Tuesday, October 24, 2006

Measuring the Customer Value of Non-Customer Decisions

One of the bedrock propositions of Client X Client’s approach to Customer Experience Management is that ALL business decisions should be measured by their impact on customer lifetime value. That sounds simple and dramatic enough to be memorable, which may be reason enough to say it: after all, a good part of what we’re doing is evangelism, and a simple, clear message is critical for effective communication.

But, marketing aside, are we serious? Of course, it’s possible to argue in a general way that non-customer-facing decisions such as, say, a new factory, result in cost reductions that increase margins and therefore increase customer value. But if that’s the only connection, wouldn't it make more sense to analyze the investment directly in terms of its impact on total profits and leave customers out of it?

I believe there’s more to it than that. A detailed assessment of impact on customer value yields insights into non-customer-facing decisions that are otherwise unavailable. The critical point about customer value is that it’s always based on assumptions about future transactions. Thus, calculating the impact of a new factory on customer value requires estimating not only the change in product costs, but also any change in product mix, product development time, delivery schedules, quality, and host of other factors.

For example, if the new factory is in China, it may have lower costs but be less nimble due to longer lead times for retooling and shipping. In a quick-changing industry like fashion or consumer electronics, this could significantly reduce future sales. Conversely, if the new factory expands the range of products the company can sell to its customers, their future values increase even though the customers themselves have not changed. Or, if the new factory produces lower quality goods, the cost of that decline in quality includes not just returns and refunds on the defective merchandise itself, but the lost future sales to customers who become annoyed.

It’s possible to build such considerations into a conventional analysis, but they are much more obvious when calculations are based on projections of customer behavior. So we are making more than rhetorical points when we argue for customer value as the measure of all business decisions.

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