I was asked this question in a meeting earlier this week—I replied by explaining how I think about understanding customer value. I realize that this post has probably been written before but I’m curious if you agree or disagree?
As companies grow they eventually have to ask “who are our best customers”? In most cases, the buck stops with the chief executive officer who has to be able to clearly articulate the answer in support of the overall business strategy. To get the answer a good CEO will engage with his/her executive team ….
The answer depends on who you ask
You chief customer officer replies, “our best customers are the ones that don’t require support!” (i.e. low cost of maintenance/support) or perhaps your CCO replies “our best customers are those that can help themselves in our community.” (nod to CMO).
Your chief product officer replies, “fundamentally, our best customers are the ones for whom the product meets their requirements” (i.e. product/market fit) though your CPO might add “our best customers are those that drive the most innovation and growth.” Finally, “our best customers are those that buy the most but cost the least to service” (nod to CFO and chief customer officer).
Your chief marketing officer replies, “our best customers are those that advocate for us and drive the most new customer acquisition,” and in alignment with the CPO “our best customers are those that drive the most innovation and growth.” Finally, “our best customers are the transactional ones for which there is no additional cost of sales” (glances: at CRO).
Your chief revenue officer replies, “our best customers are the ones the keep coming back for more,” (i.e. loyalty, low-cost of sales, and greatest lifetime-value) or perhaps your CRO replies “our best customers are the ones that drive the biggest deals,” (thinks: biggest commissions).
Your chief financial officer replies with a chuckle,”our best customers are the ones that pay on time!” The your CFO pauses and replies “actually, our best customers are the most profitable customers …. though I’ll need all your input to calculate that ….
Synthesizing the answer
These answers need to be rationalized with each other to ultimately segment your customers by value. The CFO is the best position to build such a model. Ideally it would embrace a lifetime value basis and set factors for the cost of marketing, sales, and support. In addition to that it must account for customer driven value in the form of advocacy and innovation.
Such a model can be hard to build early on because there may not be much historical data on which to base lifetime value—so it may be necessary to impose a pragmatic horizon for your analysis … perhaps three years to start. If you’ve gone to the trouble to build out the model it’s fairly easy to see how extending the horizon will impact the results.
Once you’ve collectively defined who your most valuable customers are it’s possible to use this as an input for the business strategy and resulting goals/measures that will cascade down through the management and implementations teams.