CCG - Where Measurement Begins

excerpted from
StrateScapes – Volume 4, Number 1

Where Measurement Begins
Proof that you’re changing customer behavior has to start somewhere.

How do you measure a relationship? It sounds awfully complicated to quantify. But you don’t have to measure everything at once. If you choose your measuring sticks thoughtfully, you’ll have results that not only keep the gears greased in the short term but propel your big-picture marketing goals as well.

So what will you measure? That should depend on which quantifiers are most important in your company. Somewhere in your office, there’s no doubt a list of objectives that includes phrases like “strengthen customer relationships,” “grow revenue,” or “reduce marketing costs.” Ask yourself which of those yardsticks your CEO, CFO, board and other powers-that-be tend to fixate on. Take the top two or three, and you’ll have the basis of measurement tasks you can tackle — and results you can leverage to bring that big picture into focus.

If your priority is to reduce marketing costs, focus on:

Measuring direct savings If ABC Investment Company builds a Web site that lets clients track investments online rather than through a live customer service rep, it saves the costs associated with staffing and overhead for those CSRs.

Gathering customer information The more you know about your best customers — interests, wants, needs, demographics, even media preferences — the better you can target your marketing dollars. So instead of mailing a sweater offer to everyone, Susie’s Sweater Shop can e-mail it to the customers most likely to respond.

Quantifying productivity/efficiency If a quality-improvement initiative helps your staff do its job better, faster and more efficiently, that initiative will contribute to the bottom line. Let’s say Joe’s Jeans improves its custom jeans ordering process, making it more detailed. The end result: jeans that fit better, translating into fewer returns.

If your priority is to grow revenue, measure overall ROI:

Everyone wants to see ROI in the form of bottom-line dollars and cents. If you spend X amount on your program, then it returns X percent in incremental sales. A typical formula looks like this:

Contribution ÷ Cost = ROI

For example, a retailer has a margin of 40% after cost of goods and overhead. If the program cost $500,000 and the incremental sales gain equaled $1.5 million, the contribution (at 40%) would be $600,000, yielding a 120% ROI:

$600,000 (contribution) ÷ $500,000 (cost) = 120% Return on Investment

One caveat: If you’ve implemented a broad-based CRM program, measure ROI semiannually to allow time for offsetting one-time program launch and implementation costs. Though you should measure individual program components, the strength of any CRM program is the sum of its parts.

If your priority is to retain customers and grow your customer base, quantify:

Customer reactivation The number of inactive customers who’ve been enticed to purchase again.

Customer repurchase rate The percentage of existing customers who have made a repeat purchase within a specified period of time.

New customer acquisition rate The rate at which new customers are being acquired — usually expressed as the ratio of first-time buyers to repeat buyers during a specific timeframe.

If your priority is to increase customer spending and profitability, calculate:

Monetary value The cumulative amount spent by a customer over the life of the relationship.

Transaction frequency The cumulative number of transactions completed by a customer over the past quarter or past year of the relationship.

Cross-sell/upsell These measure the relationship across all product lines. How many products/departments and add-on services are being used?

If your priority is to strengthen customer relationships and enhance loyalty, measure:

Channel penetration Many believe that accessing and buying from a variety of channels is an indicator of loyalty. Customer penetration tracks the number and types of channels used.

Customer profitability This measures the value of the total customer relationship over time across all product lines and channels, after the cost of servicing the customer.

Customer lifetime value LTV uses current per-customer profitability to forecast the customer’s value over the predicted life of the relationship.

Customer satisfaction This is the percentage of existing customers who say they are “extremely satisfied” or “satisfied” with your product or service offering. Customer satisfaction scores can be derived from telephone surveys, mailed questionnaires or face-to-face intercept interviews.

Knowledge Is Power, Data Is Not

Morphing metrics into money isn’t as insurmountable as it seems, but you gotta have a game plan. Start by pinpointing what you want to prove. Then the people you get to help you prove it will be generating knowledge — not just data — that speaks your company’s language. Once that happens, people start listening.

Translate That Into Dollars, Please.

Telling CFO-types that your CRM program resulted in 2,000 new customers will likely be met with a big “So what?” They want to know what those 2,000 customers mean to the bottom line. Some examples:

Example #1:
To show the impact of customer reactivation

Let’s say you sent a mailer extolling the benefits of balance transfer. Based on that mailing, 2,000 previously inactive cardholders transferred balances to your card.

Total dollars transferred $400,000

minus promotional costs $100,000

_____________________________

Net incremental revenue* $300,000

* This example provides the revenue impact immediately after the mailing. For simplicity, other revenue sources such as interest and fee income are not included.

Example #2:
To show the impact of channel penetration

You’ve decided to incent your customers to use all available channels for their shopping needs. And it worked: The typical customer used to shop only in your stores, spending an average of $100 every visit. Now he’s shopping online, in your catalog and at the kiosk in the grocery store, spending $100 on each purchase. That’s $300 in incremental spending. Here’s how that might look on paper:

Incremental spending per customer $300

minus overhead per customer $100

__________________________________

Net profit per customer $200

STRATESCAPES and STRATESCAPES SUPPLEMENTS are published by Customer Communications Group, Inc., a full-service agency specializing in relationship marketing and customer communications. Our comprehensive, turnkey services include data analysis, customer segmentation, strategic consulting, account management, creative execution, print production and multimedia solutions.