Maximize lifetime value of “good” customers.
Rounding out Aurora WDC’s slate of presentations on Thursday afternoon’s portion of the RECONVERGE G:2 symposium was Allison Hartsoe, CEO, Ambition Data, LLC, who facilitated a business simulation during which participants discovered the value of customer-centric business models.
One theme from the conference is how to discern the signals from the noise, noted Hartsoe. This workshop helped attendees to filter data to help better understand customers and what is going on.
Themes in the conference have been about insights, storytelling, accountability, and responsibility, Hartsoe continued, all elements that are important in customer-centric work.
This simulation is an MBA exercise from Wharton, and a team-based event; participants are grouped in teams of 2-5.
Hartsoe indicated that certain things resonate with board members and business owners; information needs to have a filter to bring the appropriate data to the forefront.
This is the age of customer equity, and the key has to do with brand value. But in 2005-2007, customer value has become of greater importance. Influencing this trend has been a digital shift—mobile vs desktop. There is much more customer information available.
There is a lot of noise about customer service/centricity—watch for the aggregate term, “customer,” used in a generic way. (”Customer experience” or “customer survey,” for example.)
“If you can’t look at your customer and know who is good and who is bad, then you can’t be customer centric,” notes one professor.
Customer centricity is NOT putting the product first, nor about treating all customers equally to drive volume. Customer centricity IS understanding some customers create more value, and about how to build a growth strategy around these customers.
Product vs customer-centric organizations:
- Product-centric company is measured by the number of new products, what percentage of revenue is from products less than two years old, and from market share.
- Customer-centric company—measure share of most valuable customers, customer satisfaction, lifetime value of customer, and customer retention.
What is lifetime value?
Revenue of each current customer over 10 future periods and using this as a net present value applies a discount rate to generate CLV. (Customer lifetime value)—know that customers have a future trendline. Earlier customers have “higher goodness” than later customers.
You can develop customers by indirect and direct acquisition; whatever purchase is made is the initial value. As you encourage satisfaction and loyalty you will increase or decrease customer lifetime value.
Aggregation of CLV is customer equity, which feeds into market value.
Five key points to customer centricity:
- Identifies most valuable customers
- Maximizes their CLV
- Find and group new customers with similar quality
- Initial customers have more “goodness”
- Value of customers drives the value of the business
How the game is played:
The object is to find and retain Hartnow’s (simulated company) most valuable customers. Assessment will be market value demonstrated to Hartnow—a 3D printing company.
Participants access dashboard with market valuation, market share, regional sales, revenue, net income, customers, contracts, and regional sales
At the customer tab, participants see a news section, decisions to be made on branding, sales and marketing, external sales, and customer service. The budget can be split and spent in a variety of ways.
The job today for attendees is to spend money. If the budget is not spent in a round, it doesn’t carry forward. Review financials, customer data, and discuss insights.
Hartnow manufactures 3D printers, is 15 years old, and has a revenue model of leasing–now below expectations.
Hartnow serves three sectors: Auto, defense, and aerospace—it is a B2B model, and cost prohibitive for consumers. Hartnow has two models of printers.
Their financial position is good and profitable, but Hartnow has marginal investor confidence.
The participant’s role is to control distribution of marketing budget by branding, marketing and sales, customer service, CRM info, and strategic decisions.
The budget is a function of overall revenue.
Participants submit budget decisions for round one. Look at customer churn, lost customers, customers by acquisition, number of customers by revenue—consider which reports are best.
Information is available for decision-making: News, customer area, sales, financial, dashboard.
Goals of rounds:
- Year 1-2 become comfortable with software
- Year 3-5 develop a consistent strategy for Hartnow to identify and begin to target key customers
FAQ/advice for attendees:
- Budget is use it or lose it.
- Lost customers and customer rate reports: Don’t buy both!
- Budget is 12% of revenue and will never fall below initial budget plus 3% growth per year.
- If you do not buy a strategic decision it will continue to be available in future rounds; your results do not affect other players.
Conference attendees separated into groups of three teams, and they began.
Outcomes
Blue team wins
Round 1:
Team blue spoke about segmentation strategy. They attempted to determine which customers have greatest value, began by looking at attributes in the report—do channel customers have more value? They were concerned about an 80/20 rule (distributors) and so the budget was impacted. They also recalled value of customer over time.
Green team considered how to maintain customer database and get more onboard? Invested a lot in marketing and brand.
Hartsoe says, when investing in internal sales and marketing—you know your customers. In external sales and marketing, you are choosing to cast a net.
Also consider churn for new ideas. Important in specific sectors, get a sense of “goodness” by watching churn. Blue team invested heavily in automotive, green team invested in defense. Defense was chosen because they did not want to alienate large market share, they spoke of keeping and growing this sector.
Churn rate was very low in defense strategy, Hartsoe noted.
Automotive customers were designed to generate quick volume, but the customers don’t stick around.
In round one, standouts were:
- CRM decision, red team invested there heavily in branding, internal marketing, and sales. This was detrimental in round 2.
- Blue team spent less on branding, and an even split between external/internal marketing and sales, spent heavily in customer service. Hartsoe noted branding can be an accelerant, but it depends when you invest in it.
- Orange team invested significantly in branding, even split in external/internal marketing, and a fair amount in customer service.
Key learning is that you need to investigate the customer base and see what’s working.
Blue team wanted to watch what was happening in different sectors, so did not change investing strategy too much to watch for trends.
Round 2:
- Red team eliminated aerospace investments entirely—“you can’t feed all the animals,” so they opted to invest in other segments.
Round 3:
- Green team is ahead in this round, took a hit on buying the CRM package, and they started to zero in on automotive. They felt they did well on new and younger accounts.
- Blue team considered the questions they wanted to ask and looked for a report to match that. Some important questions: acquisition channel first, then tenure by sector. Spend less money on retention than acquisition.
- Blue team tried to assess attractive vs unattractive customers, and focused on customer lifetime value, so they examined the full revenue stream from the day they joined the company.
- Green team discovered external investment returns were much higher; they lost some ground in the short term–18 of top 20 were acquired via external brokers.
- Blue team noted automotive was 50% of the pie but they knew they had to determine if they were good or bad customers. Volume metrics are not the same as quality metrics.
Hartsoe asked if CRM has changed, or do we just give old process a new name? Dr. Fleisher noted there is more data than ever before, but it did not drive multiples in their small enterprise. They had granular data on things that didn’t matter, and could not get such data on things that did matter.
One participant says improvements in CRM are small and incremental, and asks if data is accurate?
In the survey business, notes another, the focus is more and more on key accounts. CRM systems are not necessary to figure out who top customers are. Where do you invest your time—CRM records or by making another contact with a high prospect? Should more time be spent in grading them over time or by entering data in another place?
CRM is important in bigger companies, likely also in service businesses. There needs to be a record of how they found success.
Opportunity cost in data entry in CRM is time lost on sales—a big tradeoff.
Last comment: A beneficial, fun exercise. Anytime you can get in the lab to test things and lose there is a better option than tough lessons learned in the real world.