Can you see profitability in each customer?

The development of long-term profitable relationships should be a major focus for all businesses. Customer lifetime profitability is one way to approach this, as many organizations do not have an accurate understanding of which customers are profitable and which are unprofitable.

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Markets are increasingly becoming competitive, with consumers actively seeking brands and providers they can rely on and keep purchasing from over many years. How those relationships are managed and nurtured is the foundation for customer lifetime profitability (CLP), which offers a measure of the underlying profit for an organization’s customer base, and considers the future revenues and costs for the lifetime of the customer.

By taking a customer-centric view to managing the revenue and cost base, organizations can make decisions founded on customer need and deliver “good profits” derived from improving customer experience and advocacy. This means investing in what matters most to customers and, at the same time, removing or improving processes that frustrate customers and increase an organization’s costs.

Quality not quantity

What EY has found is that many of the businesses we work with don’t yet have a detailed understanding of the cost-to-serve component of their businesses. In the CLP model, gaining large numbers of customers isn’t the focus, but gaining high-value, long-term customer relationships is.

Today, thanks to research, big data and social media, detailed customer profiling has become possible. CLP, by extension, is a product of this new insight and the way massive datasets can be interrogated to reveal customer behavior and, to a large degree, predict future customer behavior.

More organizations are now focusing on one-to-one customer marketing rather than a model based around mass-market broadcasts. These are delivered through analytics, incorporating insights that focus on personalized solutions and the “next best action” for the customer using trigger-based scenarios. Pre-empting customer needs improves their experience and is a powerful tool for engagement.

The disciplines of knowing who your customers are at a very detailed level, and understanding which of those customer segments your proposition is aimed at, must be approached collaboratively across the organization.

The omnichannel experience

It’s also important to recognize that the ultimate goal of CLP may not, in some scenarios, mean selling a product or service, but providing a positive customer experience. It is an important component of CLP to realize that great customer service also has a commercial value, even if it doesn’t deliver an immediate commercial benefit.

Social media has become an incredibly important channel. Many organizations still don’t appreciate how significant social networks have become to their customers and their businesses. As more customers move to social media for customer service queries, these interactions must be comprehensively supported, as this aspect of customer service has a fundamental impact on the success of CLP.

How businesses approach the tools they use to interrogate the customer data they have will vary. Many begin with specific reports and expand their actions based on that. A dashboard approach to viewing and interrogating data is also useful. But the key aspect to focus on here is regular reporting, as this will influence the planning and execution of business strategy that has CLP as an important component.

The omnichannel approach is a result of businesses having to deliver multiple touch points for their customers. Mindful of this trend, Whole Foods recently launched a customer loyalty mobile app and a groceries delivery service. Both launches are part of the US supermarket chain’s strategy to keep its loyal customers connected across multiple selling channels.

“Customers now expect to connect with the brand whenever, wherever and however they choose,” says Whole Foods Co-CEO Walter Robb. “And it’s part of our broader digital road map; we are rapidly building out an extended customer experience beyond the four walls of our stores.”

Customer experience begins within the organization

What is important is that CLP isn’t adopted by just one department — customer service, for instance — as this will not deliver the required levels of cost reduction and profit increases. An organization must have a holistic approach to how it changes in order to adopt CLP. 

The area that tends to take the most time to implement is organizational change management. Improving the service experience that customers have means changing how these relationships are managed. The business philosophy and brand values of the company have to be clearly communicated — something that is often overlooked. CLP demands that the customer-facing aspects of a business must be clearly defined and focused on high levels of customer service, as this is the foundation for long, lucrative customer relationships.

CLP is a measure of how effective a business is at delivering customer needs. All businesses want to be customer-centric. CLP enables a business to measure how it is delivering its services, what this means for cost and, of course, the level of profit it is gaining from individual customers

When businesses understand their customers at an attitudinal, functional and geographic level, they can start to develop new products and services that will speak directly to these customer groups.

This is the essence of CLP and the tangible delivery of improved levels of profit with reduced costs.

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