What's the Secret to Measuring Customer Value?


The goal of just about any smart company is to keep its relationships strong with profitable customers. The challenge is to find them and then meet their changing needs over time. According to a new study from
Aberdeen Group, it all comes down to measuring and managing customer value, something only a handful of companies do right.

In its study, The 'Wallet-Share' War: Measuring Customer Value and Profitability, Aberdeen surveyed 280
companies across industries to understand how they approach customer profitability. While no "magic bullet"
emerged as a way to manage customer value effectively, the study identifies four measurements that when analyzed
together show a useful customer picture: customer retention rates, customer turnover/churn, return on
marketing investment (ROMI), and customer acquisition costs.

Best-in-class best practices
The study ranked 20 percent of those surveyed as "best-in-class" (BIC) -- companies that understand the most about
customers and reap the most rewards. Two thirds of these companies have annual customer retention of more than
75 percent, a rate achieved by just a quarter of the total number of companies surveyed. Two thirds of BIC
companies achieve double-digit return on marketing investments, compared to just a fifth of total companies
surveyed. It's the best practices from this group that Aberdeen hopes companies will take away as ideas for
furthering customer insight.

The report notes that best-in-class companies share the use of analytical and precision marketing tools to measure
and increase customer value and profitability. More than seven out of 10 have implemented or are planning to
implement solutions to identify and segment high-value customers. This includes customer dashboards, real-time
analytics, and both descriptive and predictive statistical modeling.

Data-sharing is also a best practice of these BIC companies. Ninety-three percent have processes and systems in place that use customer information to support sales and marketing operations. And on the marketing side, 93 percent create personalized messages and marketing programs based on customer insight. Eighty-four percent use customer routing and lead prioritization based on channel, cost, or capacity.

"You can't manage what you don't measure," says Andrew Boyd, senior vice president and research director of
Aberdeen's CRM Practice. "Leaders are measuring across the board," not just looking at a few isolated customer satisfaction
measurements. "The best-in-class companies have visibility across the customer lifecycle and act accordingly." Ninety-six percent measure customer retention, 79 percent look at return on marketing investment (ROMI), 100
percent tracked customer turnover or churn, and 82 percent measured customer acquisition costs. "If you can
identify [different customer groups] and market to them accordingly, you'll see results," Boyd says.

But he warned against falling into the abyss between knowing and doing. Measuring is not enough. Actions and
customer management based on those measurements fuel the best-in-class performance.

Australia Post
Boyd mentions Australia Post as an example of a company leveraging customer value metrics. It uses both financial
(revenue) and non-financial criteria (mail volume, length of contract, cross-product purchases) to profile and group its top customers. With this insight, the organization offers flexible pricing and personalized messages to its best
customers. Senior managers are responsible for the customer experience and customer profitability remains a top executive priority.

Boyd says that customer value measurements can be challenging because customer value measurement is a cross-functional problem that tends to be the responsibility of one department. The combination of processes, organizational capabilities, knowledge management, technology, and performance measurement all need to play a part. This extends across operating groups as well. "It's a collaborative effort between sales, marketing, and finance," Boyd says. "It's got to be a board-level issue."