Our fathers worked for the boss, and when they left the office at five, they left their job worries behind. But today's managers and employees work and worry nearly 24/7—and probably for someone other than their bosses on the organizational chart. What has caused this shift, and just who is this new boss?
The answers to these questions are the Internet and the recently empowered customer, respectively. With its powerful search engines and near-instant gratification, the Web has irreversibly shifted power from sellers to buyers. And every supplier of products and services is scrambling to become more customer-focused.
Performance management, defined narrowly by most as merely better strategy, budgeting, and control, is increasingly becoming recognized as a much broader concept. Performance management runs end to end as the complete, closed-loop planning, design, marketing, selling, and customer order fulfillment cycle.
As you know, one of the critical components in the portfolio of performance management methodologies is customer relationship management. But why is CRM now so critical to performance management?
A Shift of Power
Organizations have realized they must be increasingly focused on customers in order to stay in business today. This is due to slimmer margins, commoditization of product and service offerings, and the increased availability of information for the customer—especially through the Internet.
This doesn't mean that organizations should reduce their acquisition of new customers through marketing, arguably the most critical function in an organization. But they should balance their use of financial and personnel resources between growing sales with higher-potential, existing customers, and acquiring high-profit customers who share characteristics with their existing, high-profit customers.
The Internet has shifted power from suppliers to buyers because shoppers and purchasing agents can instantly view comparative pricing from a broad range of vendors while collecting more information from Web-based product and service-line resources.
Just imagine the shopping experience of a forgetful husband the evening prior to his 10th wedding anniversary. Once he realizes on his commuter train ride home from work that he has forgotten a gift, he types—or even speaks—these five words into a search engine on his smartphone: "10th wedding anniversary wife gift."
In less than a second, his phone provides a list of gifts other husbands have purchased, ranked in order of popularity. With a click, he can view price ranges. Once he specifies his price range, he can locate nearby stores complete with driving directions, and he can even immediately phone each of those stores to talk to a salesperson.
If he had been prudent enough to remember his anniversary only a few days earlier, he could have been directed to Websites where he could have purchased the item at a far lower than retail price, and have had the gift already wrapped and shipped.
There are dozens of different purchasing experiences you can imagine, not just for consumers in households but also for purchasing agents in the virtual B2B marketplace. Buyers are no longer restricted to suppliers from the local geography; now they can order globally.
How Can Suppliers Compete?
Some suppliers overreact, becoming customer-obsessed when they attempt to transform themselves away from developing innovative new products and services, and motivating their sales forces to sell them. Most eventually realize they should work backward by first understanding the unique buyer preferences of the types of customers and prospects they want to serve.
There is a difference between being customer-focused and customer-obsessed. The latter approach may cast too wide a net and capture savvy, high-maintenance, price-driven, non-loyal buyers who ultimately yield little profit margin in the long term.
As a supplier increasingly micro-segments its customers and sales prospects, the company will need more accurate intelligence on the current and future potential profitability of its products, service lines, channels, and customers. The idea here is not just to know which types of customers to grow or acquire and which not to, but also how much to spend growing and acquiring the desired types.
If you bribe loyal customers and prospects with unnecessary deep discounts and excessively costly differentiated services, or if you neglectfully fall short in offerings or services to non-loyal customers and prospects (thus risking their abandonment), you destroy shareholder wealth. The spending and investment of sales and marketing is ultimately a financial optimization problem.
This is why an effective managerial accounting system that helps you understand the profitability of a customer and its potential customer lifetime value (CLV) is another one of the key components of the performance management portfolio of methodologies. This explains the increasing adoption of activity-based costing systems; these replace flawed and misleading broadly averaged standard cost system allocations lacking causality with a cost-tracing approach, one based on cause-and-effect relationships.
Single View of the Customer
Cutting aside the skills and capabilities needed to measure customer value and derive a return on customer value score, there is a myriad of other tactics available to exploit customer intelligence data. For example, sales and marketing campaigns can become continuous, closed-loop learning cycles.
Based on known patterns of psycho-demographic customer data (e.g., teens' TV viewing preferences) and their recency-frequency-monetary spend, or RFM, history (how much money was spent, how recently, and how often was it spent), offers, deals, and discounts then can be customized to micro-segments and ultimately individuals. In addition, based on the actual-versus-expected response behavior, future marketing campaigns can be fine tuned.
To create greater shareholder wealth, a company must analyze its customer portfolio in new ways to discover new profitable revenue growth opportunities. Many organizations have difficulty accessing, consolidating, and analyzing the necessary customer data existing across its various business systems. This issue is exacerbated over time as the number of systems and discrete customer databases expands.
Becoming customer-centric requires a view of data that involves no walls. For example, a bank should ideally consolidate its information onto a single decision-making platform, rather than keeping its credit card data in one silo, its banking account data in another, and its mortgage data in yet another.
A "single view" of the customer must eventually be created, one that consolidates relevant and accurate data related to a single customer across different organizations, databases, and operational systems. Without this single view, a customer with a variety of products may be viewed as less valuable than a customer with one product. A customer who spends a lot of money with you, as well as time with technical support, could be determined as highly unprofitable/undesirable in the customer service department but very valuable to sales and marketing.
As initially mentioned, CRM is one of the critical components in the portfolio of performance management methodologies for this very reason. When customer analytics is combined with the other components of the performance management portfolio—such as balanced scorecards, demand planning/forecasting, marketing automation, and predictive resource capacity management—the full vision of performance management can be realized.
Gary Cokins is global product marketing manager for performance management at SAS, a provider of business intelligence and analytical software, as well as a speaker and author.