In the article The New ROI of Marketing, we looked at the calculations to understand our ROI and profitability. The conclusion was that becoming a customer-centric business will unlock a better engagement with customers that will have direct commercial return.
To make the move towards customer-centricity, you need to first look at how you measure your efforts. This means that you need to understand the value of your customers. If we understand the value of each customer, we can then be more selective with the communications, products and “treatments” that each customer will get.
Not all customers are equal
This starts with recognising that not all customers are created equal. As a commercial organisation, it is just a fact that making investments in some customers pays off in the long term. This is the ugly truth: some customers are more valuable to you and some will cost you more but not return value to your business. If you are still campaigning to your customer base on the basis or your products and latest offers, then you are not making these investments wisely. As it is a sensitive area and one where your reputation as a business is at stake, you must manage this carefully.
Net Present Value = ROI
So, in order to understand the value of your customer, what you must be able to understand about each customer is their “Net Present Value”. How you calculate this and your ability to calculate it will vary depending on the data you have access to. Basically, though, it is the following formula:
‘Sales’ divided by ‘Cost to serve/supply’ + ‘Predicted future sales’ / ‘Discount for present day value’.
The discount is applied to bring back the future sales to the present day estimation. Whilst this calculation may seem simple enough, in large complex organisations, it can prove very elusive. You may have to use a proxy for some data and therefore the interactions and solutions that you design must take this into account. When you have this calculation for your entire customer base, your marketing goal is then to maximise the value of your customer base.
Digital environments have created an important change in this measurability. It is now possible to understand and manage the customer’s journey towards a particular goal. We can measure their engagement as progress through the buying cycle. This gives us the ultimate control of our marketing investments through a clear picture of our funnel. When a customer is reasonably advanced in their journey, we can decide on the investments that we are going to make and how we are going to be selective. However, the inverse is true when we look at the entire audience (not just the customer base). Your audience is self-selecting and you will only be engaged with those that you share a point of mutuality. This is where your brand can be seen as relevant to discuss with your audience. However, we treat the audience as if they are all created equal. This means that we are not simply focusing on those that respond positively. If you do this, you will create audience “fatigue”. By following an engagement map, you take the entire audience with you and you do not start to “leak” prospects from your funnel.
What this means for your new ROI calculations is that you can apply a value for the level of engagement each person has with you. The progress of their engagement towards a goal can be added to the calculation above. You will not have this number when you start. It will have to be built up through experience of how your customers engage with the various content that you have created. But you will create a proxy of it with percentages. For example, if the goal is £100 and they are 20% through the journey, you could add a value of £20 to that customer record.
Where to begin?
Where to begin, if you do not have your engagement maps created yet, is with your existing communications. Look at the response rates at an individual customer level and then see if these responses track to sales. If they do, then you can assign a percentage value to those who have responded but have not yet made a purchase. This creates an approximation of value calculation for your funnel. And by the way, this might sound very B2B, but this it is not just for those companies. All companies should be able to calculate the current and potential future value of each customer.