Building Shareholder Value Through
Customer Portfolio Management
Global Benchmarking Council:
Portfolio Optimization
February 7, 2003
Contents

The Customer Portfolio Management Opportunity

Extracting Insights from the Customer Base

Managing for Customer Value
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
2
The Customer Portfolio Management
Opportunity
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
3
The Customer Portfolio Management Opportunity

Surprisingly few companies today have a true
understanding of customer profitability
— Product and operations focus
— Lack of tools for analysis

Those who do rarely have an objective, up to date
perspective on what drives differences in profits from
one customer to another
— Spotlight on volume and price metrics
— Limited exploration of root causes: attitudes, needs and
perceptions relative to competitive offerings
— Dated knowledge

The result: most companies are wasting resources and
missing opportunities to create value within their
customer base
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
4
Extracting Insights from the Customer Base
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
5
Extracting Insights from the Customer Base
Robust customer portfolio management starts with a deep understanding of customers
on two key dimensions: value and needs…
Insight
Value
Needs
Insight into customer needs, attitudes, behaviors, and
perceptions about relative competitive performance
Insight into Customer Lifetime Value
Result
Action
Where to Allocate Resources
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
How to Win
Customer Portfolio
Management
Treatment strategies and organization
Improved
Shareholder Value
6
Shift the financial lens from product to customer
Develop financials that cut across the typical product line view
Product A
Product B
Product C
Product D
Individual
Portfolio
Customer Base
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
7
Select an appropriate metric for determining
customer value
Four levels of profitability metrics. The best choice identifies meaningful differences in
performance between customers while avoiding analytical overload.
Metric
Description
Rationale for Use
Gross
Margin
• Contribution after product COGS
only
• Simple
• Use if little known difference in
operating activity or infrastructure
investments by customer type
Contribution
Margin
• Contribution after COGS, SG&A
and other operating expenses
• More discriminating
• Use when there are different selling
models, marketing strategies or
distribution channels by customer type
Operating
Cash Flow
• Cash contribution before interest,
amortization and depreciation, but
after adjusted taxes
• Same rationale as above
• Use when focus is on cash
management
Free
Cash Flow
• Operating cash flow less changes
in working capital and capital
expenditures
• Complex
• Use when there are different levels of
infrastructure are required to support
different types of customers
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
8
Disaggregate product-line P&Ls and re-aggregate
customer P&Ls
Contribution
Margin
Customer
Group A
Product A
Product G
Product I
Product K
Product L
Product B
Product C
Product D
Product E
Product F
Product M
Product H
Product J
$129
$157
$199
$391
$77
$1,049
$1
$195
$95
$237
$200
$334
$471
$46
$77
$100
$164
$40
$229
$1
$11
$48
$67
$107
$135
$81
$33
$69
$84
$107
$40
$62
$1
$6
$46
$41
$100
$80
$24
-$22
-$7
$3
-$75
$1
-$230
$0
-$26
-$4
-$268
-$83
-$137
-$87
$3,542
$1,111
$709
-$932
Portfolio
Customer Base
© 2003 Peppers and Rogers Group. All rights protected and reserved.
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Customer
Group B
Customer
Group C
$4,630
9
Example
Customer
Group D
$186
$296
$385
$588
$158
$1,110
$3
$186
$185
$77
$324
$412
$488
$1,612
$1,110
$
3
$ 370
$
77
$ 736
$ 488
$4,630
Actual customer value as net present value of
financial flows
Customer Group A Contribution Profile
A
430
258
172
Revenue
COGS
Gross Margin
G
I
1,570 796
1,178 557
393 239
Operating Expenses
Sales
9
Marketing
22
Distribution
13
Total Operating Expenses
129
Contribution Margin
Product
K
B
2,607 5,245
1,694 3,567
912 1-678
…
Total
17,998
12,399
5,599
126
47
63
16
8
16
261
182
78
210
210
210
988
616
453
157
199
391 1,049
3,542
Drivers:
Actual recognized revenue
Actual product unit cost
Total account time
Direct collateral and % exposure
Channel usage by product
Customer Group A Actual Value
Forecast
History
5,000
$000
4,000
3,000
2,875
3,168
3,291
3,542
3,797
4,071
4,364
NPV = $9.7MM
Assumptions:
CAGR = 7%
WACC =12%
3 years to defection, no terminal value
2,000
1,000
0
98
99
00
01
02
03
04
Year
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10
Example
Quantify potential value
A perspective on potential value will drive future resource allocation and program
decisions
Actual vs. Potential Value
$
Increase
price
Lower cost
to serve
Increase
share of
wallet
Actual
(Current)
Value
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
Grow
category
spending
Grow
adjacent
category
spending
Potential
Value
11
Four fundamental value tiers arise from actual and
potential value customer views
High contribution
Most Valuable
Customers
MVCs
Most Growable
High unrealized potential
Customers
MGCs
Migrators
12
Actual Value
Neither a high current
contribution nor high
unrealized potential
Below Zeros
BZs
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Potential Value
Negative
contribution
Each Value Tier Creates Measurable Cash Flows
Typical levers
• Allocate “farmers”
• Reduce acquisition
investments
• Improve retention
MVCs
NPV = $11.3bn
MGCs/
SMGCS
Customer
Flows
NPV = $25.2bn
• Allocate “hunters”
• Improve targeting
• Invest in growth
and retention
• Reduce cost to
serve
MIGs
NPV = $13.3bn
BZs
• Improve or exit
NPV = $ .4bn
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
13
Identify levers for capturing a greater share of
potential over a customer’s lifetime
Long Term Economics of a Customer
Customer
Growth
Rate
Profitability
Time to defection
• Acquisition
Programs
• Retention programs
Interventions to Capture
Long Term Potential
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14
• Cross-selling
• Solution-selling
• Stimulating
latent demand
Customer portfolio results lead to improved
shareholder value
Portfolio A
$16, 586.0
• Existing
• Reduce ineffective
acquisition
NPV =
$31.3M
• Implement
retention programs
NPV =
$43.9M
• Add acquisition
programs
NPV =
$77.8M
• Add growth
programs
NPV =
$52.2M
Add.Value =$205.2M
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
15
Sum of customer cash flows drive firm value
Example
Cable Company
Customer Flows
Growth
infiltration
NPV $31.5bn
Infrastructure Flows
NPV $18.7bn
Debt ($17.6bn)
Equity $1.1bn
Total Flows
© 20031Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
Top-end
constraint
Penetration
rate
NPV $50.2bn
16
Understanding Value Is Half The Challenge

Shift the perspective on the customer from convenient traditional
segmentation schemes to needs-based schemes

Use qualitative research to drive early hypotheses and quantitative
research to validate and deepen understanding

Understand customer needs at each point of interaction

Assign customers to needs segments

Discover what drives the purchase decision within each portfolio
In order to drive effective sales efforts, inform new product and
service development, and efficiently deliver new treatment
programs, you must have a crisp understanding of customer needs.
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
17
Shift from convenient traditional segmentation
schemes to needs-based differentiation
From
To
Needs-Based Differentiation
Traditional Segmentation
 Typically inside out view – product
 Typically outside in view – market back
forward
 Based on demographics/
 Based on customer needs as expressed by
“firmographics”
the customer
 Provides a standard “industry view” of
 Proprietary scheme provides source of
customers
competitive advantage
 Clusters customers into groups with
 Segments built around attitude, behaviors,
different needs
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
and receptivity to products and services
18
Use qualitative research to drive early hypotheses and
quantitative research to validate and deepen understanding
Qualitative
Research
•Focus groups
•1to1 sessions
• Preliminary needs categories
• Discrete needs statements/ Motivators
and barriers to decision-making
• Preliminary segmentation hypotheses
Quantitative
Research
© 2003 Peppers and Rogers Group. All rights protected and reserved.
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•Robust survey design
•Large scale sample plan
• Statistically distinct homogeneous needs segments
– meaningful and actionable
• Importance of satisfying needs
• Relative competitive performance
• Predictive models for segment membership
19
Discover full hierarchy of needs across all touchpoints to build rich perspective
Needs Hierarchy
Decision Criteria
Needs
Advocacy
Will I recommend this store to my friends?
• Helps me with my meal
planning
Loyalty
How long will I continue to be a customer?
• Recognize me at the counter
• Recognize with custom
mailings
How often will I shop at this store vs. others?
•
•
•
•
Will I buy from this store or not?
• Reasonable prices
• Clean stores
• Sufficient variety
Preference
Cost of Entry
Customer Touch-points
Marketing
Service
Product
Operations
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
20
Always fresh produce
Specials on key items
Few stock-outs
Helpful counter staff
Value and needs provide insight needed to construct
customer portfolios
Data Elements
X1 ………. Xn
Data Elements
X1 …… Xn
Model 1
Model 2
Actual Value
Potential Value
Data Elements
X1 …… Xn
Model 3
Value Tier
Needs Segment
Interaction Matrix
N_1
N_2
Most Valuable Customers
Most Growable Customers
Migrators
“Below Zeros”
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
21
N_n
Discover what drives the purchase decision within
each portfolio
Within each need and value segment, analysis of the importance and
relative competitive performance provides key guidance on treatment
strategies
Portfolio-Specific Action Grid
CPM Interaction Matrix
Needs Segments
MVCs – Needs Segment-4
Value Tiers
Needs1 Needs2 Needs3 Needs4
MVCs
MGCs
MIGs
BZs
Over
Relative
Performance
Under
|
|
Re-Allocate
Defend/Exploit
|
- - - - - - - - - - - - - - - |- - - - - - - - - - - - - - - - - - - |
Ignore
Fix
|
|
|
Low
Attribute Derived Importance
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22
High
Map Attributes to Develop Roadmap for Action
Example
Segment 1 Outsourcing Action Grid
10.00
Performance
9.00
8.00
7.00
Reallocate
Resources
Defend/
Exploit
Financial Stability Service Reliability
Quality Operators
Site.Mgmt.Experience
Capital to Buy Assets
Training
Service Flexibility
Competitive Wages
Ignore
6.00
Fix
Price
Reporting
5.00
4.00
4.00
Workforce Transition
Labor Relations.Exp.
5.00
6.00
7.00
Importance
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23
8.00
9.00
10.00
Actionable treatment strategies include specific
tactics, required resources and expected results
# of
Value
Level
Tier companies
3
MGC
Needs Group
XYZ’s
Program
Inside Sales
30,345
$240 M
# of
companies
10,546
Program
Costs
$1 M
Actual
Value
Potential
Needs Group
Value
$540 M
• XYZ’s
10,546
• ABC’s
4,325
• QQQ’s.
5,474
Potential
Programs
Value
$140 M – Prod A • Inside Sales
$ 50 M – Prod B • Direct Mail Campaign
$ 20 M – Prod C
• Web Content
Revenue
Goal - Yr. 1
$12.3M
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1to1® is registered in the U.S. Patent and Trademark Office.
Example
Overall Strategy for Group
• Create awareness of low cost options for
secure delivery and confirmation
• Provide education on direct mail process
and shipping options
• Provide education on direct marketing
and enhance the retail experience
Product
Channel
Strategy Supported
Prod A
Sales
Awareness
Prod A
Direct Mail
Awareness
Prod A
Web
Ease of Access
Keys Messages - Inside Sales
Metrics
•
•
•
•
# of
companies
Revenue
Rev/company
Close Rate
Sales per day
24
•
•
•
•
•
“Blah Blah Blah”
“Yadda, Yadda, Yadda”
“More Blahs”
“More Yadda’s”
“Read My Lips”
Managing for Customer Value
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1to1® is registered in the U.S. Patent and Trademark Office.
25
Best Practice Marketing Organization Model
Components of
Value
(“Raw Materials”)
Tailored Value
Propositions
(“Assembly”)
Product
Development and
Management
• Pricing
• Product
development
• Product
management
Value Delivery
System
(“Distribution”)
Segment
Management
Value Excellence
• One Voice
• Channel
coordinators
• Customer
experience
champions
• Contact
strategists
Feedback Loop Enabling Value Improvement
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
Channel
Management
Experience Superiority
•
•
•
•
•
•
•
Sales
Web
DM/Email
Inside Sales
PR
Retail
Customer
Service
• Local Marketing
• Events
• Advertising
Feedback Loop Enabling Integrated Relationship Management
26
Positive
Customer
Experiences
Customer
Loyalty
Over Time
Profitable
Relationships
Example
Proposed Process
Deliver value to customers
with a focus
on efficiency and
effectiveness
Channel
Manager
Match offers to
customer segment
needs. Define value
and needs, negotiate
execution.
© 2003 Peppers and Rogers Group. All rights protected and reserved.
1to1® is registered in the U.S. Patent and Trademark Office.
•
•
•
•
•
•
Agile organization
Smaller incremental wins
Gaining credibility
Results driven
Accountable
Organization focus on
core business elements
Segment
Manager
27
Product
Manager
Create
value
propositions
Vision:
Example
Individual Roles
“Segment Manager”
 Accountable for incremental
results from segment initiatives
 Prioritizes segment programs
 Develops segment plan
 Develop integrated strategies
for their segment
 Marketing communications
 Retail and sales
 Monitors and manages segment
results
“Product Manager”
 Accountable for product
revenue (contribution?) and
market share
 Decides and implements
features, service requirements,
product enhancement initiatives
 Sponsors CVA market research
 Develops product plan, works
with the Segment manager to
develop value product value
propositions
“Channel Manager”
 Accountable for efficient
execution of channel programs
and customer satisfaction scores
that position Company as
superior value in the marketplace
 Decides on channel infrastructure
enhancements
 Allocates channel maintenance
and improvement budget
 Manages customer migration
Integration in Action
(example)
Integration in Action
(example)
Integration in Action
(example)
To Product Manager (feedback
loop)
To Segment Manager (action
loop)
“We can increase share of wallet
with small law firms if we offer
later pick-up times for package
services”
“We need to incorporate new
RPN feature into our segment
communication plans”
To Product Manager (feedback
loop)
“Our web site hits on the
Welcome Center have tripled
since program launch.”
“For web transactions we need
flexible payment capabilities”
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1to1® is registered in the U.S. Patent and Trademark Office.
28
Proposed Segment Management Model
Example
Acquisition
Support “Engine”
Segment
Management
Customer
Segments
Primary Contact
Channel
Tier 1 Commercial
Tier 2 Commercial
Tier 3 Commercial
Tier 4 Commercial
Consumers
A1
C1
A2
C2
A3
C3
A4
C4
A5
C5
B1
D1
B2
D2
B3
D3
B4
D4
B5
D5
Elite Sales Teams
Field Sales
Inside Sales
CCM
USPS.com
Potential Value
Lower
Support
“Engines”
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Higher
Retention
29
Establish portfolio managers to orchestrate the
customer experience
Analyze

Understand customer
value



Act
“Think”

Understand customer
needs
Determine value
maximizing treatment
strategies

Understand customer
economics
Launch campaigns that
support strategies

Get things done
— Influence service
delivery
— Support
new/improved
products
— Drive cross
product/BU
integration
Understand
competitive landscape
(for customer)
Get inside the customer’s head,
but take your company perspective with you
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1to1® is registered in the U.S. Patent and Trademark Office.
30