In business administration and marketing, customer value is the contribution of a customer evaluated by the provider to the achievement of the provider’s business goals. Not every customer is profitable for a company. Every company has a certain number of customers for whom it spends more costs on maintaining relationships than it earns in profit contribution. Customer Relationship Management (CRM) aims to improve this situation. This includes customer evaluation (assessment of customers according to their potential, which can be used by the company) as well as the resulting marketing or possibly demarketing activities.
Determining Customer Value
There are several ways to determine customer value:
- Customer Lifetime Value (CLV), which estimates a customer’s profitability in terms of their net present value for each period of the business relationship. The CLV is therefore an economic consideration of the customer’s lifetime.
- RFM analysis, in which customers are divided into target groups or segments based on various criteria (recency, frequency, monetary value). RFM shows which customer groups are particularly profitable and for which customers certain campaigns or marketing offers are less worthwhile.
- Customer contribution margin accounting, in which revenues and expenses are offset against each other for each customer in order to obtain the surpluses per customer relationship.
- ABC customer analysis, in which customers are classified according to their turnover and/or contribution margin.
- Scoring model in which all transactions with a customer are weighted and evaluated with positive or negative points. The weighted point value is used for customer classification.
- Client portfolio
All of these classifications have the aim of applying a differentiated customer relationship strategy in order to counteract customer treatment according to the watering can principle. For cost reasons, only the most profitable customers receive elaborate support. In the case of unprofitable customers, costs are reduced.
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The focus on customer profitability has the advantage of taking a long-term perspective. Customer care expenses are investments that must yield long-term returns.
Client Portfolio
The portfolio approach developed in the financial sector assumes that the various investment options are mixed in such a way that there is a balance between profit and risk. Since the seventies of the last century, this approach has also been used in strategic corporate and marketing planning.
In terms of customer value, this means that the funds invested in each client must be in balance with their profit potential. The following four customer groups can be distinguished:
- Stars: These customers derive a great deal of value from the company’s products and/or services. On the other hand, they are very valuable to the company as they provide high contribution margins as well as long-lasting customer loyalty. This is a classic win-win situation. This customer group is the most attractive for the company.
- Poor dogs: These customers derive little benefit from the company’s products or services and have little value to the company. If it is not possible to turn them into more profitable customers, investments in this customer group should be reduced.
- Question mark: They represent a high value to the company, but derive little benefit from its products or services. These can be, for example, long-standing customers who stay with the company mainly out of habit. The relationship with these customers is jeopardized by the actions of competitors, as they are not optimally served by the company. For this group of customers, consideration should be given to improved products or services, as well as additional benefits and similar activities.
- Free riders: They derive a high value from the company’s products or services, but have little value to the company. These are, for example, large companies that enforce large discounts. Basically, the prices for this group of customers should be increased or the level of service lowered. However, the evaluation of such customers must also take into account spill-over effects that may arise from their switch to competition.
Customer Potential Analysis
By means of the customer potential analysis, the future opportunities of the individual customers are evaluated in order to obtain indications for the differentiated processing of these customers. A purely past-related consideration of figures from the company’s own accounting, such as sales, incoming orders, contribution margins, is not sufficient for this purpose.
- Client’s company size and growth
- Competitive situation of the customer
- Client’s management
- Macroeconomic influences, such as cyclical dependence
