Therefore, the challenge no longer is simply to build a customer-value model, but to use that model in increasingly sophisticated analyses. However, although customer-focused metrics are becoming a crucial component to any corporate culture, it can be a not-so-easy learning experience. What follows is a roundtable discussion with executives from three very different industries on how they have embarked on their own specific customer-value journey.
>Q&A: Customer Portfolio Asset Management
1to1 Magazine: What does customer value mean to you and why do you measure it?
Judy George, founder and CEO, Domain: The Domain concept is different from most retail concepts here-we are in upscale malls and have very upscale freestanding locations. We spend a great deal of money for rent and exposure, so we don't have the normal ad dollars that the furniture industry has. On average, the industry spends 8 or 9 percent of sales on ad dollars, while we only have 2.6 percent of our ad dollars to spend across the board. So we have to go through enormous effort to measure and qualify the customer value.
Steve Hawco, VP, Direct Marketing and e-Commerce, LEGO direct division: The challenges and hurdles at LEGO are also atypical when it comes to measuring customer value. First of all, we're dealing with kids, and there are certain legal restrictions of how we can communicate and gather data from kids. Also, the lion's share-90 percent or more of our transactions-occur in third-party retail channels, in which gathering data is extremely challenging, so we don't have the breadth of that kind of feedback. That's very important to understand. So we have to do things differently.
Measuring customer value helps us allocate our resources and build our brand and business for the long term. In the U.S., we're now entering our second or third generation of individuals who are using LEGO products, so we're seeing parents coming back who had the experience of using it as a child.
Chris McCann, president, 1-800-flowers.com: Customer value means the world to us. It's everything we do. We view ourselves through our customer relationships. Our mission, the goal of our company is to connect people to the important people in their lives, so we have to do the same thing with our own customers.
1to1 Magazine: How do you measure customer value and what factors come into play?
McCann: We look at revenue per customer, but profits per segment. Two key factors are retention and frequency usage. And we're measuring satisfaction and that ties into the intent to repurchase. Ultimately, we're interested in their long-term value. We also measure offline and online activity. We've discovered that as we get the customer to interact with us online, we increase their product purchase, as well as satisfaction and retention rates.
We've implemented a service-performance index (SPI). That's made up of several components of measurements, including surveys with telephone and retail-store customers, online surveying and a service-quality index-a quality or "Q" score-how was the customers' interaction, the product, the gift advisor, the online experience; the quality scores go into every department.
Laura Katz, SVP, Merchandising and Marketing, Domain: We maintain a database of over 185,000 core customers, and we know their every purchase going back 10 years. We've ranked each of these customers in terms of their lifetime value to Domain. This ranking consists of scoring each customer according to six variables, which include total purchases over their lifetime, average purchase value, frequency, time between each purchase, overall length of time with Domain, and then a negative score for the number of returns. Then we add up all the scores to effectively rank each customer from one to 185,000.
There are many things we know from this value scoring. For example, the typical first-time purchase from a customer is about $1,500. Repeat purchasers with Domain spend 3.5 times what a one-time only customer purchases. Our "most valuable" customer has spent over $140,000 with Domain. We accumulate the past five years of spending to calculate these lifetime purchases.
We measure customer value both after the first purchase and before to target prospective, high-value customers. From doing our database analysis of lifetime value, we have created demographic profiles of what our best customers look like. Then, when we open a store in a new area, we send prospect mailings to the demographic "proxy" of who is likely to be our best customers. So, customer value comes into play for us both before and after a sale.
Hawco: We conduct annual benchmarking. We find the right time of year to capture what would happen last holiday. The toy business is very seasonal-50 percent of sales are done in the fourth quarter. But remember that nearly all the transactions are occurring outside our sphere. We also have the LEGO club, with more than 2.5 million members worldwide. There's LEGO magazine, which is published six times a year, and with that avenue, we use a lot of market samples and proxies to see if we're talking to the right kids. We're finding that, because the kids play with LEGO more, they're willing to ask for more LEGOs. And when parents see that, they will endorse their wishes. We want an economic and lifetime member, to keep people active longer.
1to1 Magazine: Who within your firm measures customer value?
Katz: We have employed an outside data house to measure lifetime value and to work each month on our database, cleaning it, managing it and creating educated sorts for new customized mailings. Hawco: We measure it internally. There's one dedicated person, but that person is supported by other people in the direct-marketing area and market research. Those two departments really focus on that.
McCann: It's primarily in-house. We have people in Vendor Relations and Fulfillment who monitor customer satisfaction each day. Also, a large portion of what we do in our service centers involves work related to customer satisfaction and their orders.
1to1 Magazine: How do you measure the overall value of customer portfolios vs. the impact of specific campaigns?
Katz: Each month, we measure the results of our customer-value program by tracking sales from new customers vs. existing customers. We track response rates and average sale by promotional vehicle and customer type.
Hawco: We do it two ways. First, we use a classic method of measurement for lifetime purchasers and their expansions into different categories: We can see some families will be in younger-age products and the following year, they evolve into older-age products.
Then there's our influencer method, such as our club members. How active are they? Do they share information with their friends? Like with our magazine, we know our circulation, but we try to establish actual readership. Are they passing it around to their friends and colleagues? We also try to measure how engaged they are, and how much of an advocate they are. Do they participate in the brand?
We do surveys, both offline and on. We send a percentage of kids a questionnaire to rate the content, as well as a host of other topics, such as product reviews. The response rates are in the double digits. The internal joke is that people want to talk to us when we open the door. So we try to leverage that, not only by benchmarking, but also by improving the customer-lifetime value. We solicit their feedback and act upon it. It's challenging when a club member says, "I didn't like this particular product line."
1to1 Magazine: How do you disseminate what you learn from value measurement? Do front-line employees have access to that information?
McCann: That's why our SPI exists. We had all these measurements, but it was hard to make our people understand what it all meant. So we combined our data into one index published monthly, and it goes to everyone. It's in our publications, posted in our service centers and on the Internet. It's our rallying cry, particularly for the people on the front line. Katz: We send monthly telemarketing lists to our stores that indicate high customer value, last purchase date and other specific targeting data.
Hawco: All the service reps have access to customers' histories. They know lifetime-transactional value, and while they have guidelines on how to handle situations, they have the endorsement to treat customers appropriately. With customers on the Web, a lot of information goes back to R&D and our brand-marketing people.
1to1 Magazine: How do you keep your customer-value methodology "fluid?" What are some of the challenges you've had in putting value-measuring capabilities in place?
Katz: One of our biggest challenges has been to constantly merge/purge our customer address listings to keep them clean and up-to-date. Since each direct mailer costs us $1, it quickly gets expensive to mail duplicates or incorrect addresses. Data hygiene takes a lot of our attention. Hawco: Again, the biggest challenge is that we don't have all the tool sets available to most marketers, because we're dealing with children up to age 13, and also that an extremely high share is not done on our own channels.
1to1 Magazine: What are the costs behind supporting customer value? What are some of the issues you've had to address around customer-level costs and how have you overcome them?
McCann: We periodically come back to this, and we drive ourselves nuts. We look at our quality and all of our fulfillment parameters and what we spend, because we know we spend a fortune on it. And we know we deliver better quality in the long run than our competitors, but sometimes we scratch our heads because our competitors are not spending anything [to measure it], and it doesn't seem to hurt them short-term. But we look at [customer-value measurement] as an investment, and as long as we see the SPI and the retention move up, [we know] it's paying off for us.
Katz: We have a direct cost each month in managing our database, which is a significant number, but used in our calculation of return on each promotional vehicle. The finance people have helped us evaluate the costs and have become partners with marketing in how important and useful this information is in targeting future mailings. We see a direct benefit in that we can use our customer-value information to greatly fine-tune our mailings. Although we spend money on measuring customer value, we save money on mailing fewer pieces, but getting a much higher return on those pieces we mail.
1to1 Magazine: For companies that want to measure customer value, what are the strategic issues that need to be resolved first?
Katz: The first is data hygiene-put the money and resources into cleaning up your database. Second, partner the financial and marketing people together to get internal support for spending money on measuring customer value.
Hawco: In terms of a corporate ideology, you have to be open minded and comfortable with giving up control. If your customers en masse are telling you 'X,' you have to be willing to take that input.
1to1 Magazine: Have you changed your organizational structure to support the learning behind measuring customer value? And how do you use what you learn from valuation?
McCann: We were an operational-excellence company, built and driven by convenience, reliability and dependability. But as the world changed and as the Internet changed the world, we've changed. If you're not customer-driven, then you've lost your competitive edge, because price has become a commodity.
Hawco: [It's important] to be a learning organization. Some look for the ultimate solution. They measure every breath their customer takes. But the real challenge is, how can we sample that information and evolve it. You've got to make it a part of your culture, and that takes time.
The Main Points:
The companies interviewed here measure customer value because they understand the importance of building individual relationships. They see measuring customer value as a necessary exercise for ensuring that they are building the right relationships.
For companies that want to put a customer-value measurement system in place, Domain's Katz recommends concentrating on data hygiene first, then partnering financial and marketing staff together to get internal spending support.
To arrive at customer value, 1-800-Flowers looks at revenue per customer, but profits per customer-portfolio group. Key factors include retention, purchase frequency, satisfaction and intent to repurchase. A service-quality index-a compilation and ranking of all the metrics factors-makes the data easier to understand.
LEGO conducts an annual benchmarking survey of its club members and magazine subscribers. These tools are vital to the firm's ability to measure customer value, since it sells the majority of its products through third-party resellers.
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