Customer Measurement Problem 1

FAILURE TO CONNECT CUSTOMER MEASUREMENTS
TO FINANCIALS

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Managers today are very concerned about return on investment (ROI). With tighter and tighter scrutiny around expenses, an eye toward cost reduction, and organization-wide constraints on spending, inevitably the value of customer measurement programs is questioned. “It is costing us a million dollars a year to track customer satisfaction! What’s the payoff?”

Somehow, companies need to demonstrate that customer measurement not only pays for itself, but also produces a return. While there are available lenses through which to view the question (e.g., cost of customer defections, return on quality, customer equity, customer life time value analysis, etc.), in practice, organizational departments responsible for customer satisfaction measurement often fail to take any steps to link their survey measures to financial data. Amazingly, financial data often are readily available which would allow for the testing/demonstration of such linkages.

More than ever before, companies are able to manage customer relationships at the individual customer/account level, and companies often have behavioral data at that level on things like types of purchases, amounts of purchases, frequencies of purchases, and so on. Further, those kinds of behavioral measures often are tracked over time. If we also are collecting customer survey measurements at the individual customer/account level over time, there is a clear opportunity to connect these streams of data quantitatively. Even in many B2C settings where large numbers of customers are involved, there still may be survey and financial metrics available at the individual level, at least for samples of the customer base. And, even if individual level data do not exist in some mass-market B2C situations, often linkable customer and financial data exist at some higherlevel aggregated unit of analysis (e.g., segment, store, region, period, etc.).

Certainly there are some very elegant financial approaches that have been proposed, but, some very basic explorations can be sufficient in demonstrating to senior management the linkage between customer measurements and financial performance. For example, in my work at Walker Information, we typically use customer measurements to classify respondents into one of four loyalty segments. Whenever a client of ours provides customer-level spending metrics, we can connect our categorical classification to financial metrics by matching on a common customer identifier. We then examine whether ensuing customer behaviors show important variations as a function of the loyalty segmentation.

Do highly loyal customers tend to increase their total purchases and spending by greater relative amounts than less loyal customers? It is a testable question. We can do something as simple as using behaviors 12 months prior to the survey as a baseline, then expressing the 12 months after the survey as a percentage of that baseline. It is a powerful way to show a company, with their own data, that earning higher levels of customer loyalty pays off in specifically quantifiable ways. That kind of financial linkage information can be especially powerful when companies also have statistical models of how best to influence customers’ loyalty levels. Then companies can construct simple “what if scenarios showing how much total revenues might be expected to increase if the proportion of customers in the most loyal segment were to increase by some specified amount due to projected changes in levels of selected model components.

The specific mechanics are not my point here. Theorists and modelers can invent any number of sophisticated and reasonable approaches. My point here is to note the typical absence of such a financial linkage effort in many companies. Far too many organizations fail to link customer metrics to financial metrics. Sadly, the required ingredients often are already at hand, at least for some basic initial analysis. The very premise upon which the measurement program probably came into being financial payoff- remains unproven. Managerial attention and action surely will suffer whenever a compelling, company-specific, empirically grounded financial case has not been built.