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November 18, 2020

What drives the value of customer relations?

When appraisers value customer relations, they use three major parameters: current revenues, attrition rates, and customer margins. Basically, the size of customer value depends on customer loyalty, and customer profitability.

For similar businesses in the same sector, we often observe that customer loyalty and profitability differ by a wide margin. This is the result of business strategy (some focus on technology, some on brand, some on customers), and of customer relationship management (CRM). The key question in this context is what is the essence of customer relationship management and what drives customer value. Several value drivers can be identified:

  • Ability to target the most profitable customers. Profitable customers are not only cheap to acquire and serve, they also buy more and/or at higher prices.
  • Integrated offerings across channels. Customer interactions across different channels (personal selling, online, phone) often become fragmented and disjointed. This imperfect hand-off of customer information results in un-planned, inequitable treatment of customers and subsequent erosion of customer loyalty.
  • Sales force efficiency. Using state-of-the-art technology in sales force management improves the knowledge of salespersons about customer attitudes, products and pricing. Moreover, it helps salespersons to focus and to approach their customers at the right moment.
  • Customized pricing. Often, prices are averaged across customers. CRM supports better pricing decision making by increasing a marketer’s ability to understand customers’ needs and wants and to adjust prices accordingly.
  • Customized products and services. CRM – in connection with digitization and automation – increases a company’s ability to customize products and services to meet the explicit and implicit needs of their customers.
  • Customer service efficiency. Customer service functions are on the frontline of an organization. An increase in readily available customer knowledge to customer-facing employees will serve to improve both the speed and completeness of their resolution efforts, and finally customer satisfaction.
  • Individualized marketing messages. The movement toward one-on-one marketing and customized marketing messages has created both a shift in the function and the organizational structure of marketing departments. Customized messages improve the content and timing relevance of messages to each customer, and reduce advertising wastage.

This list of value drivers is not a ranking. The importance of each ingredient depends on the type of business, its customers, and its previous approach to CRM. A properly managed CRM approach can increase customer value very substantially.

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