Don Peppers

Rules to Break and Laws to Follow
How Your Business Can Beat the Crisis of Short-Termism
Don Peppers
Vancouver 7 October 2008
2008 Peppers & Rogers Group
Daimlers prediction of automobile demand

Gottlieb Daimler
Worlds first four-wheeled gasoline-powered automobile
Limiting factor: A shortage of qualified chauffeurs

21st Century competition in all sectors Technology and deregulation have created a surplus of products, services and channels
Limiting factor: A shortage of customers

Customer scarcity has real-world consequences

Company X sells auto, property, health and life insurance Agents recruit customers, then are protected from poaching by other Company X agents Life and health are far more profitable lines But this agent does a terrific job winning new customers for auto insurance...
How much value does Company X lose every time this agent recruits a new auto customer?
Companies do not create value unilaterally

At your company, how do you create value? Superb online technology? Great products? Compelling services? Terrific customer service people?
No, no, no, no. Only customers create value!

This is a different dimension of competition
Customer Relationship Management
Customer Needs Satisfied
Maximize the value created by each customer

Share of customer
Traditional
Marketing
Market share
Maximize the value created by each product
Customers Reached
The power of remembering customers individually
And now along comes Moores Law
Three technologies:
Customer databases Interactivity Mass customization
Customer relationships have become practical for any business!

Catering to customers different needs Quarterly mailing goes out to thirteen million customers in thirteen million versions!
25 % to 30 % y es generall t ll y esponse ra R ales annua ls ncrementa i 100 million
Paying attention to customers Go to an ATM for ING Bank

Ask to withdraw cash Suppose the ATM notifies you that you dont have enough money in your account for this...
If this happens, and you are creditworthy, the ATM will offer you a credit line, immediately!
Response rate greater than 50%

Source: SPSS Netherlands
10
Treating different customers differently

Empowers store-level employees to treat different customers differently
Affluent professionals Focused, active, younger males Family men Busy suburban moms Small business customers
One store meets special needs of suburban moms

Small appliances sold as impulse items Large appliances arranged in home settings Separate, supervised childrens play area
Sales gains at pilot stores now twice as high

11
Focusing on the customer, not the product
Many green house customers
Remote monitors for complete environment
12
What do all these businesses have in common?
They are maximizing the value created by each customer

13
Customers create value in two ways

First, they generate current-period sales and costs
But second, they change their intent to buy, or their likelihood of buying, in the future
Suppose a customer calls you with a complaint
14
Balancing between short term and long term

Attempts to increase current income affect a customers lifetime value, and vice versa Marketing too aggressively can damage a customers lifetime value, while Improving service in order to increase lifetime value costs money currently
Taking a balanced approach is critical

15
Customers have memories, whether you do or not
How you treat car parts in a factory today will have no effect on their price tomorrow
But how you treat customers today has everything to do with their value tomorrow
16
The Goldfish Principle
Some species of tropical fish have no territorial memory
Businesses focused solely on current transactions have no customer memory But with no customer memory, their decisions will appear irrational or even hostile to customers
17
Businesses are at risk of being consumed by short-termism
18
The Crisis of Short-Termism
Would you give up real economic value to make this quarters numbers?
What portion of American public-company CFOs answered yes to this question?
In a recent survey, nearly 4 out of 5!
19
truths Three business myths

Myth: With good marketing, you can always acquire more customers from somewhere
Myth:
Myth:
hat ic t Value is created by offering metr differentiated th s s products and serviceses tru in ree us A b ese th all value Truth:eCustomers create d: th d Nee lances The most important goal in business is ba
increased sales and profit
Truth: Customers are scarce
Truth: Long-term value is just as important as current profit

20
Return on Customersm defined ROI = ROCsm

Profit from investment + Change in value of investment Starting value of investment Profit from customer + Change in value of customer Starting value of customer
ROI answers the question:

How much value can I create for the money I have to use?
ROC answers the question:

How much value can I create for the customers I have to use?
Which metric to choose depends on what resource is scarcest

21
Return on Customersm and ROCsm are registered service marks of Peppers & Rogers Group
ROC at the tactical level
Consistently one of the best relationship marketing companies in the world Analysis has improved with improvements in data technology and analytics
From three basic segments in 1990, to
20,000 continuously monitored segments
22
Behavioural Based Modelling Analytics system calculates customer-specific LTV effects of

Product revenues Direct, customer-specific costs
All marketing decisions now made on the basis of overall efficiency
Balancing immediate cash impact of an action and LTV changes specific to that customer
23
ROC leads to organic growth Example: Automatic overdraft protection

If checking customer for 90 days, at least one deposit in last month, low-risk credit score
Overdraft protection tailored to your profile

Improves customer experience and reduces banks costs in handling bad checks
13% increase in average profit per client

High-value clients up 20% in just five years
24
Enterprise value and customer equity
Total lifetime values of all current and future customers

Customer equity = enterprise value of the firm Therefore, ROC on customer equity is the same financial value as Total Shareholder Return
Profit from customers + Change in customer equity Starting value of customer equity Company profit + Change in companys value Starting value of company Total Shareholder Return
ROC = = =
25
Finance 101: Shareholder return must always exceed cost of capital
If your borrowing rate is higher than total shareholder return (TSR), keep your money in the bank Because ROC = TSR, it must also exceed your cost of capital, or value is not really being created
This is a boardroom issue: Are you building enough customer equity to support the growth you want?
26
Creating, harvesting, or destroying value

Company 1 Beginning customer equity Ending customer equity Change in customer equity Profit during the period Return on Customer Company 2 Company 3 Company 4 Company 5
$1,000 $1,200 $200 $50 25%
$1,000 $1,200 $200 ($50) 15%
$1,000 $975 ($25) $50 2.5%
$1,000 $950 ($50) $50 0
$1,000 $900 ($100) $50 (5%)

Value Destroyer ROC < 0
Value Creator ROC > Cost of capital
Value Harvester Cost of capital > ROC > 0
27
Consider mobile telecom companies

Value Destroyer
Value Destroyer
Value Harvester Value Creator
Source: McKinsey Quarterly
28
How one value creator did it Verizon Wireless generated $13.7 billion in operating earnings from 2002 to 2004
Joint venture with Vodafone
During this period, Verizon Wireless cut monthly customer churn in half, from 2.6% to 1.3% This created an additional $10.4 billion in new and increased customer LTV! Average annual ROC during the period:
~70%
29
How did Verizon Wireless accomplish this? They changed their customers behavior
Based on their understanding of individual customers needs They had to see their business from the perspective of their own customers
They were willing to give up short-term profits in order to create longer-term value They invested in customer satisfaction
30
LTV change: Focus on Leading Indicators

LTV drivers
Churn rate, frequency of purchase, share of customer, service contract, account penetration level
Behavioral cues
Changes in account profile, interactions, sales, referrals, returns, complaints
Lifestyle changes
New job, retirement, graduation, marriage, moving
Attitudinal indicators
Willingness to recommend, customer satisfaction, brand preference, level of trust and confidence
31
Now think about your competitive situation

Why do customers choose you instead of your competitors?
Two Canadian marketing professors asked thousands of business executives this question over a four-year period
Answers in all industries are remarkably similar
...trust, confidence, strength of customer relationships...
32
Consider your value proposition

A customer will create the most value for you at about the point you create the most value for him. But when do you create the most value for the customer?
Maximizing the value customers create requires you to earn their trust
33
New technologies require trustworthiness Reputations are now circulated online
You cant un-Google yourself.

Linda Kaplan Thaler, CEO, Kaplan Thaler Group
34
Customers interact with each other Disappoint one customer and thousands of others will soon learn of it Yankelovich asked consumers what they would do if a business violated their trust:
3% would complain to the Better Business Bureau or Chamber of Commerce 76% would tell friends and associates 12% would write about it in an Internet forum!
35
Transparency should be the rule now
transparency may be the

single greatest cultural shift that businesses will face as they engage with social media.
- Paul Gillin, The New Influencers (2007)
36
Two requirements for earning customer trust
Intention to act in the customers interest Competence to carry out this intention
37
Acting in the customers interest

Treat the customer the way you would want to be treated if you were the customer.
Forrester survey rated USAA highest in customer advocacy the perception by customers that a firm is doing whats best for them and not just for the firms bottom line According to Forrester, customer advocacy is the best indicator of whether financial services companies are able to achieve cross-sell success to a customer base Firms that score highest, such as USAA, are considered the most for future purchases of products and services.
38
How to destroy trust through incompetence

When customer calls IVR, ask for account number, then when he speaks with a rep Mail the customer an offer for something he already bought from you. Again. And again. When customer makes a mistake entering info on Web site, reset all fields, make him start over Reduce call center expenses by hiding the phone number on your Web site Make lower prices available to new customers only Give employees no power to resolve complaints
39
Two ways to become competitive road kill
Allow something about your offering to annoy customers or employees Let your offering look just like everyone elses
40
Computers will never be able to do everything
41
Judgment, creativity, empathy, intuition How would you write a rule requiring employees to delight customers? You can analyze X-rays in India, but bedside manner happensat the bedside You can automate how a sales call is reported
but no computer can look into a prospects eyes and decide whether to press for the sale
You cannot prescribe what employees should do in situations that you cannot define precisely You have to empower your employees to act!
42
What customers say they want from companies
Improve the product Empower employees
Through 2010, empowering employees will be the quickest route to improving the customer experience.
- Ed Thompson, Gartner
Share customer data across departments Brand strength
360 customer data
Online selfservice
Crossselling
76%
71%
41%
35%
34%
32%
11%
Richard Lee and David Mangen survey: Customers Say What Companies Dont Want to Hear
43
Great to empower your employees, but
will they do the right thing for the business?
44
The real secret to a great customer experience
The Mechanical Turk (1769)
45
There has to be a person in there Your employees need to be

Engaged in their work and Enabled to accomplish their mission
Your goal: self-organizing employees
46
Your most powerful competitive asset:
Trust
Customer trust will not only make you a more profitable company
it will make you a better company!
47
Peppers & Rogers Group

Management consulting for customer-facing issues
Magazines, newsletters, research white papers
Offices around the world London, Brussels, Norwalk, Sydney, Istanbul, Dubai, Mexico City, Sao Paulo
To subscribe to the 1to1 Weekly email me: dpeppers@1to1.com
48

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Rules to Break and Laws to Follow

How Your Business Can Beat the Crisis of Short-Termism

2008 Peppers & Rogers Group

Daimlers prediction of automobile demand

Limiting factor: A shortage of qualified chauffeurs

Limiting factor: A shortage of customers

Customer scarcity has real-world consequences

2008 Peppers & Rogers Group

Companies do not create value unilaterally

No, no, no, no. Only customers create value!

This is a different dimension of competition

Customer Relationship Management

Customer Needs Satisfied

Maximize the value created by each customer

Maximize the value created by each product

The power of remembering customers individually

2008 Peppers & Rogers Group

And now along comes Moores Law

Customer relationships have become practical for any business!

25 % to 30 % y es generall t ll y esponse ra R ales annua ls ncrementa i 100 million

2008 Peppers & Rogers Group

Paying attention to customers Go to an ATM for ING Bank

Response rate greater than 50%

Treating different customers differently

One store meets special needs of suburban moms

Sales gains at pilot stores now twice as high

Focusing on the customer, not the product

Many green house customers

Remote monitors for complete environment

2008 Peppers & Rogers Group

What do all these businesses have in common?

They are maximizing the value created by each customer

Customers create value in two ways

Suppose a customer calls you with a complaint

2008 Peppers & Rogers Group

Balancing between short term and long term

Taking a balanced approach is critical

Customers have memories, whether you do or not

2008 Peppers & Rogers Group

The Goldfish Principle

Some species of tropical fish have no territorial memory

Businesses are at risk of being consumed by short-termism

2008 Peppers & Rogers Group

The Crisis of Short-Termism

In a recent survey, nearly 4 out of 5!

2008 Peppers & Rogers Group

truths Three business myths

Truth: Customers are scarce

Truth: Long-term value is just as important as current profit

Return on Customersm defined ROI = ROCsm

ROI answers the question:

ROC answers the question:

Which metric to choose depends on what resource is scarcest

ROC at the tactical level

20,000 continuously monitored segments

2008 Peppers & Rogers Group

Behavioural Based Modelling Analytics system calculates customer-specific LTV effects of

All marketing decisions now made on the basis of overall efficiency

ROC leads to organic growth Example: Automatic overdraft protection

Overdraft protection tailored to your profile

13% increase in average profit per client

Enterprise value and customer equity

Total lifetime values of all current and future customers