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December Volume 3.03
A Mission For Your Customers Continues
4.0 Subcontractor Selection and Management------->
Now that you have decided to undergo the CVA approach
for managing the business, you may ask, “Who can do the work?”
While many areas within a business can manage and support CVA projects,
parts of the work should be subcontracted outside the business.
Critical business decisions will be made on the basis
of the CVA information. To ensure CVA work has excellent survey
design, data collection and analysis, an objective party is needed
to undertake these parts of the work. Evaluating a few research
suppliers (vendors) will provide a good indication of their capabilities
to undertake the work. Determining executive requirements
such as timelines, markets to cover, and reporting standards will
provide a framework for the evaluation of vendors. Some key
working issues to cover would be management of the interviewing
(CATI) facility, and questionnaire version control procedures.
Determining roles and responsibilities within your organisation
ensures processes to and from the vendor flow smoothly and are simply
managed. As most CVA research is conducted at least annually,
the vendor should have procedures set up for handling a second wave
of research six months or a year later, e.g., a simple update of
the CATI questionnaire, and a lock out capability to avoid contacting
the customer too frequently.
A one-year audit is recommended to review contracts
completed by the vendor. At the end of a year, your company
may chose an exclusive supplier. Having a clear vision of
who plays what role in the CVA work will make the audit process
easier and make it clear if the supplier has earned an exclusive
contract.
The preparation and planning in this step ensures
that the work occurs efficient, to a high standard, and that your
company can manage the vendors of the CVA work. Additionally,
the following 7 steps will flow better due to establishing who does
which piece of the CVA work. Watch the following newsletters
for more information about the next 7 steps…
Susan Moore
Previous
Step 3.0...
Next Step 5.0 (Part One)...
Customer Value or Customer Value?
Lifetime Value of a Customer
In the June newsletter we looked at how some companies
put a dollar value on each of their customers. Although there
are many problems to overcome in determining this value, there are
some occasions when it has to be done. The most significant
of these is when one company ‘buys’ the customers of another company.
In the New Zealand electricity industry, one company recently purchased
400,000 customers at a cost of about $500 each. A journalist
commented that the expected value of the customers was $400.
This expected value would have been decided by a formula that calculates
the net future worth of a customer adjusted to its present value.
When a company acquires customers in this manner, it is one time
when the market determines the actual value of a customer.
Whether the value determined by the market will work out to be a
fair price, will be determined by the customers of the acquiring
company and the service they receive.
Many years ago I took out a life insurance policy
with a company that was taken over by another company a few years
later. The new company wrote to me, telling me about the take-over,
and explained how the service would be vastly improved in the future.
In fact the service stayed much the same – fairly middle of the
road.
Well that company was taken over in turn, and from
what I can recall I am now with the fifth insurance company.
The service from each company has been the same – they send a bill,
I pay it, they send me letters telling how their service will be
improved. I have had no reason to leave any of these companies,
as they did nothing wrong, and nobody else offered superior value.
So in this example the value that each of these companies paid for
me as a customer has worked out as they expected. But what
if I had moved my business to another insurance company?
For the Electricity Company we discussed earlier what
would happen to the value of their purchase if 20% of their customers
left in the first year? Now instead of each customer costing
them $500, customers would have cost $600. The value of their
investment would have dropped by $4 million. Using the Customer
Value Added (CVA?) tools it is possible to predict the expected
loss of customers resulting from poor product and service quality
or low customer perceived value. In a strongly competitive
industry where there is nothing to lock a customer in, attrition
rates of 20% are typical. In an electricity energy market
where there is little differentiation on service, newcomers with
product offerings that provide superior value would be well placed
to attract customers from incumbent suppliers.
Existing companies with a large market share have the most to lose.
Consider two companies, the first with 400,000 customers, and the
second its new competitor with 40,000 customers. Each loses 20%
of their customers over a year. Then we have 20% X 400,000
X $500 = $4 million which is a lot more to lose for the first company,
than the 20% X 40,000 X $500 = $0.4 million loss that the second
company must bare.
Fortunately the CVA? tools provide a cost-effective
approach to protect against this type of costly market share loss.
Prior to making any investment that involves the purchase of customers,
the predicted customer loss rate can be determined and factored
into evaluation of the investment. After the investment has
been made it can be protected by focussing on improving the customer
purchasing criteria that strongly impact customer loyalty.
Rodger Gallagher
Organisational Performance
Management
Last year one of the leading researchers from the
Mathematical and Information Sciences Division of the Australian
Commonwealth Scientific and Industrial Research Organisation (CSIRO)
attended a workshop on Customer Value Management run by Ray Kordupleski
and me. We thought that it was a great compliment that such
a senior researcher was interested enough in the CVA tools to want
to probe into the approach.
One of the major projects undertaken by CSIRO this
year has been to develop a best practice organisational performance
management approach (OPM). The OPM spans all of types of business
performance measurement and management including financial, process,
people, and customer opinion. Leading up to the design of
the OPM, the CSIRO reviewed published best practices. Practical
study work was undertaken with selected Australian businesses to
identify what techniques worked effectively with real day to day
business challenges.
As part of their studies the CSIRO people had been
reviewing and discussing the Customer Value tools with their peers
at other research establishments including Bell Labs.
As part of this review Ray and I were asked to visit CSIRO’s Mathematical
and Information Science’s Division to run a tailored workshop at
their North Ryde campus in Sydney. Working with these top
people for two days was very rewarding.
Sydney is such a beautiful city that it is always
a pleasure to visit. A quick trip across the harbour bridge
to the north of central Sydney takes you to North Ryde, a bustling
complex in its own right of research establishments, a technology
park, and Macquarie University. The well cared for campus is a great
place for creative thinking and working on Customer Value. The Sydneysiders
apologised for the cool spring weather. It seemed pretty pleasant
to us with sunny days and a steady 18 degrees C.
Regards,
Rodger Gallagher
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