How To Convert Customer Data Into Profits
Your company or brand should be managed in such a way that the customer value is at the forefront and managed professionally to create value for the shareholders. That is how you begin converting customer data into profits.
Converting Customer Data Into Shareholder Value
Ever wonder what big companies do with your information? Ever wonder why when they know where we travel and when, on which airlines, in which class of service their customer service is so cold? They know, where my daughter goes to ballet lessons, what brand of dog food I buy, what medications I take, the restaurants where we eat, and the stores where we buy wine and books and clothes. Buying a home due to divorce? They’ll even get the particulars of who got what in the settlement. They know this and much else for millions of us, but they have no customized solutions for us? As a business owner, do you know how to convert customer data into real shareholder value?
Let’s look at some of these data-rich, value-poor corporations. Think of financial services firms, phone companies, airlines, retailers, hotel chains, rental car companies, service providers — the infotech revolution was supposed to make customer knowledge the killer competitive advantage of my time. The missed opportunity is stunning. Why have these companies failed to make use of the massive troves of customer data they possess is one of the great business puzzles of the Info Age?
How Much Is Customer Data Worth?
One important item to note that this is not mainly a technology problem. While integrating data scattered among a hodgepodge of business units and computer platforms is no layup, it is no longer an insurmountable hurdle.
If technology isn’t to blame, what is? Not privacy concerns, regulatory restrictions, or other apparent obstacles that managers like to cite. Talk with managers at companies that use customer data effectively, as well as those at companies that are struggling, and it’s clear that the most essential problems lie within. Converting customer data into real shareholder value — a process we call customer knowledge management (CKM). CKM starts with the right corporate mindset, organization, accountability, and leadership. Until an organization squares these away, even the fanciest new tools will do little but run up the IT budget.
7 Ways to Capture Value From Your Customer Data
The analysis of successes and failures in the use of customer data shows that every company needs a strong foundation made of seven elements. As they are described, ask yourself which ones your company has, needs to build, or needs to strengthen. Give your company a score of 0 to 10 for each trait. In the end, I’ll explain what your total means.
1. Leadership committed to delivering and maintaining a premium P/E multiple.
Great companies recognize that they must excel in the eyes of their capital suppliers — the shareowners. A weak stock means you’ll have a tough time attracting the best employees. It’s harder to please customers when you’re struggling to fund research and customer service. When you need to buy companies to get technology, talent, or access to key markets, a healthy stock may be your best currency. That’s why many leading companies focus explicitly on maintaining a P/E multiple that’s superior to some broad market benchmark such as the S&P 500.
In my experience; most companies are unwilling to set — even internally — such an aggressive goal. This is a significant problem, since using customer data more effectively often requires wrenching institutional change. Many of the companies sitting on untapped gold mines of customer data typically benchmark against peers, not the broad market. If the whole industry is in the dumps, a poor performer can look good by comparison and the urgency to improve vanishes. Set the capital market goals low, and the customer service goals will almost certainly be low as well.
2. Strategic planning built around customer segments — and a cultural belief that not all customers should be treated identically.
With the CKM tools now available, it’s far easier than ever for a company to learn a piece of crucial information: how much money it’s making (or losing) on each customer. You’d think every company would want to segment customers by expected profitability and treat the most profitable customers best. After all, extensive research — most notably by consultant Frederick F. Reichheld — proves that retaining current customers is enormously more profitable than bringing in new ones, and finding that goes double or triple for the most profitable customers.
Many companies resist
Often a key reason is that the corporate culture regards it as unfair to treat some customers better than others. It’s an odd attitude; after all, as consumers, we almost always feel we deserve special treatment if we’re loyal customers, and getting it makes us more inclined to do additional business. Keeping that in mind is important. Because customer loyalty is so valuable, the most profitable customers should get better treatment.
Applying that principle isn’t always easy
To satisfy your best customers, you must be able to segment not just by profitability but also by needs. For example, a bank might find that its most profitable customers include young professionals with big mortgages as well as elderly widows who keep large balances in savings accounts. Using customer data to personalize outreach, you would know only one of those groups would be a legitimate prospect for sophisticated investment products.
Some companies have made significant progress in creating (and acting on) multiple segments
The company long held that treating all customers equally was almost a moral obligation. Now it has come around to tailoring different strategies for different groups segmented by revenue, then sub-segmented by profitability, with third-party data and customer interactions used to gauge needs. Each revenue category includes profitable and unprofitable customers (an extreme example of the latter being one customer who calls some 3,900 times a year). All this data should be applied in several ways: to develop products and services for each group, to create marketing programs, and to differentiate service. The results are higher customer loyalty, better returns on marketing investments, and a more significant share of customers’ total spending on services.
Nevertheless, many companies remain wary of similar opportunities in their businesses. Failure to differentiate becomes an even bigger problem when the economy tanks. Companies cut headcount in branches, call centers, and installation centers, reducing customer service “equitably.” When it’s most essential to keep the most valuable customers and get more of their business, these undifferentiated cost cutters do precisely the opposite.
3. A genuinely customer-centric mindset and a corporate organization built around customer segments.
At most companies, the world revolves around products or functions or geography. Customers endure the all-too-familiar experience of contacting different parts of the organization and finding that each part knows nothing about that customer’s experience with the others. Have you ever called your local phone company and tried to order a new service or question a bill? For most of us, you may be treated like a total stranger, even if you’ve been a customer for decades.
For that to change, someone must “own” the customer — and that means each customer segment must be a business unit run by a manager with profit-and-loss accountability. This is a radical change at most companies, but it works. Dell is organized this way, an essential element in its knockout performance during the past 15 years. Why don’t more companies follow suit? Corporate politics are a major factor. A reorganization would take power from today’s product-, function-, and territory-based barons, all of whom command formidable resources with which to kill the new system.
More fundamentally, the problem is one of mindset — what the company perceives itself to be all about. Today, who uses customer data better than Amazon (AMZN)? No one. Ask former CFO Joy Covey why, and she replies immediately, “It’s the mindset.” From day one, founder Jeff Bezos made clear that Amazon would use its information about customers to build relationships with them and make them happy. There simply was no other way of operating.
Not many companies inherit a customer-centric mindset from their founders. But those that weren’t born with one will need to get one — and organize on that basis — before hoping to turn customer data into shareholder value. If you ask CEOs today, their response may be something like, ” We’re building toward that customer-centric model. “It’s a long slog, but Butler is starting with the right insight. “It’s more than just technology,” he says. “It’s a change in culture and organization.”
4. Caring enough about customer data to invest in developing it — and then holding managers accountable for returns on those investments.
It’s remarkable how many companies just don’t care about customer data. Banks in the United States for example, as an industry, always had the data, but threw it away. Today quite a few are cranking it up a notch with significant effort to create more value from what it knows.
Even companies that spend a lot on infotech often spend remarkably little on developing customer knowledge. At most of the companies I’ve looked into, infotech investment is conceived as building infrastructure — with the payoff defined vaguely at best — rather than as pursuing profitable projects.
It needn’t be that way. There’s a phrase that was coined by General Electric (GE),” drive it to the ledger,” meaning that if something is worth doing, its bottom-line benefits must be planned and tracked. Excellent companies routinely apply that practice to such activities as cost-cutting and working capital management because managers are accountable for those things. So if a company wants to make wise investments in developing customer knowledge, it will need to make managers responsible for the profitability of customer segments. Those managers will have to guide those customer-knowledge investments — and drive them to the ledger.
5. A culture that enthusiastically examines customer data uses it to form hypotheses, experiments and applies the results.
In any company, different people respond to data in different ways, some useful, others counterproductive. Here’s an excellent example of the latter at a major global retailer. During a review, managers excitedly told the company’s senior marketing executive that a study had discovered that the top 1 percent of customers accounted for about 25 percent of the company’s total credit card sales. But the executive wouldn’t believe it. With millions of customers coming into the firm’s stores every day, it just couldn’t be true that a mere 1 percent were that important. Intent on proving his intuition, he attacked the data and the design of the study — and resisted an insight that might unlock a new value proposition for his most important customers. His passionate subordinates eventually prevailed — a year later.
The best companies evaluate the data without prejudice, make inferences, and figure out ways to use it. Managers should sift through the data every day, looking for insights. The culture must endorse such behavior and penalize the more common unproductive responses to customer data.
6. A record of merging operations successfully, with zero declines in satisfaction among the most valuable customer segments.
In any company more than a few years old, customer data probably resides in several computer systems across the enterprise — marketing, production, shipping, billing. Putting those together is a big job, but in many companies, it’s even more significant because the company has recently gone through a merger.
Naturally, no organization can form a complete picture of its customers until it combines data from all of its component companies, a massive infotech assignment. But here again, the most significant challenge is managerial. Consolidating customer data requires employees to cooperate in ways they may not be accustomed to. Making that happen day by day is a specific management task, and some companies are better at it than others. The best are companies with lots of experience in integrating acquisitions. Among those, the very best are the firms that made acquisitions with a customer-centric mindset.
7. Top management that spends at least 25 percent of its time teaching these principles to all levels of the organization.
Fully exploited, enlightened use of customer data will almost always drive a company toward profound organizational changes. That’s why top management commitment is indispensable. Just consolidating data can become so contentious a process that it may fail unless participants know that the CEO is watching and expecting it to succeed.
More profoundly, a genuinely customer-centric company is unlike almost anything that now exists. How far in that direction can a company go? No one knows, but we’ll likely find out in the next few years.
Now add up your scores.
Here’s How To Interpret The Total
0-25: Don’t even try extracting more value from your customer data. Until you improve on the basics, applying today’s customer knowledge management tools for this purpose will tie your company in knots.
26-50: You’ve got a shot at success, but you’ll need to improve your lowest scores quickly.
51-70: Go for it. The management challenges won’t be easy, but you’re better prepared for them than most. Move now, and you could build a substantial competitive advantage that delivers a premium P/E for your shareowners.
What owners managers need to do is change their mindset. Begin thinking about the economic value of personal data. As in ask yourself, “how much is my consumer data worth” to XYZ company. Then apply that same mindset in-house. Your company or brand should be managed in such a way that the customer value is at the forefront and managed professionally to create value for the shareholders.
One Final Observation:
In this application of infotech, as in many others, the future could be just the opposite of what the pundits expect. The friction-free, Internet-worked world was going to be a place where buyers flitted from vendor to vendor at the click of a mouse. In reality, it may be that the best users of consumer data can learn enough about their customers to create continuously better products and services — a competitive advantage that will just get stronger. If that’s the future, then the most customer-centric firms will get even better in the years ahead, and the gap between the strong and the weak will widen. If you’re on the wrong side of that gap, you’d better move fast.