White Paper 5 Key Digital Engagement Initiatives to Optimize Customer Lifetime Value

Transcription

1 White Paper 5 Key Digital Engagement Initiatives to Optimize Customer Lifetime Value

2 Optimizing Customer Lifetime Value Customer Lifetime Value is a pivotal concept and metric used to design, measure and manage the customer relationship. However, changes to communication technology and customer expectations are shaking up conceptions of the underlying customer lifecycle. What are the impacts and opportunities of digital customer engagement from a customer lifetime value standpoint? We look at how digital customer engagement a strategy for delivering customer care that harnesses customer communities together with social media and other non-voice channels can both create value and control costs throughout the customer relationship, thus lifting CLV.

3 Contents The cornerstone of customer relationship strategies Both a metric and a conceptual approach 4 Defining and evaluating customer lifetime value 4 Focusing on customer engagement 5 Lifting the customer lifetime value curve 6 Taking the long view 6 A holistic approach 7 Why are we talking about this now? The customer: More informed, more disloyal 8 Evolving views of the customer lifecycle 9 The digital gorilla in the room 9 Key digital engagement initiatives to optimize CLV Challenge: Use digital customer engagement for retention and loyalty 10 1 Key initiative 1: Proactively engage at-risk customers 10 2 Key initiative 2: Foster loyalty with customer communities 11 Challenge: Stay relevant with the autonomous and connected customer 12 3 Key initiative 3: Enable self-service the community way 12 4 Key initiative 4: Offer choice of assisted service channels 12 Challenge: Lower customer effort to improve customer experience 13 and loyalty 5 Key initiative 5: Increase self-service adoption by offering 13 an easy path to assisted support It s time to serve the digital customer We are all digital customers now 15 A competitive differentiator 15

4 The cornerstone of customer relationship strategies The purpose of a business is to create and keep a customer. Peter Drucker, author, renowned management thinker Both a metric and a conceptual approach Customer Lifetime Value seeks to measure and manage customer value over the long term. Customer Lifetime Value is essential to customer relationship strategies: Simply put, it seeks to measure and manage the value of a customer over time. It represents both an analytical approach to monetization and a holistic approach to capturing customer value over the long term. As a metric, it is a staple of CRM and of relationship marketing analysis. As a concept, its roots can be traced back to Peter Drucker s seminal work in the 1950s 1. Defining and evaluating customer lifetime value Conceptually, CLV is simple to express: It is constructed as the net present value of all future cash flows attributed to the customer relationship 2. In reality, evaluating it is difficult. There are several reasons for this: It is a forward-looking metric: This means making a prediction based on past customer data or data from similar customer groups; Reliable detailed data may not be readily available. Retention is a major driver of CLV with small variations greatly impacting the resulting value. With propensity to churn rising, it is harder to make assumptions about retention rates 3. Furthermore, the risk of churn varies depending on the relationship stage and lifetime events, whereas the retention rate is usually assumed to be constant throughout. Accelerating product and contractual cycles together with rapidly evolving market conditions make future margin and cost assumptions more difficult. Because of this, there are multiple approaches to evaluating CLV; Methods in use vary by line-of-business in particular whether the customer relationship is contractual or not and range from simple heuristics to sophisticated modeling techniques. 4 1 The Practice of Management, Peter Drucker, Marketing Metrics, Farris et al, Cf. The Switching Economy, Accenture, 2013

5 We will take CLV as equivalent to expected revenue, minus ongoing costs (such as onboarding, user support, product service, retention), multiplied by the length of the relationship, from which we subtract the initial cost of acquisition. Projected Customer Customer Support revenue costs relationship acquisition ( ) length cost = Conceptualizing customer lifetime value CLV Customer lifetime value is simple to express but hard to evaluate. Focusing on customer engagement Customer lifetime value encourages firms to focus on the long-term health of their customer relationships. Paul Farris, professor of business administration, author Customer Lifetime Value fits within a broad discussion of customer profitability and of customer management: Upstream, it is often applied to customer selection and segmentation strategies; Further downstream, CLV often comes into play in administering loyalty programs, and applying differentiated treatment strategies. For the purposes of this discussion, we will focus primarily on the issues of customer care provision. 5

6 Lifting the customer lifetime value curve Usually marketing departments assume that the lifetime value of a customer is fixed when doing their ROI calculations. We view the lifetime value of a customer to be a moving target that can increase if we can create more and more positive emotional associations with our brand through every interaction that a person has with us. Tony Hsieh, CEO and founder of Zappos The lifetime value of a customer is not fixed; it can be managed. Customer Lifetime Value and customer relationship stages and events can be represented by a curve over time. By optimizing moments when value is created or costs are incurred, or when the risk of attrition is heightened, it is possible to inflect and extend the curve and thus lift CLV. Cumulative value Optimized CLV Extend and lift this curve Create value Projected CLV Acquire Onboard Serve Contain costs Retain / Recontract Loyalty / Advocacy Projected lifetime A simplified representation of customer lifetime value over time Taking the long view As a metric, CLV reduces a customer relationship to a potential lump sum value. This has the immediate advantage of placing an upper limit on acquisition or retention efforts, for example. As a management approach, customer lifetime value encourages firms to focus on the long-term health of their customer relationships. 1 In CLV models, changing the inputs changes the output: However, it is all too easy to conclude that the only variables that can be controlled are costs. There are, of course, multiple actionable components other than costs. 1 Marketing Metrics, Farris et al,

7 CLV Revenue / relationship benefits Support Costs Customer Acquisition Cost Incremental revenue Relationship length Onboarding User Support Product Service Loyalty Marketing Customer knowledge Referral value Self-care Assisted support Customer Lifetime Value: A model with multiple possible inputs A holistic approach The long-term view encourages us to consider non-monetary variables also known as relationship benefits such as referral value, loyalty, and customer knowledge or learning potential; It also encourages us to consider the unintended side-effects of certain cost cutting measures. This holistic view is reflected in related approaches to customer management such as Net Promoter Score, Customer Experience Management, or the Four Gears Model formulated by Geoffrey Moore. 1 A lifetime value approach favors long-term customer relationship health. 1 Cf. Geoffrey Moore, Crossing the Chasm,

8 Why are we talking about this now? Businesses are no longer the sole creator of a brand; it is co-created by consumers through shared experiences and defined by the results of online searches and conversations. Brian Solis, Principal Analyst, Altimeter Group The customer: More informed, more disloyal Intensified competition is placing retention strategies under strain. From the standpoint of the managerial ideals of Drucker, Customer Lifetime Value is as relevant as ever. However, it is worth taking a closer look at how the underlying customer journey is evolving. In a business environment where competition is intensified and customer disloyalty has become the rule, established churn models and retention strategies are being put under severe strain. Customer and prospects have access to more information than ever before. The brand no longer controls the conversation. Social media has given customers unprecedented ability to talk to one another; they trust the opinions of their peers above that of companies. Churning: The New Normal 51% of U.S. consumers switched service providers in 2013 due to poor customer service up 5% from Furthermore, according to research published by Accenture, between 10 and 15% of total annual disposable revenue in mature markets is up for grabs as consumers no longer hesitate to switch providers. Despite the high levels of reported churning, 82% of the churners said that the company could have done something differently to retain them; Customer Experience is placed on an equal footing to price. Accenture calls this phenomenon the Switching Economy. Accenture 2013, Global Consumer Pulse Survey, Global & US Key findings (conducted using a panel of consumers in 33 countries in 2013) 8

9 Evolving views of the customer lifecycle The traditional linear customer funnel is falling out of favor for being too simplistic. 1 Today, there is a less clear-cut distinction between prospects and customers. Customers are potential switchers, and both can be very vocal as either promoters or detractors of your brand. Likewise, closed-loop views of the customer journey must account for faster product or contractual cycles. Furthermore, to sustainably acquire and retain customers which is the fundamental wisdom of the Peter Drucker quote the enterprise must find ways to engage the customer (to increase the length and depth of the relationship), and enlist the customer (to encourage positive word of mouth and co-creation of value through participation). 2 Today, there is a less clear-cut distinction between the behaviors of prospects and those of customers. Even the currently popular customer journey mapping approaches, which take a more outside-in, customer-centric view of the customer journey, must now account for an explosion in the number of communication channels and touchpoints. The digital gorilla in the room All of this these changes are happening against a backdrop of technologydriven disruption. It is hard to overstate the importance of this ongoing digital revolution: Technology, customer habits, and customer expectations are changing fast. The parallel phenomena of social channels, smart devices, mobile connectivity, and apps have brought additional depth and complexity to the customer relationship; They have also brought about the need to meet the customer in new places, at new times. Digital channels, including peer communities, social networks (Facebook, Twitter, Google+), third-party forums, , online forms, mobile apps, OTT messaging services, and SMS are where the customer is today. Companies must be able to efficiently project their service presence in these new channels. Furthermore, since it is not always possible to be in all places at all times, they must also be able to project their influence in order to benefit from customer advocacy and to harness the goodwill of communities. 1 Cf. 2 Cf. Geoffrey Moore, Crossing the Chasm,

10 Key digital engagement initiatives to optimize CLV There is a strong correlation between the intensity and quality of customer contact and the net lifetime value of that customer. 1 Michael Maoz, VP Distinguished Analyst, Gartner, Inc. Challenge: Use digital customer engagement for retention and loyalty Retention is a sensitive driver of CLV with small variations greatly impacting the resulting value. Frederick Reichheld famously stated that it costs 6 to 7 times more to acquire a customer than to retain them. Furthermore, he advances that as little as 5% increase in retention can result in as much as a 75% lift in customer lifetime value. 2 At the granular customer level, risk of churn varies throughout the relationship. However, churn is not a foregone conclusion: recent research points out that for 82% of churners, the company could have acted differently to retain them. 3 1 Key initiative 1: Proactively engage at-risk customers Customer knowledge is a key tool in identifying and successfully engaging customers at risk of churning. Customer knowledge is key to engaging at-risk customers. Dissatisfaction voiced within a community or across social channels in particular with regard to customer service is a reliable indicator of at-risk customers. Digital channels represent a tremendous source of insight. Often this information is also on display publicly. When customer service is empowered to step into these conversations, the risk of attrition can often be averted. From an operational standpoint, this requires the ability to: Identify unexpected or repeat contacts with customer service, Identify the same question posted across multiple channels (Facebook, Twitter, support communities...), Flag up red light questions (such as telephone number portability or how to migrate bank accounts), Or even detect angry tone of voice. By operationalizing these information flows, action can be taken. Next, the ability to identify the customer from their social handle and pair it with relevant customer records data is essential to deciding the course of action. The retention queue is, of course, not a new invention. The major difference now is that digital makes proactive policies more cost effective The CRM Customer Engagement Hub Targets Social Customers, Gartner Inc, Feb 10, Frederick Reichheld, The Loyalty Effect, Accenture 2013, Global Consumer Pulse Survey, Global & US Key findings

11 Few initiatives offer such leverage over CLV +5% retention improvement translates to 75% lift in CLV. 82% of churners would stay if the company acted differently. Key initiative 2: Foster loyalty with customer communities 2 Loyalty building is a primary use case for 25% of customer communities seen by Gartner, Inc. 1 Customer communities offer a destination for customers throughout the length of the relationship: For customers they offer the ability to find information, exchange knowledge with peers, and share ideas and gripes with the brand. For the brand, they play an ongoing role in capturing Voice of the Customer insight through explicit ideation initiatives, surveys, and, of course, observation. Customer communities drive trust; Trust drives loyalty. Loyalty is closely correlated to trust, which in turn is related to transparency. Therefore, when seeking to build trust via a community initiative, you should demonstrate transparency and openness to dialogue. You should be confident enough to let customers complain in public. After all, better a complainer than a churner! One important caveat: Although listening and dialogue is great for public relations and crisis management, if it is loyalty you are seeking to promote, you must go one step further and link the community to a process of continuous internal improvement. Telco provider B&YOU reports the loyalty benefits of customer recognition via the community When confronted with an aggressive offer by the competition, their customer community afforded them precious time to redesign their call plans. Subscribers preferred to complain within the confines of the community and wait for the brand to formulate a counter-offer rather than committing to the effort of a migration process. The community plays the ongoing role anchor for the customer base. 1 Technology Overview for External Community Software for CRM; Gartner, Inc; 7 May

12 Challenge: Stay relevant with the autonomous and connected customer The digital revolution has changed customer expectations of responsiveness and of convenience. Issues of volume, case complexity, and cost pressure are placing existing customer care infrastructure under strain. New social media and messaging habits have changed expectations of responsiveness and convenience. The digital, social and mobile revolution is certainly disruptive. But it also offers many opportunities to solve to these customer care issues. Better still, it offers many opportunities to create competitive differentiators. Given that customers are already engaged with these new digital channels it seems only logical to embrace them and harness what they have to offer to match customer care with customer expectations. Digital customer engagement methods offer the ability to both serve the autonomous customer and provide tailored experiences that are in line with evolving channel preferences. 3 Key initiative 3: Enable self-service the community way Cost-to-serve is a major component of the customer care equation. Developing strategies to enable and incentivize peer-to-peer customer care and to facilitate self care plays a major role in controlling these costs. Customer communities offer an ideal platform for these. Although the zero touch model is often advanced as the ideal customer support community, don t lose sight of the big picture: Depending on the business model being served and the confidential nature of information being discussed, a certain degree of company assistance is required. Community conversations are a rich source of customer insight. 4 Although contact avoidance is an important cost metric, assisted interactions offer opportunities to inflect decisions and get closer to the customer. Community generated content and conversations represent a rich source of information and insight to guide the production of more formal knowledge base articles. Key initiative 4: Offer choice of assisted service channels Responsive, no-fuss social customer service is increasingly part and parcel of the value proposition the customer is buying into and a key competitive differentiator. The ability to break down silos, unify processing of inbound messages, and present a single face to the customer is essential to achieving this type of initiative. Despite the rapid evolution of digital and social customer service channels, customers are aware of the different limitations of each and use them differently: Customers tend to prefer different service channels for different needs and at different times. You should play to the strengths of each. Assistance also applies to making sure autonomous customer communities fulfill their promise: Don t forget to regularly seed the community with resources and to make sure that answers to recurrent questions over assisted channels get prominent exposure there. A certain degree of moderation and curation may also be required to make sure the most relevant responses can be found easily. 12

13 Challenge: Lower customer effort to improve customer experience and loyalty Don t make me think. Steve Krug, author, user experience expert When looking at the customer relationship through the lens of customer effort, the potential of digital engagement methods becomes clear: convenience for the customer; improved efficiency of support processes for the company. In the realm of customer experience, Don t make me wait is second cousin to Don t make me think. Eliminating friction points and making it easy for the customer is usually seen as self-evident from the standpoint of acquisition and conversion processes. The same attitude should also apply to customer retention and satisfaction processes. Digital customer engagement is about more convenience for the customer and improved efficiency for the company. The growing role of wider customer satisfaction metrics (NPS, CSAT, Net Easy score) within the contact center is a reflection of this need. Key initiative 5: Increase self-service adoption by offering an easy path to assisted support 5 We ve already touched upon the importance of breaking down silos. The customer certainly doesn t care about your internal organization only getting their problem resolved. Customers go online to research their buying decisions; likewise they appreciate being able to do the same for customer care. Generally speaking, with current user behavior, the total addressable user base for self care is around 55 75%. How to encourage adoption is the wrong question; The right question is how to sustain usage over time? If you really want to encourage use of self care, make it easy to use, make it easy to get relevant results, and make sure you give the customer an easy way to move to assisted care. Seems counter intuitive? Not if you consider that although customers appreciate having the self-service option, they don t like being forced. Make it easy for the customer if you want to encourage self-care. We ve seen this pattern in traditional customer care in the past: When IVR first appeared, it was used to subtly direct customers to the right place for support. However, add to it the attractive revenue generation of inbound non-geographic numbers and IVR was then deployed everywhere. Not surprisingly, this wasn t always well received by customers! Self-service is one of those areas where customers quickly understand the underlying intention. Do it incorrectly and the customer concludes that it is only about you taking cost out of your business rather than providing them with a service. 13

14 Effort and loyalty are correlated 94% 88% 82% of customers reporting low effort expressed an intention to repurchase. would increase their spending. of customers who had a hard time solving their problems reported an intention to spread negative word of mouth. Stop trying to delight your customers, Harvard Business Review, July

15 It s time to serve the digital customer The bottom line is that people are seeking answers and direction, not messages or sales pitches. Brian Solis, Principal Analyst, Altimeter Group We are all digital customers now The new customer relationship is not only about changes to the channel mix. It is about a change to customer preferences and the balance of power between the customers and the brand. Customers have become more autonomous, preferring to find solutions and form opinions on their own. The twin mechanisms of web search and social discovery mean that brands and companies no longer own the customer relationship a customer relationship that is now played out in public. The digital customer has more choices than ever as to how to engage the company. And new social media and messaging habits have changed expectations of responsiveness and convenience. The new customer relationship is not just about channel complexity, it is also about changes to the balance of power. The digital customer is increasingly an attribute of all customers. A competitive differentiator Churn is not going away any time soon. Nor is channel complexity. Digital customer engagement offers the means to remain relevant in this evolving digital landscape and offer differentiated experiences in line with the expectations of the connected customer. It offers multiple levers to influence cost structure and revenue opportunities. Above all, it offers the means to promote retention and satisfy the customer at critical stages of the customer lifecycle. By optimizing moments when value is created or costs are incurred, or when the risk of attrition is heightened, digital customer engagement thus helps lift customer lifetime value. 15

16 Share this white Dimelo powers digital customer engagement Leading brands use Dimelo software to power brand communities, harness social conversations, and to effectively deliver customer service. Dimelo clients benefit from reduced cost of customer care and measurably increased customer satisfaction and brand equity. For more information, visit dimelo.com contact@dimelo.com 2014 Dimelo. All cited brands are the property of their respective owners. ver en