AN INDEPTH REVIEW OF TOOLS AND TECHNIQUES FOR CUSTOMER VALUE MANAGEMENT

ABSTRACT

Over time, it has become obvious that satisfying customers’ needs must be a key element  in  strategy  formulation,  for  differentiation and  competitive advantage to be achieved, and sustained.  Any customer-related initiative or interaction must differentiate customers to give insight into the value- creating potential of those customers. Nevertheless, at the strategy level, many companies remain focused on pushing out products rather than drawing in customers. If a company’s strategic focus is to sell as many products  as   possible,  customers  will   be   overwhelmed  by   irrelevant marketing and sales offers, and their satisfaction will be lowered. This study objective is to find out the value of the customer to the company, and to analyze the various tools that a company can used to measure and manage the customers. The objective of this study range from evaluating the value of the customer toward higher profitability, how a company can migrate unprofitable customers and  what  motivate  customers to  strengthen their relationships with the company. To be able to test our findings four hypotheses will be tested. The second part of the study talks about related literature on customer value management and various measurement tools. Data collection for this thesis has been through a survey questionnaire from companies in different areas of production ranging from manufacturing to service delivery. The data was analyzed using chi square test. The findings of the research shows that finance, customer relationship management and improve customer loyalty by companies will lead to profitability of the company. It was also agreed that corporate reputation and how the customer view the organization contribute in creating customer satisfaction. Finally it should be noted that not all customers can be profitable today and some provide learning opportunities, whilst others are strategically important or may be unprofitable today but are tomorrows ‘cash cows’. Customer profitability measurement informs many important business decisions and is becoming a ‘must-have’ inside many organizations.

CHAPTER ONE INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Successful   strategic   positioning   for   the   achievement   of   competitive

advantage, as  a  means  of  achieving superior profitability and  enhanced shareholder value, are critical issues of paramount importance in today’s business environment. They should be at the very top of the agenda for Chief Executive Officers, especially for those at the head of publicly held corporations. Present day stock markets have a very low tolerance threshold for diminutions in shareholder value, and therefore these issues determine the career success of many Chief Executive Officers in the long run. Unsurprisingly, the market capitalization of the firm has been described as the  ‘gold  standard’  of  success  for  publicly held  companies (Gupta  and Lehman 2005). On the other hand, an unprecedented turbulence in world markets,  especially  in  major  markets  such  as  North  America,  Western Europe and Japan, has not helped matters at all. Over the last two decades, a number of powerful forces have collectively and progressively redefined the rules by which organizations achieve competitive advantage and superior profitability.

The process of globalization, with the consequent weakening or outright elimination of geographical trade barriers,is creating a global marketplace which is becoming progressively more competitive, and where the control of lucrative regional markets by dominant regional players can no longer be taken for granted. Likewise, rapid technological advances have led to inventions such as the Internet and other technology-driven solutions such as

mobile   wireless   communication  and   broadband.   These   have   greatly enhanced the abilities of customers and competitors to acquire insight into product  and  service  offerings,  as  well  as  company  processes,  for  both existing and alternative suppliers.

These new technologies have led to the emergence, from time to time, of maverick type players in different markets. These companies gradually encroach on lucrative markets, and become peripheral players with inconsequential market shares. However, they usually offer benefits  not provided  by  the  dominant  players  to  meet  both  expressed  and  latent customer needs, and at a significantly lower overall cost, therefore become influential players over time. In a study of innovative organizations (Carrillat et al. 2004) it is argued that this type of innovation tends to shape overall market structures and the behaviour of market players. New types of behaviour are adopted by consumers, typically to the detriment of incumbent service providers. The ultimate beneficiary of these developments is the consumer,  a  new  kind  of  consumer  who  has  increased  significantly in sophistication and in bargaining power.

This  consumer  is  described  as  active,  knowledgeable  and  post- modern. It is also widely acknowledged that this new consumer is distinctly different and identifiable from its predecessors (Baker 2003). These phenomena have caused major changes in the magnitude and effect of the classic competitive forces described by Michael Porter, such as threat of new entrants, threat of substitute products (and services), rivalry between existing competitors and bargaining power of buyers (Porter 1985). These classic forces  had  previously been  understood to  shape  industry structures  and determine  the  inherent  profitability  of  individual  industries,  while  the

strategy  of  a  company  determined  the  positioning  of  its  products  and services within the industry, and consequently it’s earning power.

Over time, it has become obvious that satisfying customers’ needs must be a key element  in  strategy  formulation,  for  differentiation and  competitive advantage to be achieved, and sustained. An early indication of the potential to differentiate all types of goods and services, whether they are industrial goods and services or consumer goods, was given by Levitt (1980). He argued that even though generic products may have identical features, offered products can be differentiated. He stated further that the  former would create an advantage in acquiring customers, while the latter would serve to retain them. This was one of the pieces of work which heralded renewed interest in marketing as a means of achieving sustainable competitive advantage.

The concept of differentiation was later considered in the context of contemporary markets (Hulbert and Pitt 1996). They argued that creating competitive advantage had become more critical, but also more difficult, and that maintaining it may have become impossible in a situation of hyper- competition. They went further to suggest that as competition intensified further, the need to identify, and deliver, new sources of value would be critical to  creating competitive advantage. In  concluding,  they took  the position that in today’s climate of intense global competition, power lies with the buyer and not the supplier. The implication of this is that firms must begin to focus great attention on customers to develop real insight into their problems. By doing this, they would be able to identify both latent and

expressed needs, through which unique and superior value can be created and delivered.

A more analytical view of a customer orientation was taken by Dobbins and Pettman (1998) who suggested that with time, the emphasis of strategy should be on delivering benefits which would result in improvements to the lives of customers. They argued that marketing involves differentiating products vis-à-vis competition, and that firms which focus on the benefit to the customer would at least have a chance of making a profit. According to them, the ability to differentiate itself is a company’s competitive advantage, and the reason why customers would buy a product or service from one company  and  not  its  competitors.  They  argued  further  that  customers perceive  this  differentiation  in  terms  of  superior  value  delivered  by suppliers. Therefore, understanding, creating and delivering value to customers is arguably the single most important issue in major business circles today, especially since the customer’s concept of value has proven to be elusive and continues to change from time to time.

“Most sales people manage for short-term revenues (regardless of profits). With an increasingly sophisticated customer base that wants lower prices, greater service and more control, this strategy most often results in declining profit margins and commoditization. “Increasingly buying power and market influence is being concentrated in an ever-smaller number of strategic customers. Hence, going forward, we believe that companies will have to think beyond short-term revenue and profitability of today. They will have to take the long view and manage their strategic customer relationships as assets. They will attempt to maximize the net present value (NPV) of future

profit streams from these customers, thus shifting to the enhancement of long-term Customer Relationship Capital.” It is important to understand that customers sometimes become unprofitable as a direct result of the way the business operates in its relationship with them. For example, a profitable customer may inadvertently be cross-sold a product or service that cannibalizes an existing source of revenue for the business. Similarly, the way the sales process is conducted and remunerated for sales staff may well encourage the acquisition of unprofitable customers.

Hence,  companies  must  improve  in  several areas  to  develop  successful strategies that focus on customer value. Any customer-related initiative or interaction must differentiate customers to give insight into the value- creating potential of those customers. Nevertheless, at the strategy level, many companies remain focused on pushing out products rather than drawing in customers. If a company’s strategic focus is to sell as many products  as   possible,  customers  will   be   overwhelmed  by   irrelevant marketing and sales offers, and their satisfaction will be lowered. It is very difficult to  acquire,  grow or  retain profitable customers in  that kind of environment. Ultimately, insight into the value created by each customer relationship provides the most useful information for decision makers. Traditional CRM profit measures typically calculate historical revenues and costs and, therefore, do not provide insights to future value creation.

1.2 STATEMENT OF THE PROBLEM

A customer-oriented strategy for improving shareholder wealth should focus on three factors: costs, potential customer value and customer needs. When

companies  miss  the  mark  on  these  three  areas,  they  end  up  placing customers into the wrong value groups. This error ripples out to enable suboptimal managerial decisions, misallocation of marketing and sales resources, and, ultimately, lower profits, slower growth and lost competitive advantage. Companies need a complete picture of the measurable value of each customer relationship. “The only value your company will ever create is the value that comes from customers – the ones you have now and the ones you will have in the future,” say Peppers and Rogers in their most recent book, Return on Customer. “To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable and serve them more efficiently.”

Any  measure  of  customer  value  depends  on  an  accurate  view  of  both revenue and costs. All companies use sales accounting systems to track and assign sources of revenue to  individual customers. And there is  usually enough transparency between customers and their purchases to come up with a reliable revenue figure for each customer. Unfortunately, the same transparency does not apply to costs, and many companies struggle to get a clear picture of the cost-to serve for different customers. Without an accurate view of customer-related costs, companies end up with a distorted understanding of customer value. Customers thought to be high-value, for instance,  may  actually  be  much  less  valuable  if  their  cost-to-serve  far exceeds the  average. Activity-based costing can be  used to  resolve this measurement problem. The main problem is to determine the most appropriate way to value a customer and also gain a better understanding of customer value management (CVM) in a group of companies involve in different lines of business?

1.3 OBJECTIVE OF THE STUDY

The objectives of this study are:

   To   evaluate   how   customers   can   be   managed   toward   higher

profitability?

     To evaluate how profiles of existing highly profitable customers can be applied to attract new customers with similar characteristics?

     To   know   how   a   company   can   properly   measure   customer profitability?

     To evaluate how a company can migrate unprofitable customers to profitability or de-select them and eventually “urge them out”?

1.4 RESEARCH QUESTIONS

   How does a firm benefit from CVM?

    Should a firm “fire” low value customer?

    How does increasing customer value affect firm profits?

    Are firms in an industry better off with CVM?

      Do firms in an industry benefit as CVM capabilities become more affordable?

     What will motivate customers to strengthen their relationships with a company?

1.5 RESEARCH HYPOTHESIS

The following null hypotheses are hereby formulated.

H1- There is a positive relationship between CVM and profitability of the company.

H2- There is a positive relationship between customer satisfaction and

customer loyalty in the long-term.

H3- There is a positive relationship between the financial function of the company and customer profitability.

H4- There is a positive relationship between corporate reputation and the creation of customer satisfaction.

H5- There is a positive relationship between customer value and various management tools.

1.6 SIGNIFICANCE OF THE STUDY

Implementation of Customer Value concept necessarily provokes changes in the value-creating process of the company. The form of the value-creating process and its management must allow a differentiated treatment of customers based on their value. This means that this process must become an efficient support to the aforementioned working method with market segments, micro-segments or individual customers. Activities in this process should be carried out in a way allowing the customer to gain an individual value corresponding to his/her value to the company. Individual customization of activities will yield revenues corresponding to the individual value provided to each customer and expenses that should be assigned to the clients by whom they were provoked.

This study is valuable to the students, businessmen, and entrepreneurs because of the importance of the customer in keeping the business moving. Thus CVM helps firms retain high value customers better. When a firm has better CVM accuracy than its rival, it enjoys a competitive advantage. CVM moderates competition and lowers the firm’s overall spending on customers. With CVM, the firm “skims the cream” of the customer base, leaving behind

those who are less attractive. As the rival does not find it worthwhile to compete  as  hard  for  these  “leftover” customers, the  firm can  lower  its customer spending. It will also help firms in achieving customer satisfaction and intimacy and to know which tools to use so as achieved this objectives.

1.7 SCOPE AND LIMITATION OF STUDY

To address the research questions explicitly in a competitive context, the study will focus on eight companies offering different services based in five states  of  the   Federation.  The  companies  range   from  manufacturing, financial, engineering, retail, Telecom and others. All the firms have existing customers and can distinguish between their own and rival’s customers. They compete to retain/acquire customers by offering costly inducements. The model CVM as a technology provides a firm with private, imperfect information about customer type, is more accurate in determining the type of a firm’s own customers than its rival’s customers, and allows a firm to tailor inducements based on a customer’s perceived type.

Due to time constraint and limited financial resources, only five states of the federation were covered for the research. Based on this sample I arrived at my conclusion even though it might not be indicative of the entire situation of the country and the world at large but it gives an adequate situation of the general literature about customer value.

1.8 DEFINITION OF TERMS

Value is defined by the Oxford English Dictionary as the importance or usefulness  of  something  (for  example  goods,  services,  an  object,  a substance, information or even an opinion) or its worth in monetary terms.

CLV (Customer Lifetime Value) is defined as a present value of all present and  future profits  generated by  the  costumer within the  period of  their cooperation with the company.

CLTV (Customer Lifetime Value) It is defined as a net present profit value for the entire lifetime period of cooperation with the customer and is calculated by this relation:

LTV  (Lifetime  Value)  is  defined  as  a  present  value  of  the  flow  of anticipated future financial contributions by the customer.

The Potential Value refers to the value, which the customer could have if the  company applied  a  conscientious strategy to  increase  this  value  by changing its behavior towards the customer based on his/her needs

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