Customer Profitability and Demand Chain Strategies

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Summary

Demand chain strategies built upon customer value metrics such as profitability or lifetime value provide examples of the effective application of Ventana Research’s PerformanceCycle framework for driving performance improvement. Ventana Research suggests that cross-functional marketing, sales, and service strategies that are created to engage value-based customer segments could help organizations realize impressive return on customer information assets. We further suggest that an account-management attitude toward customer relationships is an important ingredient in a successful deployment.

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Customer value and profitability metrics provide a PerformanceCycle foundation of “understanding” in the Ventana Research performance management framework. Measurable performance improvement comes only through leveraging this understanding to optimize processes and applying technology to bring the organization into greater alignment.

Ventana Research finds that best practices in the demand chain at top performing organizations are optimized with robust applications built on a solid interpretation of cause-effect relationships. What are the determinants of customer value? What are the characteristics of profitable, marginal and unprofitable customers? What can be learned from customer attributes and behaviors? What are the relative responses to organizational actions, attitudes, and behaviors? What organizational behaviors can be identified that have influenced positive, profitable interactions with customers?

These are all straightforward examples of customer segment and market response analyses that take on new meaning when applied to customer segments defined on profitability. When organizations derive optimal strategies from a clear understanding of profitability by customer, as well as by product group and channel or vertical target market, the real value of customer value-based metrics begins to surface.

Cross-functional objective setting by profit segment is an approach that resonates with virtually any senior business management team. When the fundamentals of segmented target marketing are extended into the sales and service functions, cross-functional alignment is brought into the customer value dimension. In this scenario, all customer-facing operatives are armed with consistent knowledge and support systems that differentiate customers and prescribe modified behaviors based on profit potential going forward.

The marketing department targets its efforts to reach and capture leads with higher profit profiles, not just higher response rates. The sales department qualifies prospects based on profitability expectations, not only revenue. Account management is goaled on migrating existing customers into more profitable segments, not just retention or cross-sell rates. Service center practices are optimized to align with value-weighted customer satisfaction scores. In these examples, each profit segment receives specialized treatment that reflects not only differentiated marketing messages and promotional offers, but also specialized sales support materials and customer service procedures and practices. This is clearly doable only with scalable applications and IT infrastructure.

This value-based strategic technique applies well in both business-to-consumer (B2C) and business-to-business (B2B) commercial environments. Ventana Research is of the opinion that adoption of an ongoing account management mind-set is the most important differentiating factor in either environment. A customer value-based account management approach is more likely to be a de facto best practice in top performing B2B organizations. A finite customer/prospect base and direct personal contact with each customer is more typical. Even without a supported value-based strategy, top performing account reps will judgmentally determine which customers are marginally more fruitful customers and prospects at a given point in time. A B2C organization’s larger customer universe makes such an ad hoc approach impractical, increasing the value proposition of a software-based solution.

Assessment

Among those organizations that have established a foundation of customer value and/or customer profitability, Ventana Research asserts that such metrics should be dynamically maintained and used more often as the basis for cross-functional business initiatives. Those that have not built customer value metrics should do so. Regular assessment of enterprise and business unit P&L will drive new business initiatives, and, in a similar vein, changes in product profitability are often the basis for shifting organizational objectives. Clearly, customer profitability dynamics should drive strategies across the demand chain. We further recommend that value-based strategies best bring about performance improvement when account management processes are linked to sales management. Customer acquisition efforts and those aimed at retention are best treated as a single process continuum, defined to encompass all components of the customer-facing demand chain.

See also:

Customer Profitability is Not a Financial Metric
Demand chain perspective often accelerates resolution.

Sales Effectiveness And Customer Profitability
Using planning and analysis to optimize account coverage.

Customer Profitability Revisited
A strategic initiative for finance executives

The Customer Drives the Demand Chain
Customer intelligence is becoming a priority.

Jack Hafeli is VP & Research Director - Customer Intelligence & Demand Chain Performance at Ventana Research