Managing Customer Value - Cimaglobal

1 ManagingCustomer ValueByMarc J. EpsteinandKristi YuthasMANAGEMENT ACCOUNTING GUIDELINEMANAGEMENTSTRATEGYMEASUREMENTP ublished by The Society of Management Accountants of Canada, the AmericanInstitute of Certified Public Accountants and The Chartered Institute ofManagement 2007 by The Society of Management Accountants of Canada (CMA Canada), the American Institute of CertifiedPublic Accountants, Inc. (AICPA) and The Chartered Institute of Management Accountants (CIMA). All Rights part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, withoutthe prior written consent of the publisher or a licence from The Canadian Copyright Licensing Agency (Access Copyright).For an Access Copyright Licence, visit or call toll free to : 1-55302-208-4 NOTICE TO READERSThe material contained in the Management Accounting Guideline Managing Customer Value is designed to provide illustrativeinformation with respect to the subject matter covered.

2 It does not establish standards or preferred material hasnot been considered or acted upon by any senior or technical committees or the board of directors of either the AICPA, CIMAor The Society of Management Accountants of Canada and does not represent an official opinion or position of either theAICPA, CIMA or The Society of Management Accountants of today s rapidly-changing businessenvironment, products and services areincreasingly viewed as information and communicationstechnologies have made product andprocess innovations easier to copy. Inaddition, sophisticated product develop-ment methodologies and technologieshave dramatically reduced the time ittakes to bring a product to market. Inmany industries, products no longerprovide a sustainable source ofcompetitive advantage, and companiesare increasingly emphasizing componentsof the Value proposition that extendbeyond the now widely recognize that to achieve and sustain competitiveadvantage, they must become morecustomer-focused.

3 Many have changedtheir strategies, structures, and processes,leading to dramatic increases in customersatisfaction. Although these companiesmay understand much better how toprovide Value to their customers, they are far less effective in deriving Value fromthese customers. A large and growingbody of evidence indicates that mostcompanies have great Customer diversity,with some customers being highlyprofitable to the company and othersbeing enormously of differences in customerprofitability by senior financial managersand the use of available tools are criticalMANAGING Customer VALUECONTENTS EXECUTIVE SUMMARYThe focus on Customer relationship managementhas become central to all have increasingly recognized thesignificant costs related to the loss of customersand are trying to better understand, measure,manage, and improve Customer .

4 These organizations are examining how to measure and improve long term customerlifetime Management Accounting Guideline examinesnew tools and techniques for measuring andmanaging Customer profitability, retention, andlifetime Value . It will include recent examples inboth for profit and not for profit organizationsand will also demonstrate how these analyses must be customized to the business model of the organization. Financial professionals, as part ofthe senior management team, will be better ableto analyze Customer profitability and developapproaches to improve Customer profitability,retention, and lifetime AND TARGET AUDIENCE4 Customer Value the foundation of Customer profitability6 The Customer Value Management Cycle6 Customer Value from the Customer s perspective7 Customer Value from the company s perspective81. MANAGE Customer SEGMENTATION10 Segmentation Basics10 Current Approaches to Segmentation11 Adding Profitability to Segmentation Structures122.

5 MEASURE Customer MARGINS13 Assigning non-product costs153. MEASURE Customer LIFETIME VALUE18 CLV profits19 Customer Retention20 Customer Loyalty214. MEASURE Customer IMPACT22 Customer influence23 Customer knowledge245. MANAGE Customer PROFITABILITYO bjectives, strategies, and structures26 Managing Customer Value26 Managing Customer Profit Margins27 Managing Customer Lifetime Value28 Managing Customer Impact30 Measurement and Reporting31 Customer PROFITABILITY:A COMPREHENSIVE EXAMPLE32 CONCLUSION36 ENDNOTES37 Page3 MANAGEMENT4to a firm s ability to derive Value from its enormous variations in profitability, manycompanies continue unprofitable relationshipswith customers, often providing them withproducts and service levels identical to thosereceived by the most profitable ones. Identifyingprofitable and unprofitable customers can allowcompanies to more efficiently allocate resources,maximize profitability, and ultimately increasemarket why do managers continue to market tounprofitable customers?

6 In most cases, it is lack ofinformation companies simply do not know whothe unprofitable customers do not havethe knowledge and tools that would allow themto differentiate customers on the basis this information, they areunable to develop strategies to direct marketingor manage costs companies highly sophisticated in customerresearch and management can insufficientlyunderstand Customer profitability. MGM MirageResorts, for example, had a very advanced systemfor tracking the gaming activity and profitability ofits casino customers. Until recently, however, itwas unable to match purchases of rooms, food,and other products with a Customer s gamingrevenue and costs to obtain a complete picture ofcustomer profits, even though non-gamingrevenue had gradually grown to over half of allMGM s revenue (Bellin et al, 2006).Volvo has also discovered the Value of customerprofitability information.

7 For years,Volvo used asophisticated method for measuring customersatisfaction for its Swedish customers. Using thisdata,Volvo has built an extensive database thatallows the company to examine relationshipsbetween products, services provided, anddimensions of Customer satisfaction. As a result ofa recent study,Volvo was able to match customerprofits with other information in the database,allowing the company to use the satisfactiondatabase to predict the future profitability of itscustomers. (Johnson and Gustafssen, 2000)Harrah s Entertainment has used decision analyticsto gather very detailed data on its customers activities at its data is cut into smallsegments that identify unique Customer Harrah s develops targeted marketingstrategies for each approach may be most responsible for Harrah s position as thelargest gaming company in the world (Johnson2007).

8 But not all companies need a state-of-the artdatabase or analytics technology to improvecustomer profitability fortunately, a practicalunderstanding of Customer profitability is noweasily within reach. Many straightforward andpowerful techniques are now available to allcompanies seeking to better understand andmanage the profitability of their customers to advances in data managementand communications, the information needed tocontinually sharpen profitability estimates isincreasingly this guideline, we provide a comprehensiveapproach for measuring and Managing approach, which is called The CustomerValue Management Cycle, is illustrated in Exhibit is designed to work in a cyclical manner, allowingcompanies just beginning to measure customervalue (as well as those with well-developedprofitability models) to gain insights that can helpthem enhance and sustain effective profitabilitymanagement AND TARGETAUDIENCEThis Guideline seeks to provide information usefulto managers in a variety of functional areas acrossa broad range of companies and the terms company , corporation and firm are used throughout, most of the informationin this Guideline is also relevant for otherorganizations and governmental entities.

9 Althoughmost of these concepts can be used by not-for-profit, governmental, and for-profit entities, mostexamples come from the for-profit sector. All ofthese entities share goals of increasing valueprovided to customers and other organizationalstakeholders, while reducing resources requiredto provide this overall purpose of this Guideline is to (a) enhance the reader s ability to understand andanalyze Customer Value , and (b) develop effectiveand sustainable methodologies and measures forprofitability management and general objectives of this Guideline are: to highlight the importance of understandingand responding to differences in the Value ofcustomer segments to illustrate important Customer valueconcepts and components, including: customerprofitability, segmentation, Customer costs and margins, loyalty, retention, and customerlifetime Value (CLV)STRATEGYMEASUREMENTMANAGEMENTMANAGI NG Customer VALUE5 to outline a comprehensive view of customervalue that includes understanding, measuring,and improving Customer -related profits acrossthe lifetime of the Customer , the Guideline provides a systematicapproach for addressing Customer Value issuesthat includes: Customer segmentation, measuringprofitability, estimating Customer lifetime Value ,identifying additional sources of Customer Value ,and Managing to enhance Customer profitability.

10 Itdemonstrates how organizations can create morevalue for and derive increased Value from target audience for this Guidelineencompasses a broad range of professionals whoinfluence or manage Customer -related corporateprofitability. Professionals who may benefitdirectly from information presented here include: senior and top-level managers, as well asmembers of the Board of Directors, who seekto increase the market valuation of the firmthrough more effective Customer management marketing managers who are responsible formaximizing overall Customer Value financial managers who are responsible formeasuring, analyzing, and reporting oncustomer profitability sales and Customer relationship managers,who acquire and use profitability informationto enhance Value provided to select segments marketing researchers and product planners,who can use Customer knowledge to defineproblems and needs and identify groups who may benefit indirectly fromthis Guideline are.