Measuring Customer Value

As relationships with customers continue to change, now might be the time to revisit your customer profile, identify those that bring value to the business and then consider what actions you need to take to re-connect with those who will provide the income needed to sustain the business.

Measuring the value of individual customers, or segments of customers is vital to all business sectors, to understand where future profits lie and thus where to focus strategies. Businesses must retain their most valuable customers and devote less attention to the least valuable. However, deciding how to measure value can be daunting. 

There are a multitude of factors that can contribute to customer value, such as profitability, loyalty and retention; all of which are highly debated in themselves. This article outlines some of the different techniques, and the advantages and drawbacks of each. As a starting point, some definitions may be useful:

  • customer value – includes profitability and the secondary benefits a customer can bring to a company 
  • profitability – can be synonymous with value, but here is defined as the monetary value a customer provides following cost deductions 
  • customer retention – maintaining customers. This can be the outcome of high customer loyalty and satisfaction 
  • customer loyalty – here includes attitudinal loyalty (such as commitment), and not merely behavioural loyalty (purchasing behaviour) 
  • satisfaction – is how content customers are with current quality and price as well as prior period expectations 

These traditional methods calculate the absolute and relative profit of customers over a defined period and use these historical costs and revenues to predict a future value. Profitability profiles can highlight the interests of leading customers, which can assist in developing new products and improving existing services. However, such an approach needs to incorporate reliable revenue cost figures, future downstream costs and multiple periods. 

Three profit-based approaches are analysed below: Recency Frequency and Monetary Value (RFM), Customer Lifetime Value (CLTV) and Activity-Based Costing (ABC).

RFM – Recency, Frequency and Monetary Value: This method of profitability analysis concentrates on historical transaction data of individual customers to map purchasing cycles and to predict future behaviour. It regards recent, frequent purchasers and high spenders as the most valuable customers. RFM is beneficial as it broadly defines the customers and customer segments generating the most income, and reveals the consumers demonstrating recent activity. 

It also valuably highlights key events in a customer’s purchasing cycle, the effectiveness of marketing strategies and impacts on shareholder value.


  • The focus is on revenue, so the cost of acquiring, maintaining and keeping customers is ignored. This is problematic as some customers may be costlier to serve than others, e.g. those requiring bespoke work or specialist products. 
  • It assumes recent large purchasers are more likely to stay valuable than small purchasers some time ago, which is not always the case. 
  • Historical spending patterns can be misleading as the size and frequency of expenditures generally fluctuate with cash flow availability. 
  • RFM ignores the volatility of a customer’s past purchasing behaviour. 
  • This technique is not capable of considering a customer’s potential value, i.e. opportunities for cross-selling (selling the customer different types of product to their regular purchase) or up-selling (selling more of the same types of product to a customer).

CLTV – Customer Lifetime Value: This technique is often utilised by businesses. It focuses on the long-term value and predicted purchases of individual customers based on the entire lifetime of that customer. It calculates the value in today’s terms of those future purchases by considering revenue from the customer, cost of generating the revenue and projected lifetime value. Successful implementation requires accurate prediction of both a customer’s future spending patterns and the cost of acquiring future sales. The use of data warehouses, which record consumer activity, is particularly useful for this technique. Such warehouses are common in retail where information is collected on store cards, and used to analyse past transactions and develop risk strategies.


  • This technique incorporates many of the same problems as RFM because it too relies on historical spending patterns to predict future spending. This ignores cash flow fluctuations, volatility of past spending and potential value. It also regards customers as static entities incapable of change. Equally the company is passive and unable to influence future consumer behaviour through marketing, sales and product development. 
  • This technique is inappropriate for industries with tough competition and rapid changes, as historic patterns of buying will be short and thus less reliable and it does not include what may cause customers to change purchasing behaviour.

ABC – Activity-Based Costing: ABC is a financial tool developed to aid profitability analyses that focus on transaction size, level of purchases, changes in order volume and the cost of the customer. However, the latter is often ineffectively calculated. This is because cost of sales varies and customers use such resources as marketing and general administration very differently. ABC overcomes the problems of allocating costs by calculating the actual time spent on each customer, and multiplying this by the cost per hour. 

This tool is particularly relevant for industries with customers that exhibit very different purchasing behaviours, as it allows identification of demanding and costly customer segments. It also allows managers to identify the specific activities which are the costliest and can thus look at ways to reduce these costs.


  • ABC still does not examine potential customer value, and again regards both customers and companies as static and incapable of influencing change. 
  • It incorporates difficulties of acquiring (often costly) information.

Customer Retention

All the above examples have based customer value on the profits they can generate. However, research has demonstrated that customers can in fact create additional benefits, and organisations may occasionally retain less profitable customers [1]. In 1990, Professor W Earl Sasser Jr, and Frederick F Reichheld published an article in the Harvard Business Review which suggested that a 5% increase in customer retention leads to a profit increase of between 25-85% [2]. Customer retention is thus an important consideration when analysing value.

Benefits of customer retention:

  • Revenue grows from repeat purchases. 
  • Serving an experienced customer can often be more efficient as they may not demand the information and extra service required by new customers. 
  • Learning from existing customers can benefit process effects as feedback and suggested innovations can reduce costs of product development and can inspire new products. 
  • Some companies retain customers who will ‘stretch’ them. These are more demanding and thus push the company to continually improve. 
  • Existing satisfied customers will generate new business through referrals. This strategy is valued as shown by the emergence of ‘family and friends’ deals. 

Retention is often calculated by the percentage of customers repeat buying within a specific time, the cumulative value of purchases over a specific time or the percentage of customers repeat purchasing from year to year. However, measuring retention is difficult as many complex factors such as loyalty and satisfaction will interact to determine whether a customer will stay with a particular brand or company. These can be difficult to quantify.

Customer Loyalty

Along with satisfaction, customer loyalty is often used as a measure of retention rates, and is equally as problematic to quantify. It is often calculated by repeat purchases, cross-selling, multiple purchases and referrals. However, loyalty is a multi-dimensional concept involving behavioural elements (purchasing patterns) and attitudinal elements (commitment, trust, emotional attachment), therefore measuring just repeat purchases cannot fully capture the motivation behind consumer loyalty.

‘Loyalty’ is a dubious term, as customers demonstrating loyal behaviour may not always be showing true commitment to the brand or company, but merely repeat purchasing out of convenience. It is therefore important to consider why customers may stay ‘loyal’:

  • monetary incentives 
  • convenience 
  • no alternative 
  • may see no difference among alternatives 
  • avoid risk 
  • high switching costs 
  • loyalty initiatives 
  • true attitudinal loyalty 

Customer satisfaction and loyalty are difficult to incorporate into valuation methods, but understanding how these contribute to customer purchasing patterns is vital for managers. Understanding these factors can provide managers with information, such as which customers are most likely to continue purchasing and why they remain loyal to a particular company. This allows implementation of targeted strategies to keep the desired customers, attract new business and develop successful products or services.

However, deciding which customers to retain and which customers to attract is far from simple, even with the above factors accounted for. Dhar and Glazer suggest ‘hedging’ customers can overcome such issues. To do this, a manager must assess the customer base as a whole and gain a spectrum of customers between the high profit, highly volatile and the low profit, low volatility customers. This means that any new customer must be judged in accordance with the existing portfolio to strike a balance between volatility and expected return. This is beneficial as high spenders are often unpredictable so should not be relied upon exclusively, but steady spenders may not generate sufficient profits. Instead of always trying to attract big spenders, it can also help to keep some reliable customers around. Managing a customer portfolio in this way brings stability to cash flows as the collective impact is always accounted for [4].


New technologies and analysis methods (such as ABC) are allowing more accurate calculations of customer profitability that can be used to predict future purchasing behaviour. However, profit-based analyses omit the human elements that determine what makes a person buy into a product or service. Therefore, they remain useful as a base for decision-making, but should not viewed as an exact reflection of future customer behaviour. It is important to understand the motivations behind consumer patterns, as it can be useful to direct marketing, develop products and retain customers. Businesses need to retain their most valuable customers, but as this can include more than just monetary gains, care needs to be taken over the method of analysis used.

[1] Lynett Ryals ‘Are Your Customers Worth More Than Money?’ Journal of Retailing and Consumer Services, Vol 19 Issue 5 (September, 2002) pp 241-251.

[2] W Earl Sasser Jr & Frederick F Reichheld, ‘Zero Defections: Quality Comes to Services’, Harvard Business Review, Vol 68, No 5 (September, 1990), pp 105-111.

[3] E Grigoroudis & Y Siskos analyse national satisfaction barometers spanning various countries and sectors in: E Grigoroudis & Y Siskos, ‘A Survey of Customer Satisfaction Barometers: Some Results from the Transportation-Communications Sector’, European Journal of Operational Research, Vol 152, Issue 2 (January, 2004) pp334-353.[4] Ravi Dhar & Rashi Glazer ‘Hedging Customers’, Harvard Business Review (May, 2003) pp86-92.

Customer Journey Mapping
April 20, 2020
What is it?

Customer Journey Mapping is a valuable tool which can be used by organisations to fully understand the customer end to end experience from the initial point of contact through to resolution.  Customer journey maps are excellent at showing the gaps between customer expectations and perceptions of the actual experience at key steps along the journey.

How does it work?

Customer Journey Mapping works by asking a customer to reflect on what it’s like to do business with your organisation.  Unlike Process Re-engineering, it is essential that a real customer is involved where there is a direct interaction between the organisation and a customer. These are known as ‘moments of truth’.  Moments of truth are the points in a journey that define the overall experience, both positive and negative, i.e.

  • the moments that present an opportunity to delight the customer;
  • the things the customer expects and does not necessarily notice unless they are not in place.

The process follows the steps listed below.

  • Using a complete business ‘transaction’, break the transaction into steps. A transaction can be a quick and simple one such as an enquiry or request or conversely it can be complex, involving several departments.
  • The customer then walks through each step, describing their experience. On occasions it may be helpful to offer the customer a prompt such as ‘At that stage, how did you feel?’.
  • Capturing the journey is usually done by portraying the experience in terms of a ‘Heartbeat Monitor’. Where a customer is happy or satisfied with the service, the heartbeat travels in an upwards direction and conversely, dissatisfaction is captured in a downwards direction.  From this, the completed journey will resemble a heartbeat monitor.  However, this is merely one mechanism to map the customer journey.
  • It is essential that where dissatisfaction or less than satisfactory service is experienced, the necessary actions are identified to rectify the problem.
Why use it?

Customer Journey Mapping offers organisations the opportunity to gain excellent insight from their customers. Customers will use their own words to describe their experience and not be constrained by having to select a ‘best fit’ questionnaire response.  In addition, it can identify issues which really matter to customers – organisations may not even be aware of them.  The best customer journey mapping exercises take place with customers who can offer an honest reflection of their experience, especially where service has been less than satisfactory and improvements can be made.

Customer Relationship Management
April 7, 2020

Customer Relationship Management (CRM) is a strategy used to learn more about customer’s needs and behaviours to create, develop and enhance relationships with carefully targeted customers.

Many organisations view CRM as primarily a technological issue and as a result implement systems that more often than not fail. This is because they assume that CRM is ‘done’ once the right system has been found. The real value of CRM, however, transpires when it is regarded as a strategy or approach that deconstructs the underlying processes, relationships and structures concerning customer behaviour. It is important to align organisation wide business processes to such strategies.

Technological CRM solutions comprise of systems that link together the different influxes of customer information, for example from mail campaigns, web sites, call centres, and sales and marketing. The information is then organised by operational systems (for example sales and inventory systems) and analytical systems. However, these systems “don’t provide the divisional and holistic customer view needed”[1] as they underrate the value of individual customer relations and the benefits of building a strategy to derive benefit from the information.

There is common agreement that a customer relationship should be managed in stages: [2]

1. Recruitment: The customer is targeted and encouraged to purchase. 

2. Welcoming: Make sure the customer knows how to use the product or service and has a contact in the company in case of queries. 

3. Get to Know: Make sure information is exchanged. This stage is where companies can analyse loyalty, satisfaction and retention to determine the future strategies required for individual customers. 

4. Account Management: At this state, customer relationships are managed securely and additional needs problems are identified ahead of time through good communication with the customer. 

5. Intensive Care: If a problem arises and the customer is dissatisfied, for example from bad service or changing needs, special attention is needed to return customers to stage four. 

6. Dissociation of the Relationship: This is where a customer no longer purchases. It may be possible to win them back in time if the reason for leaving is resolved. 


The above stages will benefit if businesses first decide on the information they need and what they want to do with that information. Many commentators state that there is little point in endlessly gathering customer data if this knowledge cannot be used. Successful CRM relies on the ability to access information and the existence of internal organisational structures that manage this data. So rather than focusing on technology-based processes, businesses must change the way information is integrated and utilised throughout the organisation. Even before the information is gathered there must be a customer strategy in place that builds relationships based on the individual company and their individual customers. 

A Harvard Review written in 2002 [3] is still as relevant today describing the importance of:

  • Acquiring Customers: The most valuable customers must be identified so their needs can be identified. This means the product or service can be improved to retain valuable customers and marketing strategies can be directed to attract new customers. Technology can analyse historical revenues and cost to predict future value, although this can be fraught with difficulty (see ‘Measuring Customer Value’ article). 
  • Producing the Right Value Proposition. By studying customer needs and surveying competitors, the product or service can be developed to meet the needs and demands. Technology can show product and service behaviour data, create new distribution channels and develop new pricing models. 
  • Instituting the Best Processes. Research must be carried out on the most appropriate and effective ways to deliver the service. Technology can process transactions faster, and provide information to manage logistics and the supply chain. 
  • Motivating Employees. Employee loyalty and attitude must be appropriate. Technology can assist to create and implement incentive schemes to retain employees and improve attitude, which will ultimately impact customer service. 
  • Learning to Retain Customers. Customer behaviour must be analysed to determine what keeps them loyal, why they defect and what wins them back. Technology can track these aspects through monitoring buying behaviour and customer service satisfaction levels. 

Managerial Implications

Again in 2002, Lynette Ryals [4] suggests some managerial implications for implementing a CRM into a company: 

  • Managers will need to oversee and support the implementation of organisation wide strategies of CRM. 
  • Although CRM is not purely a technological issue, new software may have to be put in place for CRM support. Such technology will allow companies to gain information on buying behaviour, to monitor marketing strategies and to respond to suggestions or complaints. 
  • A new emphasis may be needed to stress value creation (for example customer loyalty and word of mouth advertising) rather than just profit (monetary value). This means creating strategies that span the lifetime of the customer relationship. This can help improve returns, minimise risk and gain the benefits from the customer.
  • Aims to retain customers may require changes to pricing policies which reward longer-term customers. It may be necessary to implement other strategies such as outlining cheaper alternatives to customers to induce trust. 
  • Customer risk (i.e. losing a customer) must be managed by detecting early signs of abandonment, such as slower payments or keeping lower than usual balances in an account. 
  • Managers can benefit from good customer relations by asking customers to recommend solutions. This can be achieved by involving them in new product development for innovation and referrals benefits (i.e. word of mouth), e.g. by free trials. 
  • Employees have to be empowered to act in ways that maximise value creation rather than short-term profit. For example, by allowing them the authority to deal directly with complaints, one way being to offer reduced prices. 

Employee Segmentation

A recent development within CRM is that of employee segmentation, which is based on attaining the optimal workforce in order to meet customer needs. It looks to match the skills and capabilities of employees to the needs and expectations of different groups of customers. To do this, the customer portfolio must be analysed and their needs identified, and the workforce must be segmented into groups or job families to match customer profiles. Companies such as B&Q have found that employee segmentation has generated more revenue and greater customer loyalty. 


  • businesses should support and reflect the customer base 
  • customers should expect expert advice and ‘people insight’ (which is based on analysing the links between employee data, store performance and customer satisfaction) 
  • employees should be capable of delivering new strategies, for example managers should be able to deliver new customer propositions and teams must be in place to deliver the business plan 

Customer-facing staff, on-site support staff and support teams (call centre representatives) are the groups most likely to be affected by these principles. 

Employee segmentation can help to build on customer relations; maximise the potential of technology; enable fast, high-quality service by front-line staff; ensure employees are empowered, motivated and in the right job; and improve employee engagement (higher morale, satisfaction, lower absenteeism and turnover). In some cases, this may only be fully realised with a complete change in workforce (although in practice this may not be realistic), but may just mean a re-evaluation of how capabilities should be employed. 

Employee segmentation generally moves away from staff working to ‘productivity metrics’ (e.g. calls per hour within call centres) to developing experienced staff with in-depth knowledge on the product or service. This means more quality time will be spent with each customer. Reward structures will change accordingly towards customer-related competencies, skill level and commercial awareness. [5] 


Customer relationship management methods will vary depending on the type of customer and business sector. However, we believe that in all cases a complete reliance on technology cannot build the most effective relationships. Technology can provide and collate valuable information, but it is the individual analysis of this, the organisation-wide integration of this knowledge, coupled with timeless good manners and communication skills that will produce real results.

[1] Stewart Deck, ‘What is CRM?’, CNN at (23 May 2001).

[2] Merlin Stone, Neil Woodcock & Muriel Wilson, ‘Managing the Change from Marketing and Planning to Customer Relationship Management’, Long Range Planning, Vol 29 No. 5 (1996) pp 675-683.

[3] Darrell K Rigby, Frederick F Reichheld & Phil Schefter, ‘Avoid the Four Perils of CRM’, Harvard Business Review (February, 2002) pp 101-109.

[4] Lynett Ryals, ‘Are Your Customers Worth More Than Money?’ Journal of Retailing and Consumer Services, Vol 19 Issue 5 (September, 2002) pp 241-251.

[5] Jim Matthewman, ‘Strong Division’, People Management (February, 2003), p 34.