Managing Customers Profitably Professor Lynette Ryals SM ‘Managing Customers Profitably’: that is a title of a recent book that has been produced by Lynette Ryals. Now we are joined today by Professor Ryals. Lynette, what is the basic premise of this book? LR The basic premise of the book is that organisations increasingly understand the need to manage their customers profitably, but I think many of them don’t know the how to; they don’t understand the details of how to go about it. So the book is divided into three sections: The first section deals with the how tos; the different forms of calculations and gives some guidance about where managers can get the information from. The second part of the book looks at managing the customer portfolio and thinking about the overall implications of the decisions that are made. And then the third, and shortest section, of the book looks at the different strategies that organisations can use. So things like pricing, for example, to manage their customer portfolio more profitably. SM Are we really about fundamentals: the basic tension between accountants who want to manage costs very tightly, and the sales people that want to get a sale? LR I think that is a really interesting question. I don’t see that as a tension between sales and finance. What I think it is is more like a recognition that over the last few years in the marketing and sales area, we have had a lot of focus on creating value for customers and increasing customer satisfaction and improving customer service. And I think this is more about rebalancing and saying look, rationally we can do all of this, but we do need to make money out of it as well. I think that is really what it is. So rather than being a tension between sales and marketing and finance, I think it is more about finding ways for those functions to work together in order to deliver more shareholder value. SM In a way, particularly at the moment, I guess people would say well everybody would agree with that. So what actually stops that happening in practice; that you maximise the profits from your sales? LR I think one of the big problems is just that lack of knowledge about how to do this; how to do the calculations. They are not rocket science, but it’s just marketing and sales people haven’t really been brought up understanding how to do this, they haven’t been trained, to have that Professor Lynette Ryals
instinctive understanding of the financial implications of some the decisions that they make and the value propositions that they develop. So I think the main part of it is that lack of knowledge. To some extent, the other thing that stands in the way is sometimes the organisational systems maybe don’t exist to track costs and to transmit that information to the sales and marketing department. I would have to say that mostly organisations have the information lying around somewhere, it’s just that they maybe don’t know that they have it, or they don’t coordinate it in a way, or they don’t communicate it back to the sales and marketing people in a way that can be used to help improve the management of those customer relationships. SM Now let’s have a look at some of the detail here, of some of the key ideas. One of them, customer lifetime value – tell me some more about that. LR Customer lifetime value is the net present value of a relationship with a customer. The underlying idea is that a customer relationship is an asset of the business in the same way that a brand or a physical asset – a piece of machinery – is an asset of the business. And therefore this asset, this relationship asset, has a stream of value extending out over the next few years, over the lifetime of the relationship. The idea then is to take that concept and to say OK, how do we manage that relationship to ensure that we, as a supplier, collect that lifetime value; that we capture that lifetime value back into our business? And that brings in another idea really, the idea of managing a relationship as an asset also suggests that we need to invest in the relationship. So there are some interesting issues and questions that are explored in the book about how much effort, how much investment do we want to put into a relationship. And what we see when implementing this in companies is that sometimes they are putting too much investment into the wrong kinds of relationship, and frankly too little investment into other better relationships. SM So what things should managers be considering then in this kind of relationship? LR OK, so I think that what managers should be thinking about is firstly they should be thinking about what is the financial value of the relationship at the point of which they are prospecting for customers. So we are now talking about a way in which sales and finance have to work more closely together. So I think that is much more of a fundamental principle. Secondly we need to think harder about the value propositions that marketing is creating for these sales people to go out and sell. So I am saying that I think marketing people should develop a better Page 2
Professor Lynette Ryals
understanding of the costs to deliver some of the value propositions that are developed. So those I think are the two key principles: which customers are we trying to acquire; and how much is it going to cost us to acquire those customers and keep them within the value proposition that we are offering. SM I worry a bit about the poor old underdog, the person that ends up, if you like, with a negative lifetime value – the customer. What do you do in these situations? LR It is really important to look at that and to look at if the customer has a negative lifetime value; that gives us some strategic choices as a supplier. The first choice is can we do something to reduce the cost to serve. And that might mean switching a customer to a cheaper channel, for example. So it might mean not having the key account management effort, or the sales effort, or the customer service effort – maybe perhaps getting them to buy through the internet, for example, or buy through a call centre rather than have a field sales person visit them. There are a number of things that we can do as suppliers if we discover that a customer had a negative lifetime value. I think a second option would be perhaps to look at the prices that customers are paying and perhaps the mix of products that they are buying. So if the first option is to reduce the costs to serve them, the second option is can we do anything to increase the revenues that we are getting from them? And I think the third option would be to look at what is it about the customer’s behaviour that is making them costly to us. Sometimes suppliers will actually engage in a conversation with customers, trying to get them to behave differently; and that might mean they need to do something like, let’s say, consolidating a number of small orders into a single order or changing the point to which deliveries are being made – something like that. It may be something about the customer’s behaviour that is making the customer unprofitable to the supplier and the customer may be completely unaware that that is the case. So sometimes just having that conversation will sort out the problem. SM I can see some risks in the approach that you are taking, and that you may well end up losing some really good customers. LR This issue of risk I think is a very important one, and it is one that is not considered enough. And that is why I have spent quite a bit of time in the book talking about it. I think that the most important point here is that we shouldn’t just be thinking about customer lifetime value. There are other ways that customers create value for us, and in particular things like their reputation and the association with their brand and the Page 3
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way that they can create advocacy, word of mouth, for your business; that ripple effect of throwing the stone into the pond and it creates ripples. The way that customer advocacy, in particular, can create a real ripple effect and bring more customers to us. I think these are all important considerations. I think that customer lifetime value is a very important part of the way that we manage customers. Understanding that helps us to form the basic strategy, but I think there are other relational benefits of the type that I have described, and as we think about the portfolio of our customers, we do need to have both. We do need customers who are providing generous net present value, but we do also need customers who are spreading the positive word about our products and services. Now of course the ideal is that they do both. SM Now finally Lynette, my old boss used to say to me “love your customers to bits”. Now, I guess you would want to qualify that? LR That is absolutely right, I would certainly want to qualify it. Yes, we want to love our customers, but I don’t think that we want to love them to the point where we go bankrupt in the process. And I guess that the other part of that is that we want to love them selectively and we want to chose who we love – and that seems to me to be only a rational strategy. SM Lynette, thank you. Page 4