Unlocking Customer Profitability: Part 2

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This is part two of a two-part series. The first part appeared Aug. 16.


Customer profitability has been touted as a possible nirvana for organizations looking to measure marketing more effectively. Though it offers considerable potential, much of it goes unrealized because of poor planning and execution of a profitability model. Too often the implementation ignores the very things most critical to its success.


The first part of this article identified the pre-implementation activities that need to be completed before embarking on customer profitability rollout. Its focus was on development and ownership. But these activities represent only half of the preparation.


If an organization followed only the three steps prescribed in the first part of this article, its profitability implementation likely would fail. Front-line support for the rollout is critical to adoption and use. Profitability analysis needs to yield actionable results that link customer understanding to an associate's daily job. Through adequate alignment with the organization and business processes, much of customer profitability's potential can be realized.


This article identifies the other half of the equation: those activities that increase the likelihood of a successful implementation. They include:


· Organizational alignment to support customer profitability.


· Integration into business processes.


· Measurement of the implementation of profitability.


· Ongoing management of profitability assets.


Organizational alignment. To fully realize the benefits of measuring customer profitability, a company must embrace a customer-focused culture. In the past, many marketing organizations were focused around products and brands. For some industries, especially those that sell in large volumes, there always will be a need for brand and product managers.


However, customer-focused measures such as profitability require customer segment managers. Whereas brand/product managers are responsible for growth within the product lines for which they are responsible, customer segment managers are responsible for growth within a particular customer segment. The intersection of these resources, along with channel managers, ensures revenue maximization across all three dimensions.


Consider a large publishing company facing slowing revenue growth because of market maturation. Senior management had mandated that marketing needed to become more customer-centric. The publisher was interested in capturing customer profitability data. However, they realized that the marketing organization needed to be realigned from product- to customer-focused.


They undertook an extensive redesign that recast most marketing associates into new roles responsible for customer segment growth. These segment managers led all marketing planning and execution efforts in coordination with product and channel managers. This alignment worked because segment managers were responsible for the final plan, but engaged with product and channel managers to leverage their knowledge and ideas.


Business process integration. Even the best-designed profitability models will fail if they are not integrated into the marketing organization's daily activities. Sales, customer service and other functions also benefit from integration, but that discussion is beyond the scope of this article.


The first step in this integration is determining how best to use profitability data when developing annual marketing plans. Best practices for this integration begin with formulating overall strategies and goals for the coming year. Customer profitability analysis should be included in this process to track customer growth.


From there, each customer segment team should develop a marketing plan with input from the product and channel teams. These individual plans should use profitability reports for their segments to identify opportunities to increase revenue based on allocating resources around those growth opportunities. Once the individual segment teams develop their plans, there should be a chance to share and modify plans across segment teams to ensure consistency across groups.


There are other areas, beyond the annual planning, where the inclusion of profitability analysis would be valuable. For example, when generating new campaign ideas, customer profitability could be used to identify potential targets for particular promotions. Also, as companies begin measuring the ROI of marketing activities (e.g., campaigns), profitability can be used to prioritize the campaigns that will be executed.


Effective measurement. Failure to measure profitability's effect on the organization is tantamount to not implementing profitability at all. Why make the changes to support profitability-driven decisions if the effectiveness of these decisions is not measured? One best practice around profitability is the implementation of a scorecard to measure results. A scorecard measures both the effect on marketing overall and the individual customer segments.


Variables to consider include:


· Company/customer segment revenue.


· Company/customer segment profit.


· Customer retention.


· Customer satisfaction.


· Market share.


· Campaign ROI.


· Cost-to-serve.


· Average order value.


· Promotional costs.


The scorecard should include not just marketing-specific variables, but also measures from sales, finance and customer service. Often the true value of marketing - and, by association, profitability - can be better measured by these downstream functions.


Ongoing management. One key lesson learned from implementing profitability models is to roll out profitability measures in a timely manner. During the design of a model, theories of how best to calculate it may not prove true when implemented in the field. The trick is to ensure that mechanisms are in place to measure the effectiveness and make the needed changes.


One way to accomplish this is by implementing a process - typically before the annual marketing plan is developed - in which feedback can be given to the owners of the profitability model so that changes can be made. The goal is to ensure that changes can be made and leveraged during the creation of the annual marketing plan. Ideally, the process will include a review of new and existing sources of data and other market research that could feed the model.


Regardless of the mechanism, the key lesson is to get an effective draft model to the field so that feedback can be gathered. A large hospitality company learned this during 9/11. The company had been developing a profitability and segmentation model for nine months when the attack occurred. As a result, the models had to be redeveloped, which took another six months. This shows that it is impossible to anticipate all variables that can affect rollout and adoption. Therefore, a balance needs to be struck between preparation and "analysis paralysis."


The economic slowdown of the past few years has given way to a slowly recovering economy. As a result, there is more accountability across business functions for return on spending. This is certainly the case for marketing, which traditionally has operated under a different model, one focused on measuring softer variables such as brand value and product affinity.


Profitability measurement also can be leveraged as part of customer segmentation. To this end, a transportation company recently redeployed a consumer segmentation model based almost entirely on profitability. The purpose was to refocus fewer marketing and sales resources on its most profitable customers. Profitability was then extended to differentiating pricing for various customer segments.


Measuring customer profitability clearly offers many benefits, so why do implementations continue to fail? Executives expect that by measuring profitability, an enterprise immediately will be able to increase profit by deepening the relationship with the most profitable customers. This is not an unreasonable expectation given the potential. What is often forgotten, however, are the cultural changes that an organization needs to undergo and the decisions that need to be made.


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