Taking a customer centric approach will significantly increase business value and profitability by actively creating a profitable customer portfolio.
Product centric thinking leads us to think that value for the business comes from the revenue or fees created by products. However, the value actually comes from the people (customers) who make decisions. These decisions are about what to purchase, how often, whether to stay with you, and whether provide positive or negative word of mouth.
Business leaders can make better decisions about the success of their organisation by understanding the value of the customer portfolio and the variance in contribution between different customer groups.
The value from your Customer Portfolio
Profitability for a business comes as a direct outcome of the customer portfolio. Whether we are talking about businesses (for profit, large, medium or small), Government Owned Corporations, or a not-for-profit organisations. The value they create is a sum of the customer portfolio.
The value from your Customer Portfolio (or customer base) is the cumulative sum of your customers. The number and value of those customers. The number is literally the sum of customers. And then over time the ones you add, minus the customers you lose. Their value then is the margin per customer, revenue earned through these customers, less the cost to serve.
Estimated Customer Lifetime Value
If you retain a certain portion of your customers each year there is an attributable value for the life of the customer ( estimated Customer Lifetime Value or eCLV). For example, if you retain customers at 80% and gain 100 new customers in year one, then in year two you will still have 80 of these customers, in year two you will still have 64 of these customers, and so on. Are these customers paying subscription fees, repurchasing and what are the ongoing costs to serve..?
Your customer portfolio is made up of the customers you acquire and the customers you retain. The ongoing value of these customers in your customer portfolio is the value of your business.
The value of advocacy
Also, the level of advocacy within your customer portfolio is a key driver for business profitability. Word of mouth has always been critically important but today it is paramount. What percentage of your customer portfolio actively promote your products and services to their friends, colleagues and family..?
What percentage of customers actively provide negative word of mouth (detractors)..? The level of advocacy within your customer portfolio has a critical impact on the number of customers you retain. As well as the number and cost of acquiring the new customers.
High levels of negative word of mouth can increase costs. Such as cost-to-serve, acquisition costs and loss rates, but it is always relative to alternatives available to your chosen customers. For example, some telcos have a high percentage of customers giving negative-word-of-mouth (detractors), but they may not be that concerned as long as the alternative telco has just as many or more detractors.
Most businesses have an ongoing relationship with their customers and this is where most of the ongoing revenue comes from. The customer behaviour of repurchasing and word of mouth (created by the ongoing relationship) is a significant driver of the profitability of the customer portfolio.
If your business produces a one-off sale and no further relationship, then you might feel like you are in a slightly different context. However you are still reliant on customer behaviour.
Online businesses introduced customer feedback in the late 1990’s but now almost every business has an online presence. Customer reviews drive search results and significantly influence customer decision-making. For example, if you are planning a holiday away or an interstate business trip, your choice of the hotel where you plan to stay. You will most likely be influenced by the reviews of other customers, or what others have told you.
The level of advocacy within your customer portfolio is a key contributor to the value of your customer portfolio.
The value of the business is derived from the customer portfolio. The cumulative value of each customer. This value the dollar value of each customer combined and their word of mouth value. And this value is a predictor of the future value of the business.
Leaders should see groups of customers as potential value streams. And recognising that different customer groups represent different value to the business.
Read more about this approach in this post that describes the Five Tenets of the Customer Centric approach to Business and the Nine Imperatives for Leaders. You may also get value from profit by design and the new manifesto for sales.