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Originally published June 11, 2007
Despite a dizzying rush of fresh technological innovation, old-fashioned customer development strategies will remain key determinants of success in the newest round of competition between communication services providers.
Yet most providers also lack the capability to discern critical trends in customer behavior that can radically alter purchasing habits and long-term profitability. Part of the problem stems from the failure of many providers to invest in robust customer intelligence solutions that would enable them to generate holistic views of customer activity across all product or service offerings.
In their haste to upgrade and expand their networks, many communication services providers lost sight of their most important asset – their customer base.
With the right technology, training and support, providers can distinguish between their most and least profitable customers in a multitude of complex, real-world scenarios. They can also determine which products and channels are driving financial performance, and which aren’t.
While the advantages and benefits of customer intelligence are generally well known, the ability to perceive and act upon shifts customer profitability are less widely appreciated. Customer profitability intelligence generates detailed analysis across different product and service lines. Armed with this kind of intelligence, providers can accurately:
Customer Focus is Paramount
One of the key metrics considered by customer-centric organizations is customer lifetime value (CLV), which treats each customer or segment as an investment and considers their present profitability in long-term context.
CLV is a forward-looking view of wealth creation — the net present value of the likely future profit stream from an individual customer. This involves discounted cash flow (DCF) investment evaluation math for multiple periods, not just a single period. Using DCF calculations, you can equate the future stream of net cash flow (profits) into a single cash amount (i.e., the expected value) of profit stated in today’s money.
It’s important to remember that static “snapshot” views of a customer do not accurately predict the long-term future value of a business relationship with that customer. People change as the move through various life stages, and their value as customers changes, too. A person who routinely overdrew his checking account when he was in college becomes a very different customer when he lands a job in a prestigious law firm, gets married, buys a car and begins raising a family.
No Need to Reinvent the Wheel
Back in the 1990s, retail bankers faced a set of challenges that were roughly analogous to the challenges facing communication service providers today. In response to these challenges, the bankers became experts in differentiating customer groups by value. Then they would create bundles of products and services for specific groups of customers.
Many of the early pioneers of bundled banking services were advocates of one-to-one marketing, a customer development strategy that was popularized by Don Peppers and Martha Rogers. In their books, Peppers and Rogers describe three basic types of customers:
The task of a one-to-one marketer is retaining MVCs, growing the value of MGCs and either converting BZs to MGCs or, failing that, convincing them to defect to a competitor.
In addition to calculating with great precision the type and number of products required to ensure a customer’s loyalty for a certain period of time, the bankers became adept at calculating which bundles of products were most profitable. As an added benefit, the bankers were able to lower their overall marketing costs by targeting their promotions more selectively.
Many communication services providers have not yet learned these important lessons, nor have they developed the capabilities required to reliably track CLV and other crucial measures of customer value. In a very real sense, they can’t tell their good customers from their bad customers.
For example, customers with a history of paying their bills a couple of days late every month are often lumped into the same category as deadbeats – even when they subscribe to multiple service offerings and are highly profitable over time.
Customer Value Optimization
Customer value development strategies are dynamic, not static. They can and should be continually improved, tuned and optimized for maximum benefit. For the communication service provider, the customer value optimization (CVO) process offers numerous advantages. By spanning functional boundaries, operational processes and transactional systems, it provides both a local and holistic perspective on customers, offerings and touch points.
Because it coexists with a variety of information sources and analytical tools, CVO enables fast, smooth transfer of understanding among departments, functions and roles. It also enable provider to simulate, test and assess new programs routinely. Best of all, CVO allows agile organizations to adjust even more rapidly and learn from unexpected or volatile conditions.
At the architectural level, a CVO process can be achieved with the following technology components:
Incremental technology investments can unite existing capabilities into a cohesive CVO technology platform that encompasses:
Strategic analysis and optimization — Forecasting, life cycle analysis, program development and reporting.
Program optimization — Developing, executing and managing customer management initiatives designed to minimize churn and increase revenue and profitability.
Optimization sciences — The ability to design, build and employ advanced analytical systems that provide predictive models, segmentation analysis, mathematical optimization, experimental design and inference testing required to evaluate specific customer management actions.
Touch point optimization — Synchronization and optimization of intentional customer interactions across direct marketing, contact centers, online and other touch points.
An Iterative Process
CVO offers service providers the ability to identify opportunities, optimize practical customer management actions, and feed results back into continuous improvements, swiftly and cost-effectively.
With CVO technology and competencies in place, the organization can systematically and continually:
In addition to continuously refining processes to increase customer value and boost profitability, CVO generates answers to complex, critical questions such as:
Which of our new products are fully aligned with our current business growth strategies, and which are not?
Do our loyalty incentives create customer value, or destroy it?
Which new programs will create short-term spikes in sales, but degrade long-term sales performance?
Are we wasting precious resources to win back unprofitable customers?
The Limitations of Bundling
Bundling strategies were successfully deployed by banks and other retail financial services organizations in the 1990s to reduce churn, encourage loyalty and grow the overall value of the customer base. The results of these strategies were easy to measure and irrefutably effective.
Can the communication services providers replicate those successes? Unlike the banks, communication services providers invested billions of dollars into building new high-speed networks. They also spent billions on mergers, acquisitions and alliances formed to create synergy and convergence across multiple markets.
From the perspective of a service provider, convergence means replacing a tangled knot of separate networks with a single infrastructure on which various information services travel as streams of encoded data packets. In theory, a single infrastructure should make it easy for providers to add or remove services based on demand.
From a consumer’s perspective, however, convergence isn’t about the infrastructure. It’s about the experience. For the consumer, convergence means shopping, talking, listening to music, writing a report, watching movies, playing video games and checking stock portfolios from anywhere and everywhere. It suggests a seamless flow of experience from one device to the next with minimal interruption.
That’s the image in the mind of the consumer. Pitching bundled service packages to a generation of consumers looking for ubiquitous interactivity and increasingly immersive forms of digital entertainment is at best a tactic, not a strategy for long-term profitability.
Consumers have already demonstrated both their willingness and ability to cherry pick the best offers from a variety of providers. Price wars only ratchet up the pressure on margins as providers race to the bottom in an effort to steal customers from their rivals.
Customer acquisition strategies based on steep discounting are unsustainable in the long run since they actually shrink the dollar value of the customer base instead of increasing it.
Summary and Conclusion
All around the world, communications service providers are responding to technology and regulatory changes by investing billions to enable their networks to deliver converged broadband services.
The challenge for managers at communications service providers is to generate profits from these large investments over an extended period of time. In the past, service providers counted on high penetration rates to ensure steady, predictable revenue streams. Today’s new services are more likely to appeal to segments or niches within broader markets. That severely limits the usefulness of traditional mass marketing techniques.
Sustainable competitive advantage can only be achieved through the ability to consistently attract and retain profitable customers. Building customer profiles and then using this information to make smarter decisions at every customer touch point is the only way to minimize churn while maximizing profits. It is also the only way to make the right offers, at the right time, through the right channel.
Addressing customer satisfaction, retention and profitability is not a one-time activity. Nor can it be the responsibility of a single department. It is a cross-functional discipline that must become a way of doing business. What worked yesterday may not work tomorrow, so the organization must continually strive to learn all there is to know about its customers and then adapt to meet their needs.
Communications service providers need to build this discipline and leverage organizational talent across functional boundaries, with the flexibility to adapt quickly and respond meaningfully to customer life cycle changes.
Service providers must look beyond convergence, which is largely invisible to the consumer, and should avoid relying on discounted service bundles to attract customers. Other industries have proven
that carefully developed customer-centric strategies can be highly effective drivers of both revenue and profit, even in the most highly competitive environments.