Main Points, Issues and Ideas of the article In today’s world, the competition Is fierce and shareholders demand high return on Investment. Thus, there Is a need to maximize profitability. Increasing revenues while minimizing costs are ways to boost profits. The article “Managing Customer Value” suggests that customers might be the key to improve profits. Customers are assets to firms; they generate revenues. However, some assets generate more revenues than other. In order to foster maximum returns from the customers, it becomes Imperative to understand the differences between customers groups.
Recognizing this diversity will enable value extraction from the Investments. Unfortunately, most companies are unable to distinguish between the profitable and the unprofitable customers. One approach in measuring and managing customer value is the “Customer Value Management Cycle”. This cycle consists of 5 steps. 1. Customer segmentation; A proper segmentation drives profits by tailoring values to fit different customer needs. Thus, marketing should be correlated to different behaviors that steer customer profitability.
Segments are dynamic and should be continuously refined as understanding of customers Increases. Finally, Including potential customers in the segments is also advantageous as it can help the company meet the needs of these customers. 2. Segment margins; Value from segmenting the customer base will be maximized when the profitability of these segments is measured. This in turn will allow formulating the right strategy and effective management. An effective method to increase margins is to locate the highest costs and flexure out If there are possibilities to allocate these costs to customers. . Customer Lifetime Value (CLC); Customers generate cash flows In the current and true periods. Though, at the beginning of the relationship, large investments may be required to attract the customers of a specific segment, the relationship may be more profitable over time because more up-selling and cross-selling is possible and the prospect of reduced cost of servicing the customers due to their acquired knowledge of the company and Its products. Calculating CLC requires a deep understanding of customer retention rate, purchasing patterns and cost of each segment. 4. Customer Impact; The goal Is to realize that there are a full range of resources from which customers bring value to the firm other than the CLC. Customers can influence other customers and stakeholders and is a source of knowledge that can be utilized by the firm. They can influence the image of the brand as well. Trying to capture and measure these hidden values leads to innovation and generate options to maximize long-term customer value. 5. Customer profitability; Forward segmentation and Interpreting results In a way that imprison value are keys to maximize profitability from customers.
Thus, the analysis is the base to create value from customers. Financial managers, due to their skills and capabilities, have the opportunities to take the lead and translate analysis to actions. If all of these five steps are properly followed, the Customer Value Management Cycle promises to measure and manage customer profitability, retention and lifetime value, which then can be utilized to Increase profitability. As most strategists would admit, better customer knowledge leads to better strategy and increased profits. The Customer Value Management Cycle is a tool that can help managers analyze their customers.
It seems simple and can easily be used. However, it has its drawbacks. For those companies who lack the knowledge and resources to map their customers, this method of generating value might increase costs in the short run as the need to hire external capabilities or to develop the skills in-house will be required. However, in the long-run this cost (especially if the abilities are developed within the company) might be lower and become fixed. Therefore, profits would increase as the revenues are expected to increase. For this tool to provide maximum benefits, proper segmentation is crucial.
Segmentation criteria is then of great importance. The article proposes segmentations to be based on behaviors that drives profitability. However, geographic and cryptographic segmentation are also valid types of segmentation that can be combined with behavior segmentation to maximize benefits. The article suggests looking at the highest cost and to pass it to customers. However, this way to manage cost, especially if this cost provides value to customers required to extract values from customers, might not be the right method if it is done in a static manner.
Analyzing costs should be dynamic; for example by looking at how the costs varies with time ND how important they are in providing value to customers. Only then can the managers take the right decisions as to which costs to pass to customers and how to pass them. Also, competition should be kept in mind; what are the values proposed by them and how costs are then affected. Different industries provide different opportunities and therefore, cannot be measured with the same measures. Customer satisfaction, therefore, cannot be measured on the same basis. Then, customer value measures need to be adjusted to the industry to be analyzed.
An issue that can arise from continuously refining segments is that it can ultimately lead to individual customization, a strategy that might be too expensive for some industries. Thus, the manager should be aware of this and decide what level of heterogeneity is acceptable within a segment. Finally, to fully capture values from customers, the firm has to have the internal resources and capabilities to serve all segments. This might not be feasible because of the different strategies involved. Firms often choose segments that they think they will best serve.
The question of hosing a segment based on firm’s capabilities is not discussed in the article. Conclusion and Recommendation The article provides a tool to capture and measure customer value. It states that value is best created by managing customer segmentation, customer margins, customer lifetime value and customer profitability. To effectively apply this tool, firms need to have competent resources, they need to decide on the proper criteria for segmentation, analyze cost dynamically, set measures specific to industries they operate in and finally analyze firms’ internal capabilities to choose the markets to serve.
