Customer lifetime profitability how to grow and manage your best customers

This article is an extract from Performance, Volume 7, Issue 2, May 2015. The full journal is available at
ey.com/performance
Customer lifetime profitability: how to grow and manage your best customers
The core idea behind
CLP is that companies
can improve their
profitability and
lower their costs by
being more customer
focused.
T
he development of longterm
profitable relationships
should be a major focus
for all businesses. Markets
are increasingly becoming
competitive, with consumers
actively seeking brands and providers they
can rely on and keep purchasing from over
many years.
How those relationships are managed
and nurtured is the foundation for CLP,
which offers a measure of the underlying
profit for an organization’s customer base,
and considers the future revenues and costs
for the lifetime of the customer.
Many organizations do not have an
accurate understanding of which customers
are profitable and which are unprofitable.
Companies that do are able to deploy
strategies to acquire and retain more
profitable customers, and increase the
profitability of customers that are low or
loss-making. These organizations achieve
profit growth more efficiently, retain more
customers and spend more effectively.
By taking a customer-centric view
to managing the revenue and cost
base, organizations can make decisions
founded on customer need and deliver
“good profits” derived from improving
customer experience and advocacy. This
means investing in what matters most to
customers and, at the same time, removing
or improving processes that frustrate
customers and increase an organization’s
costs. Enterprises that adopt this approach
will be rewarded with better customer
outcomes as well as improved profitability.
What does customer value
really mean?
The concept of a customer lifetime
value has been discussed for some time.
What EY has found is that many of the
businesses we work with don’t yet have a
detailed understanding of the cost-to-serve
component of their businesses. The core
idea behind CLP is that companies can
improve their profitability and lower their
costs by being more customer focused.
Those of our clients that have a close
eye on the future work with us to extend
CLP and focus on acquiring and — more
importantly — retaining high-value
customers. In the CLP model, gaining large
numbers of customers isn’t the focus, but
gaining high-value, long-term customer
relationships is. What businesses then see
is a strong positive financial outcome from
CLP, and also a strong customer services
outcome, which feeds back into CLP.
The foundation of CLP is data. Until fairly
recently, a clear and comprehensive insight
into customer behavior was quite difficult
to develop. Today, thanks to research, big
data and social media, detailed customer
profiling has become possible. CLP, by
extension, is a product of this new insight
and the way massive datasets can be
interrogated to reveal customer behavior
and, to a large degree, predict future
customer behavior.
Yet the surge in big data brings its own
challenges. In particular, the information
crisis that is now facing a significant
proportion of organizations. There are
opportunities for the taking but only for
those businesses that can successfully and
consistently identify what information is
the most relevant and generates the most
value. For those that are unable to make big
data work for them, the future will bring a
lack of control.
The vast quantity of data now pouring
into the businesses we work with has
delivered an unprecedented level of
granular insight into customer behavior.
This insight is also in real time, which means
companies need to be more agile if they are
to leverage effectively the information they
have.
More organizations are now focusing
on one-to-one customer marketing rather
than a model based around mass-market
broadcasts. These are delivered through
analytics, incorporating insights that focus
on personalized solutions and the “nextbest
action” for the customer using triggerbased
scenarios. Pre-empting customer
needs improves their experience and is a
powerful tool for engagement.
What we are finding is that many of
our clients are beginning to realize that
12 Volume 7 │ Issue 2