Customer-Centric Metrics Make Your Demand Generation Dollars Go Further by Laura Patterson * [38]

 

As one of the primary revenue generators for an organization, Marketing provides three essential roles: finding profitable customers, keeping profitable customers, and growing the value of these profitable customers. Customer-centric metrics offer a good starting point for identifying prospects who most look like your profitable customers, knowing which customers and products are making the largest contributions to the bottom line, and for effectively investing your demand generation dollars. 

Besides measuring customer satisfaction and loyalty, the impact on profitability is also an important measurement of any customer-centric strategy. Many companies have demand generation metrics and even measure customer satisfaction. Yet, we have found all too often that while companies say they are customer-centric, they have few customer-related metrics.

Most marketers agree that creating a satisfying customer experience positively affects a company’s profitability. The customer experience includes both rational and emotional aspects, as well as how the customer feels about the brand and the company, and what the customer thinks every time he or she interacts with the company. Having a positive impact on the company’s profitability translates into either increased revenue or some reduction in cost.

Ø Establish Profitability Targets - 3 Key Metrics

If you can calculate these three important customer-centric marketing measures, you can establish a set of customer profitability targets:

1.   Customer acquisition cost: Determined by calculating the average cost to acquire a new customer. See more below about how to use this measure in your demand gen efforts.

2.   Customer retention cost: Determined by calculating the cost to retain and serve an existing customer.

3.   Average customer profit: Determined by calculating the average value of each customer segment after accounting for standard costs.

You can monitor your success by measuring how well you are staying within your customer profitability targets for each of these metrics. You don’t need sophisticated tools to measure customer profitability. 

Ø Add Profitability Targets to Your Dashboard

Customer metrics are one of the primary categories that should exist on every Marketing dashboard. Once you have calculated these three customer-centric metrics you can set targets for each and report Marketing’s performance against the goal and Marketing’s impact on overall customer profitability on the Marketing dashboard. Overtime you will be able to use this data to determine which customers offer the best opportunities and focus Marketing investments on customers who will have the greatest impact on the bottom line.

Now that you understand which customers are profitable, you can apply this knowledge to determine which customer segments are worthy of your demand gen dollars.

Ø Customer Metrics to Guide Marketing Investment

When it comes to effectively investing your demand gen dollars, we recommend focusing on two customer-centric measures: customer value and cost to acquire. These measures when combined together can help your organization decide how much of your resources can be profitably allocated against a particular customer or set of customers.

The two customer-centric metrics we’re suggesting will help you identify the customers and/or segments to pursue. While it would be wonderful to be able to invest in every customer, most companies need to be selective.

We’ve simplified an approach to jump start your thinking process. You’re going to create a  2 X 2 grid with one axis being customer acquisition cost and the other axis being customer value.

Before you do these steps, decide which customers go where on the grid. Once you generate a list of all your customers, score each customer and/or customer segments for both customer-centric metrics.

1.   Create a Customer Value Score: To create a customer value score you will need information generated from two pieces of data: purchase frequency and customer revenue.

o    On the customer list table have a column for purchase frequency (you may want to use a numeric rating scale for this measure) and one column for revenue (you may want to create ranges for revenue and use a numeric rating scale for each range). Score each customer and/or segment. Customers who have high values on both columns (for example all customers who have either a 5 and 5 or 4 and 5 or 5 and 4 in the columns) would be your high value customers.

o    Those customers with a 5/5 would receive an overall score of 5, those with a 4/5 (frequency and revenue) you may want to give an overall score of 4.5 and those with a 5/4 (frequency and revenue) an overall rating of 4.

o    Do the same for each combination, with those customers with both a 1 in both columns having the lowest score of 1.

2. Calculate Cost to Acquire. For your same list of customers, in another column, calculate your cost to acquire each of these customers. Customer acquisition cost is the cost associated with convincing a customer to buy your product or service, including research, marketing, and advertising costs. It’s an important business and marketing metric that can be used to gauge marketing’s effectiveness.

• Again, to keep things simple, create acquisition cost ranges and then assign a 1-5 rating scale for each range (we’d suggest using 1 as the lowest cost range and 5 for the highest cost range).

Ø How to Use Your Scores

For each customer or customer segment you should now have 2 rating numbers: a number derived for the customer value score and a number for customer acquisition.

Divide your 2  X 2  grid into 4 quadrants:

• High Value/High Cost
• High Value/Low Cost
• Low Value/High Cost
• Low Value/Low Cost.

Plot each customer into the appropriate quadrant.

> Score Customers for Each Metric

Those customers and prospects similar to them in the High Value/Low Cost quadrant are where you should spend the money.

Obviously very little, if any resources, should be allocated to customers and prospects in the Low Value/High Cost. You may have to have some internal conversations about the other two quadrants and applying the customer lifetime value calculation to these customers can often help guide decisions related to customers in these two groups. While it may take some time, this is a relatively easy and affordable first step.

Unless you’re among the few marketers who have all the time and money in the world to burn, we hope employing this analysis helps you decide how to eke out the most value from your limited and precious resources. You’ve probably already come to the conclusion that the best place to spend it is on those customers who are most likely to buy.  

Got the customer-centric metrics bug and want to know what else you should be measuring? Here the top eight measures often associated with companies truly committed to being customer-centric:

1.   Customer retention

2.                2. Buying frequency

3.   Contact frequency

4.   Churn rate

5.   Average revenue per user

6.   Customer lifetime value

7.   Share of customer’s wallet

8.   A customer’s EBITDA

Conduct a quick audit to see whether your company tracks any of these customer-centric measures. If it doesn’t and being customer-centric is important to your organization, then it may be time to revisit the metrics you are measuring.

 * This post was reprinted with permission from VisionEdge Marketing, Inc. 

Laura Patterson is a marketing practitioner, consultant, writer, and speaker. Contact her at  laurap@visionedgemarketing.com. Also, check out Laura's article "The Value of Investing in Customer Value Management" [22].  Post Editor: Preview (blogger.com)