In our training courses and seminars, we have read more theses on this topic than on customer value. Even after all these years, we are still surprised that this instrument is so rarely found in sales. That’s why this article will look at the basics of customer value. Basically, a customer value model is an elementary building block of customer-oriented corporate management and therefore of sales excellence. As already mentioned several times, in the past, turnover and market share were central features of corporate management. Now that more and more markets are stagnating and more sales channels can be used, the focus is shifting more towards a company’s profit. But why doesn’t it make so much sense to simply stick to turnover and market share?
Customer value describes the current value of a customer’s future profit over the entire duration of their relationship with an organization. The sum of all individual customer values of an organization results in the customer equity
A distinction must be made between two types of company. Companies that sell chocolate, for example, can assume that most customers eat a similar amount of chocolate. Certainly there are moments in life, such as the pain of separation, when chocolate consumption can increase significantly, but the differences between the spending of individual customers is relatively small. There is therefore a high correlation between turnover and profit. However, this simple equation is already beginning to crack as a result of e-commerce, because logistics costs and discounts can lead to a negative contribution from a larger proportion of customers, despite supposedly high sales. Here, the customer value on the individual customer holds less control potential. For many companies, however, this distribution is significantly different. Often 20% of customers or even less account for 80% of sales (Pareto principle). In addition, customers from this 20% segment often receive large discounts and are intensively supported by the sales department. For example, a key account manager should be paid CHF 150,000 or more per year. As a result, studies show that the correlation between customer turnover and customer profit breaks down for these companies from around the 2000s. The better the understanding of the value contribution of customers in a company, the greater the potential to increase profits. This is one of the fundamental principles of customer value.
Management by means of customer value pursues two basic objectives: the highest possible increase in sales and the highest possible reduction in costs. Not both are possible with every customer. While sales data per customer is usually still available, cost analysis is apparently a major challenge on a day-to-day basis. Most companies put a great deal of effort into profit development at product level. Fixed and variable costs are precisely determined and continuously optimized. Be it in the selection of suppliers, the purchase of new machines or the adaptation of processes. As a starting point, it should be noted that most companies have extensive experience and expertise in, as the saying goes, “keeping costs under control”. The situation is completely different when it comes to customers. Although most companies can precisely determine the turnover per customer, the costs are often hidden. The first impulse we hear from sales staff on this subject is that it is difficult. Ok – is that really the case? Is it really easier to determine the exact production costs for a good than the costs for a customer? If you take a closer look, it quickly becomes clear that it is certainly not more difficult, but rather easier, to determine the value of a customer. The challenge is therefore not to be found in the degree of difficulty, but in the existing skills and experience in the company.
Before the individual methods for determining customer value are discussed, a distinction should be made between a pure past analysis and a past and future analysis for determining customer value. If the customer value model is to be based purely on a historical view, the following system can be used to determine value. This system is generally referred to as the customer contribution margin. The first step is to define the period in which the customer valuation is to be carried out. It should be noted that the period is adapted to the purchasing cycle of the average customer. The purchasing cycle plus one period applies. If, for example, customers buy the offer once a year on average, the period should be set at two years. Setting the observation period to the financial year may be well received by the accounting department, but can lead to dangerous results. The calculation is based on the following system:
Turnover of the customer in period XY –
- Discounts
- Number of customer visits * average visit costs
- Number of calls * average cost of calls
- Number of emails * average cost of emails
- Offer preparation costs
- Training (if not invoiced)
- Care visits * average visit costs
- Support calls * average cost of calls
- Support emails * average cost of emails
- Costs for complaints special interactions (fax machine)
- Percentage of costs for digital channels / employees / website / newsletter / social media / trade fairs / events / communication activities
- …
However, a customer value calculation should not only be based on the past. This is also part of the basics of customer value. The term customer value also refers to the future and should help to support decisions for the future development of a company. This future value involves more than the projection of a customer’s current purchasing behavior. Customer value comprises two groups of value drivers: the transaction potential, which results from sales transactions, and the relationship potential, whose potential beyond transactions with the customer stems from the fact that the customer feels connected to the company. The transaction potential is made up of the following elements:
- Base volume: the customer contribution margin derived from the purchase history and also expected for the future.
- Intensification potential: the potential arising from the expansion of the historical base volume through the purchase of the same product type.
- Cross-selling potential: the potential arising from the purchase of another product in a different product category (e.g. opening a savings account after purchasing a current account).
- Up-selling potential: the potential that arises from the sale of higher-value products or product bundles over time.
- Potential from falling price elasticity: the potential arising from customers’ willingness to forego price advantages.
- Cost reduction potential: the potential that arises from costs for marketing and sales that are reduced through the customer relationship and for satisfying customer needs.
The relationship potential is made up of the following elements:
- Reference potential: the potential that arises from recommendations from customers to their environment.
- Information potential: the potential that arises from customer feedback.
- Cooperation potential: the potential that arises from the customer’s willingness to cooperate with the company.
This list shows that a wide range of data can be used to create a customer value, provided it is available in the organization at an individual level. There are two different approaches to determining customer value. The organization “estimates” the future value contributions manually or using a formula/algorithm in CHF, or qualitative weightings are applied. In both approaches, an estimate is made by the respective sales employee. To supplement the basic principles of customer value, a recommendation for the temporal integration of the respective dimension into a customer value model is presented in the following table. A three-stage approach is recommended, which should be based on the company’s capabilities with regard to the specific time periods. A minimum of three years should be assumed.
| Dimension | Implementation level | Quantitative valuation (CHF) |
Qualitative assessment (Scale 1-7) |
|---|---|---|---|
|
Base volume |
1 |
5,000 CHF |
6 |
|
Intensification potential |
2 |
1,000 CHF |
2 |
|
Cross-selling |
1 |
2,000 CHF |
2 |
|
Up-selling |
2 |
0 CHF |
1 |
|
Falling price elasticity |
2 |
300 CHF |
3 |
|
Cost reduction potential |
2 |
1,000 CHF |
4 |
|
|
|
|
|
|
Reference potential |
1 |
6,000 CHF |
7 |
|
Information potential |
2 |
0 CHF |
1 |
|
Cooperation potential |
3 |
3,000 CHF |
6 |
|
Sum: |
|
18,300 CHF |
32 |
People with a financial perspective will probably prefer the quantitative valuation because it helps to determine the bottom-up financial development of the company. In sales, the financial perspective is certainly also valuable, but at the center of the customer value calculation is the support plan and the discount system. Both are based on the fundamentals of customer value. Depending on the different value segments, the sales department must invest differently in the respective customers – be it through the type and intensity of support or the discount system.
In practice, the large C or D customer segment quickly presents a challenge in this form of customer evaluation. How can such a forward-looking perspective be adopted for a large customer segment? The answer lies in time. In a traditional B2B company, customer relationships last for years. The starting point is the back office. They should contact the respective customers on the basis of the customer coverage contribution (this can also be via email) and systematically assess the potential. It is therefore completely sufficient, for example, to assess all C customers in the first year, all D customers in the following year and then all C customers again in the following year. Potentials are also estimated incorrectly and things can change spontaneously at the respective customer. More important than the accuracy of each individual customer in the C and D segments is the systematic maintenance of the entire customer base over time with the highest possible efficiency. This requires those responsible to adapt the existing internal resources optimally to the size of the customer base. It may also be expedient not to integrate the D-segment into the analysis at all. The elements presented are part of the basic principles of customer value and must be taken into account in order to increase sales efficiency.
