3/13/2007theseus professional services, llc1 the net present value in customer value analysis...
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3/13/2007 Theseus Professional Services, LLC 1
The Net Present Value in Customer Value AnalysisThe Net Present Value in Customer Value Analysis
Presented 13 March 2007
by Kevin GilsonTheseus Professional Services, LLC
Presented 13 March 2007
by Kevin GilsonTheseus Professional Services, LLC
3/13/2007 Theseus Professional Services, LLC 2
What is Customer Value?What is Customer Value?
And market-perceived quality?And market-perceived quality?
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Customer ValueCustomer Value
Market-perceived Quality Customer opinion of your products/services compared
to their opinion of your competitors Measured for present customers and potential
customers Identify important product/service attributes Determine how those attributes affect customer choices
Customer Value Market-perceived quality adjusted for the relative price
of your product/service
Market-perceived Quality Customer opinion of your products/services compared
to their opinion of your competitors Measured for present customers and potential
customers Identify important product/service attributes Determine how those attributes affect customer choices
Customer Value Market-perceived quality adjusted for the relative price
of your product/service
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Definition of QualityDefinition of Quality The evolution of Quality thinking:
Conformance quality Deming, Crosby, Juran, others Defined in terms of product/service
Customer Satisfaction Often mired in endless surveys and analyses
Market-perceived quality and value versus competitors Basis of the Baldrige Criteria
Customer Value Management Emerging thinking based on customer value analysis
The evolution of Quality thinking: Conformance quality
Deming, Crosby, Juran, others Defined in terms of product/service
Customer Satisfaction Often mired in endless surveys and analyses
Market-perceived quality and value versus competitors Basis of the Baldrige Criteria
Customer Value Management Emerging thinking based on customer value analysis
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Quality: a Strategic WeaponQuality: a Strategic Weapon
Four stages of the quality evolution: Total Quality Management (and variants)
Stage 1: Conformance quality Stage 2: Customer satisfaction Stage 3: Market-perceived quality and value relative
to competitors
Customer Value Management Stage 4: Quality and System Thinking are keys to
customer value management
Four stages of the quality evolution: Total Quality Management (and variants)
Stage 1: Conformance quality Stage 2: Customer satisfaction Stage 3: Market-perceived quality and value relative
to competitors
Customer Value Management Stage 4: Quality and System Thinking are keys to
customer value management
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Shift in FocusShift in Focus
Total Quality Management Stage 1: Internal operations Stage 2: Customers Stage 3: Market performance vs. competition
Customer Value Management Stage 4: Crucial role of Quality and Value in
the overall strategic framework (systems thinking)
Total Quality Management Stage 1: Internal operations Stage 2: Customers Stage 3: Market performance vs. competition
Customer Value Management Stage 4: Crucial role of Quality and Value in
the overall strategic framework (systems thinking)
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Measuring Customer ValueMeasuring Customer Value
Key Customer Metrics Relative Quality Perceived Value
Using this knowledge to drive the business Develop measures of quality and value Add the information to the company knowledge
base Use throughout the organization - across the
silos
Key Customer Metrics Relative Quality Perceived Value
Using this knowledge to drive the business Develop measures of quality and value Add the information to the company knowledge
base Use throughout the organization - across the
silos
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Relative QualityRelative Quality What is it?
Quality of product or service is always relative. The question: Relative to what? Relative to:
Customer perception of “quality” Market perception of “quality”
We need to know: Why don’t people buy our product/service? What is our performance relative to our competition
as perceived by our customers?
What is it? Quality of product or service is always relative.
The question: Relative to what? Relative to:
Customer perception of “quality” Market perception of “quality”
We need to know: Why don’t people buy our product/service? What is our performance relative to our competition
as perceived by our customers?
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Perceived ValuePerceived Value
What is it? How does the customer perceive the value of
products/services relative to all offerings? Customer perception of “value” Market perception of “value”
We need to know: What does the marketplace feel about all products? What does your customer think about how your
products/services compare to the competition on quality attributes?
What is it? How does the customer perceive the value of
products/services relative to all offerings? Customer perception of “value” Market perception of “value”
We need to know: What does the marketplace feel about all products? What does your customer think about how your
products/services compare to the competition on quality attributes?
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Customer ValueCustomer Value
Customers seek products/services that they perceive deliver better value than the competition. Develop “Generally Accepted Strategic
Principles” that define customer value metrics What does “quality” mean to customers? How are competitors performing on those aspects of
quality? How are you performing? Define the performance metrics that are traceable to
the customer definition of “quality”
Customers seek products/services that they perceive deliver better value than the competition. Develop “Generally Accepted Strategic
Principles” that define customer value metrics What does “quality” mean to customers? How are competitors performing on those aspects of
quality? How are you performing? Define the performance metrics that are traceable to
the customer definition of “quality”
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Market-perceived Quality ProfileMarket-perceived Quality Profile
Create a profile based on quality attributes: Ask customers and competitor’s customers
what factors influence purchase decisions Establish a customer-based weighting of the
factors as determined by customers Have customers rate each business (Likert scale) on
each factor score x weight = customer satisfaction score
Plot on a Customer Value Map
Create a profile based on quality attributes: Ask customers and competitor’s customers
what factors influence purchase decisions Establish a customer-based weighting of the
factors as determined by customers Have customers rate each business (Likert scale) on
each factor score x weight = customer satisfaction score
Plot on a Customer Value Map
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Customer Value MapCustomer Value Map
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Customer Value MapCustomer Value Map
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Customer LoyaltyCustomer Loyalty
The basics: Understand your customer value proposition Create a value proposition for your employees Provide a value to your investors and other
stakeholders Products/services will keep customers
returning for additional products/services Loyal customers are retained customers (as
long as you continue to deliver value)
The basics: Understand your customer value proposition Create a value proposition for your employees Provide a value to your investors and other
stakeholders Products/services will keep customers
returning for additional products/services Loyal customers are retained customers (as
long as you continue to deliver value)
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Loyalty-based Management Model
Loyalty-based Management Model
Customers see their value proposition being fulfilled
Loyalty is a strategy not a tactic Maximize profitability
Decrease hiring costs Decrease employee turnover
Grow the business through customer satisfaction and competitive costs
Customers see their value proposition being fulfilled
Loyalty is a strategy not a tactic Maximize profitability
Decrease hiring costs Decrease employee turnover
Grow the business through customer satisfaction and competitive costs
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Today’s MarketplaceToday’s Marketplace
A little Latin lesson: We have moved from caveat emptor
Buyer beware
To caveat mercator Seller beware
People who receive “bad” value seldom return or give your business a second chance
A company must get and retain the right customers
A little Latin lesson: We have moved from caveat emptor
Buyer beware
To caveat mercator Seller beware
People who receive “bad” value seldom return or give your business a second chance
A company must get and retain the right customers
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Economics of CustomersEconomics of Customers
Loyal customers provide Base profit to the company Revenue growth through added services
purchased over time Cost savings in recruitment of new customers Referrals of similar businesses to your product
line Price premium - no introductory “deals”
Loyal customers provide Base profit to the company Revenue growth through added services
purchased over time Cost savings in recruitment of new customers Referrals of similar businesses to your product
line Price premium - no introductory “deals”
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Customer Lifecycle Profit Pattern (Credit Card Industry)
-100
-50
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Age of Account (Years)
Annual Profit ($)
Customer Lifecycle Profit Pattern (Credit Card Industry)
-100
-50
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Age of Account (Years)
Annual Profit ($)
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Cumulative Profit Over Customer Lifetime ($)
-500
0
500
1000
1500
2000
2500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Age of Account (Years)
Cumulative Profit ($)
Cumulative Profit Over Customer Lifetime ($)
-500
0
500
1000
1500
2000
2500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Age of Account (Years)
Cumulative Profit ($)
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Customer CharacteristicsCustomer Characteristics
The Loyalty Coefficient Some customers prefer long, stable
relationships with suppliers Some customers are more profitable Some customers see your products/services
provide more value than the competition
What are your customer retention rates in each category?
The Loyalty Coefficient Some customers prefer long, stable
relationships with suppliers Some customers are more profitable Some customers see your products/services
provide more value than the competition
What are your customer retention rates in each category?
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Customer Loyalty MetricsCustomer Loyalty Metrics
Some measures of the Value of your Customers are: Customer Retention Rate Customer Defection Rate to a competitor’s
product/service Customer Duration with your company Customer Cash Flows Classes of Customer (stratification)
Some measures of the Value of your Customers are: Customer Retention Rate Customer Defection Rate to a competitor’s
product/service Customer Duration with your company Customer Cash Flows Classes of Customer (stratification)
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Investing in Your Customer BaseInvesting in Your Customer Base
How do you make the decision to increase one of the Customer metrics? Calculate the Customer-base Net Present Value
Value of Current Customer Inventory: Customer Duration (how long present customers remain
with your company) Lifecycle Profits (value customers contribute as they stay
with your company and purchase products/services) Flow of value from anticipated New Customers:
New-customer Gain Rate (rate at which new customers are added and the quality of those added customers)
How do you make the decision to increase one of the Customer metrics? Calculate the Customer-base Net Present Value
Value of Current Customer Inventory: Customer Duration (how long present customers remain
with your company) Lifecycle Profits (value customers contribute as they stay
with your company and purchase products/services) Flow of value from anticipated New Customers:
New-customer Gain Rate (rate at which new customers are added and the quality of those added customers)
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Steps to Customer ValueSteps to Customer Value
1. Stratify the customer base: New customers Gainers (current customers doing more business) Decliners (current customers doing less business) Defectors (current customers leave for competition)
2. Attribute revenue growth to each customer type Calculate NPV for new, current and defector customers
3. Use the information to determine improvements in your customer base or value offering
Which customers will you seek more of? How will you provide value to retain these customers?
1. Stratify the customer base: New customers Gainers (current customers doing more business) Decliners (current customers doing less business) Defectors (current customers leave for competition)
2. Attribute revenue growth to each customer type Calculate NPV for new, current and defector customers
3. Use the information to determine improvements in your customer base or value offering
Which customers will you seek more of? How will you provide value to retain these customers?
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7 Tools of Customer Value Analysis
7 Tools of Customer Value Analysis
Bradley Gale, Managing Customer Value Market-perceived quality profile Customer Value Map Market-perceived price profile Won/lost analysis and why Key events timeline
Map actions to improve competitiveness to customer value Head-to-head chart
Shows customer value relative to competition What/who matrix
link quality attributes to business processes
Bradley Gale, Managing Customer Value Market-perceived quality profile Customer Value Map Market-perceived price profile Won/lost analysis and why Key events timeline
Map actions to improve competitiveness to customer value Head-to-head chart
Shows customer value relative to competition What/who matrix
link quality attributes to business processes
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Company’s Value PropositionCompany’s Value Proposition
Target Customers to add value Identify the dimensions of quality and service
that will create value for the target customers Create value metrics to track progress How will the value proposition be delivered? Identify the key metrics to monitor relative to
the value of the offering
Target Customers to add value Identify the dimensions of quality and service
that will create value for the target customers Create value metrics to track progress How will the value proposition be delivered? Identify the key metrics to monitor relative to
the value of the offering
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ReferencesReferences
Gale, B. T., Managing Customer Value, Creating Quality and Service That Customers Can See, New York, The Free Press, 1994. http://www.galeconsulting.com
Reichheld, F. F., The Loyalty Effect, Boston, Harvard Business School Press, 1996. http://www.bain.com
Naumann, E., & S. Hoisington, Customer Centered Six Sigma, Milwaukee, ASQ Press, 2001.
Capodagli, B., & L. Jackson, The Disney Way, New York, McGraw-Hill, 1999.
Gale, B. T., Managing Customer Value, Creating Quality and Service That Customers Can See, New York, The Free Press, 1994. http://www.galeconsulting.com
Reichheld, F. F., The Loyalty Effect, Boston, Harvard Business School Press, 1996. http://www.bain.com
Naumann, E., & S. Hoisington, Customer Centered Six Sigma, Milwaukee, ASQ Press, 2001.
Capodagli, B., & L. Jackson, The Disney Way, New York, McGraw-Hill, 1999.