02 Nov Consider the concept of Return on Customer? (ROC) as discussed
Refer to Chapter 11:
Consider the concept of “Return on Customer” (ROC) as discussed in the chapter.
- What kind of advantages and benefits are possible for a company adopting this objective?
- How would it help a company balance the short-term and the long-term goals of the company?
- Explain how ROC different from customer lifetime value LTV?
Chapter 11 Preview
Measuring Customer Value
Customer Equity
Customer Loyalty and Customer Equity
Factors in Customer Equity
Return on Customer
Creating, Harvesting, and Destroying Value
Measuring Return on Customer
Predictive Modeling
Leading Indicators of LTV Change
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Measuring Customer Value
Short-term: immediate sales
Long-term: changes in customer’s predisposition toward company
Balance required
Too aggressively pursuing short-term sales threatens long-term value
Investing too much in great service threatens short-term value (i.e., funds required to produce that great service)
To strike a balance, measure customer equity, or customer lifetime value
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Customer Equity
The principal economic asset
The sum of all current and future customers’ LTV = firm’s total economic value
Describes effectiveness of customer strategies and implementation
However, most companies look at quarterly balance sheets as the primary measure of economic assets – which only measures short-term value
Prospects, as well as current customers, are included in customer lifetime value (or equity)
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Customer Equity and Customer Loyalty
Difficult to measure customer loyalty/customer retention
Defining retention:
A progressive variable – a volume dial, not an on-off switch
A multifaceted variable – one possibly composed of multiple relationships across business units
Distinguish customer attrition and customer defection
Attrition: results from circumstance outside company’s control (retirement, moves out of area)
Defection: customer chooses to move business to the competition
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Factors in Customer Equity
Acquire more customers
Acquire customers who are more valuable
Increase profit per customer
Reduce servicing costs per customer; sell customers additional products or services
Increase the propensity of customers to refer other customers
Reduce the rate of customer attrition
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Return on Customer
Measures how well an enterprise is using customers to create value – both short term and long term
Analogous to return on investment (which measures how efficiently an enterprise uses capital to create value)
Return on Customer = Total Shareholder Return
Just as with TSR, if ROC is less than cost of capital, it’s not worth the investment
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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Creating, Harvesting, and Destroying Value
Value creators
Combination of short-term and long-term value created by customers is greater than cost of capital
Future earnings likely to grow
Value harvesters
Harvesting customer profits from customer equity they already have, but are not increasing customer equity
Future earnings likely to decline
Value destroyers
ROC is below zero – likely showing a profit by offering deep discounts
Future earnings will certainly decline
Managing Customer Relationships: A Strategic Framework, Third Edition, Don Peppers and Martha Rogers
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