei of Harvard Business School "your customer is your most powerful asset". Most organisations generate revenue from customers.

As obvious as this may appear, while companies expect to know how many products they sell, how much revenue each product line generates and how much capital they have invested in machinery or property, they are often unable to quantify anything beyond the most basic information about their customers.  

Now back to those questions. If you were able to answer them with any level of accuracy, you may be surprised to learn that you are very much in the minority. For example, just 12% of organisations are able to measure cost to serve according to QCi (State of the Nation IV: 2005.) A survey by Genroe in Australia further supports this, revealing that only 9% of organisations reported on comprehensive customer information in the way they would other 'business assets'.  

Unfortunately, without a view of current and potential value, customer reporting can be highly misleading. According to analysis by Unity UK, up to 60% of customers are typically unprofitable. In fact, they found that between 5% and 15% of customers generate 100% of profits in the organisations in the study. They also found that some 25% to 55% of company resources are consumed by unprofitable customers. Results from our own analyses support this. We commonly see situations where over 40% of customers will lapse before ever breaking even.

This information has a dramatic implication for those using return on investment (ROI) criteria to support decision making.

Are your ROI assessments giving your organisation the right steer?

A basic campaign ROI calculation multiplies response and contribution, and divides the result by the cost of activity. So a campaign that costs $100,000, delivered 6,667 customers each contributing $150, gives an ROI of 10:1 ($10 revenue resulting from each $1 spent.)  

Now consider this example: Two acquisition campaigns each cost $100,000, each deliver a cost per acquisition of $15 with customers acquired spending $150. So the ROI is equal? In this basic scenario, yes it is. However what we don't see is that customers from Campaign A are retained at the rate of 50%, whereas for Campaign B that same rate is 85%. In this scenario, after 3 years Campaign B would deliver $822,500 more revenue and retain 3,150 more customers.

What's clear is that basic ROI calculations give you a steer on short-term tactical activity at best. However, they are lacking when it comes providing strategic direction around growing the business in the mid to long term.

Life-Time Value as a pre-requisite for understanding accurate marketing ROI.

To get a clear picture of ROI, it is our view that Customer Life Time Value (CLTV) segmentation is a pre-requisite. In simple terms, CLTV is "today's value of all future profits you predict you'll get from a customer" (Martha Rogers, Peppers & Rogers Group).   It takes account of the current value of a customer to the organisation, but vitally it factors in a probability around the potential value .   This can even inform prospecting as each prospect has a probability, however slim, of becoming a customer, and therefore can also be assigned a value.

Armed with a CLTV derived view of 'customer return' for the organisation, ROI calculations can move beyond the short-term hit and accurately support strategic decision making.   Instead of looking at immediate contribution, such an approach assesses returns based on the change to CLTV that results from that activity.

CLTV in action: ChildFund case study.

Over the course of the last 18 months, ChildFund New Zealand, an international child development organisastion, has been working to improve the returns the organisation gets from all its fundraising and marketing activity.   As a 'not for profit' it is important that every dollar invested delivers the maximum possible return.   This has involved a comprehensive analysis of the of the donor base, including CLTV segmentation.

In this case, Supporter Lifetime Value is calculated by adding current value of donor (donations v cost of acquisition and maintenance) to tenure and potential value of future donations.

The first part of this analysis looked at the relationship between costs and revenue (donations) to provide a steer on current value and customer breakeven.

That old chestnut 'not all customers are created equal' quickly became obvious. This work has very much highlighted the importance of targeting and recruiting the right type of prospects - those with a high probability to become profitable.

Unsurprisingly, one of the biggest factors in donor profitability is media. While certain media look much more cost effective on paper in terms of cost per contact and reach, they proved to be among the weakest at delivering profitable high-value donors.

Paul Brown, National Director of ChildFund New Zealand stated "It's been invaluable in helping us understand our supporters' behaviour, enabling us to optimize acquisition channels and media as well as further developing retention strategies.. It's vital we understand more about the effects acquisition channels have on the subsequent behaviour and profitablity of supporters during their tenure - if we get this 'wrong' it means we remit less funds to our programme activities and therefore we have less impact helping the children and communities where we work."

He goes on to say "It's helped us to understand the benefits of our donor development programme, and has highlighted potential campaign opportunities to increase the lifetime value of supporters.   Building a sustainable, growing non-profit organisation is constantly challenging - particularly as the economy tightens - and we'll be looking to use this lifetime value analysis to continue to refine our strategies."

Now get dialling.

Remember that basic ROI assessments only support short-term tactical activity.

It is customers that provide your organisation with most if not all its revenue - not products, services or capital investment.

So treat them like a valuable business asset, and evaluate their worth. Understand not just what value you get from them but the value you provide to them. Then leverage this information to improve total customer returns, aligning your organisation, marketing investment and other resources to better meet your customer needs.  

Getting under the skin of the customer returns will have a major impact on the way you approach the business of marketing. It takes vision and commitment, but applied well it will lead to strategically more robust decisions and deliver a real competitive advantage.

- ENDS -

Author: Mark Wilson

Mark is a founding partner and director of the agency. As Director of Insight, he is responsible for driving the analytics division of the agency, with clients as diverse as CourierPost, Pace, ChildFund, Fisher & Paykel Finance and BMW. As well as being a judge for major industry awards, his own work has been highly recognised with numerous top Nexus awards over the years.

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