At a recent BI-congress I listened to a presentation of a solution for the measurement of customer value. In this case, the visually attractive graphical representation  showed the “value” of each customer in four quadrants and the suggestion was, that customers shown to be unprofitable should be phased out. That sounded reasonable, but on more careful examination a number of questions were raised.

A more careful look at the basic data showed many weaknesses which could lead to damaging decisions. The calculation was made on the basis of invoiced goods and services minus costs. OK, but how are costs measured and applied? It appeared that in this case many of the costs were estimated, cost of sales for example, or support costs on the basis of a calculated cost per hour.

This raises two questions:

1. How should calculated sales, marketing and support costs be applied to individual customers?
2. Can customer value be defined purely on the basis of profitability?

The first point is a question for controlling and relates to processes and practices in the company. The second point is more interesting from the CRM point of view.

What is customer value? Is lifetime value the criterium or the value over a specific period? Which factors should make up value?

From the CRM point of view, the pure financial situation over a given period is only one aspect. The following aspects should be considered in any analysis:

• Does the customer have more potential?
• Is the customer important as a reference?
• Does the customer provide leads or other marketing value?
• Is the customer networked with other customers or potential customers?
• Is market share important for the acquisition of new leads?

These aspects may not be easy to handle with the BI Tools currently available, but are of critical importance to sales and marketing. An analysis without reference to these factors will produce misleading results and a frustrated sales force.

In most cases, in Germany at least, customers are categorized as A, B or C customers based on the volume of business. At first, this appears logical but at a closer look more factors should be regarded:

• business volume in relation to the customers total budget
• the customers growth plan
• marketing prestige

Just looking at achieved business volume is a very one sided view of a customer. More important is the size of the customers budget, assuming that there is no reason why you should not expand your share. Some customers will clearly grow rapidly and these need to be handled with particular care since this is a chance to establish contacts and loyalties which will keep competitors out when the company grows and more people are involved in purchase and development decisions. Some companies have a lighthouse function in their industry which makes them a generator for new business if they can be referenced.

Basically, there is nothing wrong with an ABC analysis, but the process for the classification needs to be well and clearly defined and classifications should be reviewed at least annually.

The main argument against the ABC classification, is that C customers tend to be ignored. This would lead to problems, since the rule that 20% of customers create 80% of revenue will always apply. Cutting away the C customers will only reduce revenue – it will not change the 20:80 relation!

The best sales persons are able to identify prospects with the highest potential out of a list of leads and are expert at concentrating their efforts on these. CRM Systems attempt to suport the process and allow some kind of customer/prospect valuation, but in most cases offer little more than an estimate of potential turnover or an A/B/C-rating.

Surprisingly, one smaller german CRM supplier has approached this problem and integrated an methodology developed by Walter Zimmermann and has included a field “Potential”. This misses two essential factors. Firstly, the fact that a customer has the means to buy my product does not in any mean that I have real potential – an iPhone fan is most unlikely to buy a Blackberry. Secondly, the valuation is only true for a limited period. Things change, and who is going to keep the CRM-Date up to date? Here is some scope for improvement.