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The Customer as Strategic Asset

ECM
Fortnightly Magazine - September 2004

as a Guide

When customer satisfaction is considered an asset, this perspective fundamentally changes customer-service drivers and influences resource investment, product and service offering, and how customers are valued over time.

An example is General Motors' Cadillac division. Like many American car manufacturers in the 1980s, Cadillac realized it had to become customer-centric to compete successfully against high-end imports. Evaluating customer value, Cadillac quantified that a loyal buyer could produce $320,000 in revenue over his or her lifetime in repeat purchases. This perception of the customer as a strategic asset influenced GM's design decision-making.

Puget Sound Energy (PSE) is in the early stages of defining customer value through segmenting customers based on needs, types of product and service offerings, and purchasing power. Using segmentation, a component of customer value, PSE seeks to understand how best to provide services to its customer base, as well as mechanisms for accelerating customer value and satisfaction.

"At Puget Sound Energy, we try to look at everything we do in relation to how it can improve customer satisfaction," says Darren Brady, vice president of customer services for the Bellevue, Wash., gas and electric provider. "The value we create for our customers through our product and service offerings, and the value we receive from our customers for these offerings are key components for success in our industry going forward. This concept is relatively straightforward, but it is the execution of this, and the balance between the service, the economics, and customer satisfaction that proves difficult. It is those companies that architect a strategy that optimally balances these three factors who will put themselves in a leadership position going forward."

To discern customer value, many Fortune 500 companies employ customer lifetime value (CLV) methodology. CLV is the sum of the discounted net contribution margins over time of the customer-i.e., the revenue provided to the company less the firm's cost associated with maintaining the relationship with the customer.

CLV allows an organization to approximate the revenue or cash flow of its customer base, assess the overall "health" of its customer portfolio, identify high-value customers, and/or make informed choices about service offerings-even in regulated environments. Based on this model, the customer can be viewed as an asset to the firm.

Similar to the balanced-scorecard approach used to improve quality and profitability, CLV benchmarks the profitability of customer assets by segments.

Some of the downstream benefits of this type of analysis include identifying:

  • The highest and lowest value customers;
  • The most effective product and service offerings;
  • Critical business processes that affect customer satisfaction;
  • Service levels that need improving;
  • New initiatives that increase the value of the customer base; and
  • The types of technology or services to deploy.
  • However, implementing customer lifetime value can be complex. Few utilities know how much business they do with a customer today, much less what to expect in the future, due to being organized around meters and service delivery, not customers.

    Even when based on a mandate from upper management, many of the actions needed to calculate CLV require a significant amount of time, money, and shifts