Keeping your finger on the pulse of satisfaction and giving value to get value creates lifetime customers

In the highly competitive atmosphere of the global marketplace, most discussions of customer value focus on what businesses provide to their prospects and clientele. However, providing value to customers comes at a price, and businesses need to recover their investments. That being the case, the most effective customer-based strategies are those that factor into the equation not just the value the enterprise provides to its customers, but the value individual customers represent to the enterprise as well.

In Managing Customers as Investments: The Strategic Value of Customers in the Long Run, authors Sunil Gupta and Donald Lehmann, Professors at Harvard Business School and Columbia School of Business, respectively, suggest that estimating the lifetime value of customers can help companies make smart decisions that balance the “customer is king” perspective against the hard-nosed financial view that “cash is king.”

The best customers provide the highest value to a company in the form of high profit margins, strong loyalty and longer retention. In return, these “Star Customers,” as Gupta and Lehmann call them, get high value from the products and services the business provides them, resulting in a balanced, mutually beneficial relationship.

That makes sense to Edward Miersch, COO and a principal in SUNRx Inc., a Cherry Hill, New Jersey-based pharmacy benefits manager (PBM) firm that was No. 5 on the 2006 Inc. 500 list of fastest-growing companies.

“Our point of difference in the marketplace is advocacy for our clients and full transparency. Unlike most firms in this industry, we are paid strictly on a per-claim basis,” he explains. “We do not keep spreads. All rebates, market share allowances and other manufacturer incentives are passed on to the client.”

Given SUNRx’s business model, plan utilization rates and volume are the most important variables affecting revenue and profits, and the company uses them to help it determine lifetime customer value.

Even more important is the number of participants in a client’s plan, Miersch says, so the company goes after larger employers. There are important profitability breaks at levels of about 500 participants, 10,000, 30,000 and 40,000.

At EMA Design Automation, in Rochester, New York, consistent customer focus is the most critical key to success, says Manny Marcano, President and CEO. “This is fundamentally how we have grown over the last several years and how we will continue to grow our business.”

EMA is a full-service provider of electronic design automation (EDA) solutions, a business in which there are few “new” market opportunities. “Most new business comes from replacing someone else who is not providing good customer support,” he says. In that environment, it is critical for EMA to invest in its highest-return customers, and it does so in a number of ways.

“All relevant decisions revolve around what is in the best interest of the customer. We may forego some short-term revenue by giving something away or not selling more than they need, but this type of behavior builds customer loyalty and is an investment in our future,” he says.

EMA’s efforts to measure and track the lifetime value of its customers are mostly informal, but they help the company focus its efforts on those customers that account for the lion’s share of its profitability. “We track the annual run rate over the previous three years and make sure we are paying attention to the 20% of our customers where we earn 80% of our revenue,” Marcano says, adding that he recognizes a need for “better quantification of this dynamic.”

For many types of businesses, defining and measuring customer value is not so cut-and-dried. Hospitals, for example, must cater to the needs of several different constituency groups—patients, independent physicians, professional staff—all of whom might be considered in the context of “customers,” notes B.G. Porter, President of Studer Group.

Studer Group has an international practice, with a significant portion of its operations in the New England and Mid-Atlantic states. The focus of the consulting firm’s practice is helping healthcare organizations create and sustain outcomes in service and operational excellence, and it focuses on the customer service side of the equation in doing so.

“Our vision is to be the intellectual resource for healthcare organizations to maximize their human potential. To do that, we have to focus on our own people,” Porter adds. “Consistency is important, and you capture that through measurement.”

Studer Group clients rely heavily on customer satisfaction surveys as a critical feedback mechanism, and the consulting firm takes a similar approach in its own efforts to improve organizational performance. Compensation for the firm’s coaches (the company’s term for consultants who work directly with its clients or “partners”) is keyed to performance metrics.