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Building Shareholder Value Through Customer Portfolio Management

Building Shareholder Value Through Customer Portfolio Management. Global Benchmarking Council: Portfolio Optimization February 7, 2003. Contents. The Customer Portfolio Management Opportunity Extracting Insights from the Customer Base Managing for Customer Value.

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Building Shareholder Value Through Customer Portfolio Management

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  1. Building Shareholder Value Through Customer Portfolio Management Global Benchmarking Council: Portfolio Optimization February 7, 2003

  2. Contents • The Customer Portfolio Management Opportunity • Extracting Insights from the Customer Base • Managing for Customer Value

  3. The Customer Portfolio Management Opportunity

  4. The Customer Portfolio Management Opportunity • Surprisingly few companies today have a true understanding of customer profitability • Product and operations focus • Lack of tools for analysis • Those who do rarely have an objective, up to date perspective on what drives differences in profits from one customer to another • Spotlight on volume and price metrics • Limited exploration of root causes: attitudes, needs and perceptions relative to competitive offerings • Dated knowledge • The result: most companies are wasting resources and missing opportunities to create value within their customer base

  5. Extracting Insights from the Customer Base

  6. Extracting Insights from the Customer Base Robust customer portfolio management starts with a deep understanding of customers on two key dimensions: value and needs… Value Needs Insight into customer needs, attitudes, behaviors, and perceptions about relative competitive performance Insight into Customer Lifetime Value Insight Where to Allocate Resources How to Win Customer Portfolio Management Action Action Treatment strategies and organization Improved Shareholder Value Result

  7. Shift the financial lens from product to customer Product A Product B Product C Product D Develop financials that cut across the typical product line view Product Company BU Individual Portfolio Customer Base

  8. Select an appropriate metric for determining customer value Four levels of profitability metrics. The best choice identifies meaningful differences in performance between customers while avoiding analytical overload. Description Rationale for Use Metric Gross Margin • Contribution after product COGS only • Simple • Use if little known difference in operating activity or infrastructure investments by customer type Contribution Margin • Contribution after COGS, SG&A and other operating expenses • More discriminating • Use when there are different selling models, marketing strategies or distribution channels by customer type Operating Cash Flow • Cash contribution before interest, amortization and depreciation, but after adjusted taxes • Same rationale as above • Use when focus is on cash management Free Cash Flow • Operating cash flow less changes in working capital and capital expenditures • Complex • Use when there are different levels of infrastructure are required to support different types of customers

  9. Disaggregate product-line P&Ls and re-aggregate customer P&Ls Product Example Contribution Margin Customer Group A Customer Group B Customer Group C Customer Group D Company BU Product A Product G Product I Product K Product L Product B Product C Product D Product E Product F Product M Product H Product J $4,630 $1,612 $1,110 $ 3 $ 370 $ 77 $ 736 $ 488 Portfolio Customer Base $4,630

  10. Actual customer value as net present value of financial flows Example Customer Group A Contribution Profile Product A G I K B … Drivers: Actual recognized revenue Actual product unit cost Total account time Direct collateral and % exposure Channel usage by product Total 17,998 Revenue COGS Gross Margin Operating Expenses Sales Marketing Distribution Total Operating Expenses Contribution Margin 1,570 796 2,607 5,245 430 12,399 1,178 557 1,694 3,567 258 5,599 393 239 912 1-678 172 988 126 16 261 210 9 616 47 8 182 210 22 453 63 16 78 210 13 3,542 157 199 391 1,049 129 Customer Group A Actual Value Forecast History 5,000 NPV = $9.7MM Assumptions: CAGR = 7% WACC =12% 3 years to defection, no terminal value 4,364 4,071 3,797 4,000 3,542 3,291 3,168 2,875 3,000 $000 2,000 1,000 0 98 99 00 01 02 03 04 Year

  11. Quantify potential value A perspective on potential value will drive future resource allocation and program decisions Actual vs. Potential Value $ Grow adjacent category spending Grow category spending Increase price Increase share of wallet Lower cost to serve Actual (Current) Value Potential Value

  12. Four fundamental value tiers arise from actual and potential value customer views High contribution Most Valuable Customers MVCs Potential Value Most Growable Customers MGCs High unrealized potential Actual Value Neither a high current contribution nor high unrealized potential Migrators Negative contribution Below Zeros BZs

  13. Each Value Tier Creates Measurable Cash Flows • Typical levers • Allocate “farmers” • Reduce acquisition investments • Improve retention MVCs NPV = $11.3bn • Allocate “hunters” • Improve targeting • Invest in growth and retention MGCs/SMGCS NPV = $25.2bn CustomerFlows • Reduce cost to serve MIGs NPV = $13.3bn BZs • Improve or exit NPV = $ .4bn

  14. Identify levers for capturing a greater share of potential over a customer’s lifetime Customer Growth Rate Profitability Long Term Economics of a Customer Time to defection • Cross-selling • Solution-selling • Stimulating latent demand • Retention programs • Acquisition Programs Interventions to Capture Long Term Potential

  15. Customer portfolio results lead to improved shareholder value Portfolio A$16, 586.0 • Existing • Reduce ineffective acquisition NPV = $31.3M • Implement retention programs NPV = $43.9M • Add acquisition programs NPV = $77.8M • Add growth programs NPV = $52.2M Add.Value =$205.2M

  16. Sum of customer cash flows drive firm value Example Cable Company Top-endconstraint PenetrationrateNPV $50.2bn Customer Flows Growth infiltrationNPV $31.5bn Infrastructure Flows NPV $18.7bn Debt ($17.6bn) Equity $1.1bn Total Flows

  17. Understanding Value Is Half The Challenge • Shift the perspective on the customer from convenient traditional segmentation schemes to needs-based schemes • Use qualitative research to drive early hypotheses and quantitative research to validate and deepen understanding • Understand customer needs at each point of interaction • Assign customers to needs segments • Discover what drives the purchase decision within each portfolio In order to drive effective sales efforts, inform new product and service development, and efficiently deliver new treatment programs, you must have a crisp understanding of customer needs.

  18. Shift from convenient traditional segmentation schemes to needs-based differentiation From To Needs-Based Differentiation Traditional Segmentation • Typically inside out view – product forward • Based on demographics/ “firmographics” • Provides a standard “industry view” of customers • Clusters customers into groups with different needs • Typically outside in view – market back • Based on customer needs as expressed by the customer • Proprietary scheme provides source of competitive advantage • Segments built around attitude, behaviors, and receptivity to products and services

  19. Use qualitative research to drive early hypotheses and quantitative research to validate and deepen understanding Qualitative Research • Focus groups • 1to1 sessions • Preliminary needs categories • Discrete needs statements/ Motivators and barriers to decision-making • Preliminary segmentation hypotheses Quantitative Research • Robust survey design • Large scale sample plan • Statistically distinct homogeneous needs segments – meaningful and actionable • Importance of satisfying needs • Relative competitive performance • Predictive models for segment membership

  20. Discover full hierarchy of needs across all touch-points to build rich perspective Needs Hierarchy Decision Criteria Needs • Helps me with my meal planning Advocacy Will I recommend this store to my friends? Loyalty How long will I continue to be a customer? • Recognize me at the counter • Recognize with custom mailings Preference How often will I shop at this store vs. others? • Always fresh produce • Specials on key items • Few stock-outs • Helpful counter staff Cost of Entry Will I buy from this store or not? • Reasonable prices • Clean stores • Sufficient variety Customer Touch-points Marketing Service Product Operations

  21. Value and needs provide insight needed to construct customer portfolios Interaction Matrix N_1 N_2 N_n Most Valuable Customers Most Growable Customers Migrators “Below Zeros” Data Elements X1 ………. Xn Data Elements X1 …… Xn Model 1 Actual Value Model 2 Potential Value Data Elements X1 …… Xn Value Tier Model 3 Needs Segment

  22. Discover what drives the purchase decision within each portfolio Within each need and value segment, analysis of the importance and relative competitive performance provides key guidance on treatment strategies Portfolio-Specific Action Grid MVCs – Needs Segment-4 CPM Interaction Matrix Needs Segments Needs1 Needs2 Needs3 Needs4 MVCs MGCs MIGs BZs | | | | | | | | Over Value Tiers Re-Allocate Defend/Exploit - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Relative Performance Ignore Fix Under High Low Attribute Derived Importance

  23. Map Attributes to Develop Roadmap for Action Example Segment 1 Outsourcing Action Grid 10.00 Defend/ Exploit Reallocate Resources 9.00 Service Reliability Financial Stability Quality Operators Site.Mgmt.Experience Capital to Buy Assets Training 8.00 Service Flexibility Performance Competitive Wages 7.00 Ignore Fix Price 6.00 Reporting Workforce Transition 5.00 Labor Relations.Exp. 4.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Importance

  24. Actionable treatment strategies include specific tactics, required resources and expected results Example # of companies 30,345 Actual Value $240 M Value Tier MGC Potential Value $540 M # of companies 10,546 4,325 5,474 Level 3 • Overall Strategy for Group • Create awareness of low cost options for secure delivery and confirmation • Provide education on direct mail process and shipping options • Provide education on direct marketing and enhance the retail experience • Needs Group • XYZ’s • ABC’s • QQQ’s. # of companies 10,546 Potential Value $140 M – Prod A $ 50 M – Prod B $ 20 M – Prod C Needs Group XYZ’s Product Prod A Prod A Prod A • Programs • Inside Sales • Direct Mail Campaign • Web Content Channel Sales Direct Mail Web Strategy Supported Awareness Awareness Ease of Access Revenue Goal - Yr. 1 $12.3M Program Costs $1 M • Keys Messages - Inside Sales • “Blah Blah Blah” • “Yadda, Yadda, Yadda” • “More Blahs” • “More Yadda’s” • “Read My Lips” • Metrics • Revenue • Rev/company • Close Rate • Sales per day Program Inside Sales

  25. Managing for Customer Value

  26. Best Practice Marketing Organization Model Components of Value (“Raw Materials”) Tailored Value Propositions (“Assembly”) Value Delivery System (“Distribution”) Positive Customer Experiences Customer Loyalty Over Time Product Development and Management Segment Management Channel Management Profitable Relation-ships • Pricing • Product development • Product management • One Voice • Channel coordinators • Customer experience champions • Contact strategists • Sales • Web • DM/Email • Inside Sales • PR • Retail • Customer Service • Local Marketing • Events • Advertising Value Excellence Experience Superiority FeedbackLoop Enabling Value Improvement Feedback Loop Enabling Integrated Relationship Management

  27. Proposed Process Example Deliver value to customers with a focus on efficiency and effectiveness Product Manager Channel Manager • Agile organization • Smaller incremental wins • Gaining credibility • Results driven • Accountable • Organization focus on core business elements Segment Manager Create value propositions Match offers to customer segment needs. Define value and needs, negotiate execution.

  28. Integration in Action (example) To Product Manager (feedback loop) “We can increase share of wallet with small law firms if we offer later pick-up times for package services” Integration in Action (example) To Segment Manager (action loop) “We need to incorporate new RPN feature into our segment communication plans” Integration in Action (example) To Product Manager (feedback loop) “Our web site hits on the Welcome Center have tripled since program launch.” “For web transactions we need flexible payment capabilities” Vision:Individual Roles Example “Segment Manager” • Accountable for incremental results from segment initiatives • Prioritizes segment programs • Develops segment plan • Develop integrated strategies for their segment • Marketing communications • Retail and sales • Monitors and manages segment results “Product Manager” • Accountable for product revenue (contribution?) and market share • Decides and implements features, service requirements, product enhancement initiatives • Sponsors CVA market research • Develops product plan, works with the Segment manager to develop value product value propositions “Channel Manager” • Accountable for efficient execution of channel programs and customer satisfaction scores that position Company as superior value in the marketplace • Decides on channel infrastructure enhancements • Allocates channel maintenance and improvement budget • Manages customer migration

  29. Proposed Segment Management Model USPS.com CCM Inside Sales Field Sales Elite Sales Teams Example Acquisition Support “Engine” Segment Management Tier 1 Commercial Tier 2 Commercial Tier 3 Commercial Tier 4 Commercial Consumers A1 C1 A2 C2 A3 C3 A4 C4 A5 C5 Customer Segments B1 D1 B2 D2 B3 D3 B4 D4 B5 D5 Primary Contact Channel Potential Value Lower Higher Retention Support “Engines”

  30. Establish portfolio managers to orchestrate the customer experience Analyze Understand customer value Understand customer needs Understand customer economics Understand competitive landscape (for customer) Act • Determine value maximizing treatment strategies • Launch campaigns that support strategies • Get things done • Influence service delivery • Support new/improved products • Drive cross product/BU integration “Think” Get inside the customer’s head, but take your company perspective with you

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