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Saturday, June 25, 2011

Customer Centric Organization, Value Proposition Management, Segmentation

I just finished read a great book:
Angel Customers and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock by - Larry Selden and Geoffrey Colvin

The theme of this book is about how to identify your customers, based on the profitability achieved from these customers. A financial modeling tool based on the customer segments further allows you to identify the good customers (with whom you have profitable business) and bad customers (who despite of their business bring a loss to your company). Although the book is written about overall products, using the same principles to segment your online customers should bring a positive change to your business.

If you are a person whose group is tasked with making money from existing customers this is a must read for you. I have some notes to share, but this is powerful material in a very concise format. I highly recommend reading the book.

My notes
•With the organization the accountability should be switched from being in-charge of a territory/product segment to being in-charge of a customer segment. This results in accountability and profits related to each customer segment and thus putting the resources to be responsible for making a segment profitable.
•Setting accountability around customer segment also makes organization flexible and allows manager to serve customers need in better way and reduces the costs for the organization.
•On a very high-level the customers can be segmented as Profitable OR Non-Profitable, High Potential – Low Potential.
•KPI: Spread = (Return on Invested Capital – Cost of Capital)
Three principles the a customer centric company should follow:
Principle #1: Think of your company not as a group of products or services or functions or territories, but as a portfolio of customers.
Principle #2: Every company’s portfolio of customer can and must be managed to produce superior returns for shareowners – meaning a consistently better than average share price appreciation – not just to produce earnings per share or EBITDA or revenue growth or customer satisfaction or anything else.
Principle #3: Companies enhance customer profitability and drive their stock by creating, communicating and executing competitively dominant customer value proposition.
• Capital today travels around the globe instantly, continually, relentlessly seeking its best use. Every company now gets a daily report card in the form of its share price, on how it’s doing when compared its competition to attract capital.
•There is first mover advantaged to be gained for a company that organizes itself to be customer centric before its competition.
•Customer centric is good news and bad news. Bad news as it requires a lot of hard systematic work. Good news because your competitors also face the same challenge and hence your effectiveness determines the advantages you could gain being ahead of your competition. Remember, customers are where the money comes from.
•In essence customer centric is shift from products made, functions carried out, and territories served to how profitable customer segments are.
•New technology requires companies to shift corporate power and redesign business process as they face the inevitability of putting customers at center.
•Capitalizing on customer data is creating value from what you already have.
•“Good will” is the most valuable of intangible assets in the value of the acquired companies, profitable or high potential customers.
Rate you readiness(for customer centric business):
-A premium P/E multiple as the measure of success.
-Value proposition management.
-Creating a customer centric enterprise.
Common excuses that employees pose when making changes to organization structure:
-The privacy issues are too tough.
-We are in regulated industry.
-We’ve already got a lot of customer focused initiatives.
-We’re under too much short term earning pressure to do it now.
•Metrics: Shareholder value, Customer Acquisition Cost, Number of Customers, Churn Rate.
•When calculating the profit from customers it’s not the actual profit but the economic profit from each customer.
•If you can’t earn more than the return on your invested capital your business is failing. Thus increased revenues are not always equal to shareholder value. Also, wasting money on efforts to attract and retain unprofitable customers does harm to the bottom-line of the business.
4 Factors that determine your P/E
-Return on invested capital
-Capital Cost
-Spread Duration
You have reached the premium P/E Sweet Spot if:
-Return on invested capital > 25%
-Capital Cost < 12%
-Investment (in excess of depreciation)>70% of earnings
-Spread duration>Ten Years
Why is being customer centered so important?
-Customers are the only source of revenue and profits
-Knowing each customer’s profitability, and the reasons for it, is critically important to creating value propositions that drive success.
-Understanding customer’s different needs and behaviors is central to serving them most profitably.
-Obtaining and analyzing this information used to be overwhelmingly difficult but now it’s practical.
•In a product centered company, a manger has an answer – a product – and is seeking customers with the right question. In a customer-centered company, a manager has customers with specific needs and is seeking winning value proposition for them.
•Top management must be continually vigilant so that in creating customer segment business units, it doesn’t simply replace product, territory, or functional silos with a new variation, since customer segments are always changing and customers often move from one segment to another.
•In customer centric company, product managers are still accountable for product P&L, properly calculated with all appropriate customer cost, as noted above. That’s because they must be incentivized to supply their internal customers at reasonable cost, and they must be responsible for earning a satisfactory return on the company’s investment in products. They remain company’s product experts, a necessary and vital role.
•Some of the objections that managers usually have with making changes to the organization structure are:
-May cause corporate identity crisis.
-Feasibility of Customer Centric model
-Doubtful about the cost of the IT change
-Objection with the disruptive changes
-What about other high priority tasks
-Low confidence in the change initiative
-Passive resistance.
•At a certain point adding incremental segments adds costs and wipes out the gains from the economic profit.
•Competitively superior customer segmentation is a five step process:
-Grouping all customers into deciles by profitability
-Studying customer behavior within these profitability deciles to begin to understand why some customers are more profitable than others.
-Using this understanding, defining needs based segments.
-Dividing each of these segments into profitability deciles.
-Based on experience over time, redefining or subdividing segments.
•Model on Value Proposition Management:
-Synthesizing customer segment knowledge
-Hypothesis formulation
-Hypothesis testing and verification
-Communicating winning value proposition to organization and customers
-Scaling successful experiments
-Knowledge accumulation from the whole experience.
•Six foundation stones to become truly customer centered:
-Mind set
-Preliminary data
-Customer centered people
-A service culture
-Explicit recognition of customer segments
-Committed leadership
•Changes in three dimension
-Tracking product P&L
-Product development
-Developing product strategy
-Calculating product net present value
-Product Sales
-Managing Product Life Cycle
-Running Product business reviews
-Tracking customer P&L
-Customer needs assessments
-Developing customer value
-Developing customer value propositions
-Calculating customer net present value
-Relationship management
-Managing customer life cycle
-Running customer business reviews

-Strategy driven by product organization
-Products and territories are dominant in resource allocation
-Function heads or product business unit heads are best compensated
-Incentives reward product profitability
-CEO successor comes from functional area or product business unit.

-Strategy driven by customer segment CEOs
-Customer segments are dominant in resource allocation
-Best performing customer segment heads are best compensated
-Incentives reward customer profitability
-CEO successor comes from customer business unit

-Products matter most
-Internal efficiency leads to success
-Product data is key
-Employees want to be functional or product innovation stars
-Customers are demanding and an annoyance
-All customers are created equal

-Customer experiences matter most
-Engaging customers lead to success
-Customer data is key
-Employees want to be on teams that win with customers
-We value making a difference in customer experience
-High Profit and high potential customers deserve a superior experience.

•Better way to do M&A
-To see if an acquisition will succeed or fail, look at the balance sheet, not just the income statement.
-In most mergers, the acquirer is buying customers
-In most companies, the distribution of customer profitability is much wider than manager’s suspect.
-Corporate acquirers are buying customers in bulk rather than one by one, so they should logically get a discount; instead they usually pay a premium.
-Buying profitable customers at premium prices can be far superior to buying a company.

Here are the basic questions I gathered by reading this book. I am going to get answers to these questions so that I can understand the customer segmentation needs better.

1)Who in the company owns the customers?
2)Who is responsible for the profitability of any given customer/segment?
3)How significantly does the company differentiate its interaction with different customers?
4)What is the revenue per customer segment and how profitable those customers are? (rather than just looking at the overall revenue figures)
5)Are you product managers looking at the profitability of individual customer segments to make changes to the products and services? This ensures that you make money from all customer segments.
6)What is net promoter score of your products?
7)What is your customer acquisition channel? Are there different possibilities to it? Can you change the acquisition process?
8)How much should we spend on attracting, serving and knowing the customers?
9)How can we make an unprofitable customer a profitable customer?
10)What if we spend less on service?
11)Are we better off attracting customers who spend a little every year for many years, or customers spend a lot for a few years and leave?
12)What is the value of a particular customer, or customer segment?
13)Can a customer’s value really be calculated?
14)If the customer value can be calculated how can we affect the value?
15)Which customers of current or potential are attractive and which not?
16)How can we attract additional valuable customers?
17)How much share holder value does a customer create? (Spread/# of customers)
18)Can your customers pay for employee training (indirectly) for developing new products and services?
19)What customers get discounts? Are you willing to encourage them buying other products on discount? How are you going facilitate this?
20)What customers cover your fixed operational cost and whom do you bank on for covering incremental costs?
21)Do the unprofitable customers bring some value to your company? Is this value helping the perception of profitable customers?
22)How is the current, new, lost customer segment is contributing to your portfolio (the hard numbers)
23)Are we gaining the kinds of customers we want to gain?
24)Are our current customers responding to our value propositions in the way we want, or do we have to make changes?
25)Are we losing valuable customers?
26)Who are your “best” customers?
-How do you define best?
-What is the economic profitability (in $) and return on invested capital (in %) of your best account?
-How do you set your profitability target for each account?
-Who are your worst accounts? What are their profitability levels?
-What is the minimum required profitability per account?
27)How do you define the level of your customer knowledge?
-How do your products and services affect your accounts strategy?
-How do your products and services affect your accounts revenue, asset and income?
-How strong is the senior management relationship between your company and your accounts? CEO to CEO?
-Who are the real decision makers in each customer organization?
-What is your company’s share of wallet with your accounts?
-Who are your major competitors? What are their killer value propositions?
-If you were to increase your prices by 10 percent, how many customers would you lose?
28)Do you segment your customers?
-What is your basis for customer segmentation – industry geography, size, other?
-How are you serving each segment differently from the others?
-What profitability goals per segment do you set?
-What are the benefits of serving segments differently – improved profitability? Something else?
29)How do you target new accounts?
-Why do you target those accounts?
-How will you serve each one of them differently from the others?
-What will be the results of serving them differently?
-How do you decide how much of your resources to invest in target segments?
30)What are your churn rates by customer segments?
-What are the top reasons for the churn? How do you win back lost accounts?
-Do segments constitute a certain concentration of products and services? Why?
31)Which accounts are in each decile by revenue and profitability?
-What are the noticeable similarities and differences between customers in the different deciles?
-What percentages of your accounts contribute 80% of your profitability? Or revenue?
32)What are you churn rates by decile?
-What are the top reasons for churn in each decile? What do you do to win back lost accounts?
-Do top deciles constitute a certain concentration of products or services? Why?
33)What can be done to increase your retention rate?
-What are the differences in retention among profitability deciles?
-Are the business units structured to retain profitable customers for long time?
34)How much do you know about your customers purchasing behavior?
-What is their frequency of visit?
-What is their conversion rate?
-What is their average spend per transaction?
-What was their total spend with you during the past five years?
-What is the size of their wallet? What percentage is spent with you?
-Do they prefer your value propositions over your competitors? And if so why?
-If you were to increase your price by 10 percent, how many customers would you lose?
35)How are you segmenting your customers?
-What is your basis for customer segmentation – needs, lifestyle, geography, other?
-How are you serving each segment differently from others?
-What are the benefits of serving segments differently – improved profitability? Something else?
36)What is your customer segment profitability?
-What is customer’s or segments frequency of transaction, transaction amount, longevity, recency, etc?
-What do you do to affect customer’s behavior? How do you monitor the changes?
-What are the differences in profitability between customers or segments?
37)What aren’t more customers buying our high margin services?