Maximizing Customer Equity value by strengthening customer relationships in volatile times | Strategy, Analtyics & M&A


Maximizing Customer Equity value by strengthening customer relationships in volatile times

Confronting Uncertainty Intelligently

In turbulent times even stronger strategic positioning is needed. Analytics, with its prescriptive abilities to drive more accurate, actionable and scalable business interventions, is a key capability. The third article of the Confronting Uncertainty Intelligently series explores how to determine your Customer Equity, the combined future worth of your (potential) customer base, and how to properly use analytics to build stronger, and more profitable customer relationships in volatile times.

By Kees Mackenbach, Alexandra Likhareva, and Akshay Seshadrinathan

In volatile times, organizations should use the power of analytics to recalibrate their position across a set of four integrated strategic choices. In our first blog we focused on making the choice ‘What future should we plan for?’. We discussed the power of scenario modelling to regain control in volatile times. Scenario modelling however, is only the start of confronting uncertainty intelligently. Scenario modelling allows us to prepare for a set of possible futures. It is in the end how a company responds to a possible future that enables the company to come out winning. In the second blog we focused on using analytics to fuel strengthened focus in volatile times. The second, third and fourth choice together shape that company’s response.

Blog series: Confronting Uncertainty Intelligently

See the full overview of the blog series

In this third blog in the series, we will discuss the third strategic choice: ‘How can we better serve our customers?’, which is a key decision for companies to make in deciding how to effectively target valuable customers. In times of crisis, such as the COVID situation, it is especially useful as companies might have limited liquidity & resources. Therefore, most companies will need to make crucial decisions on how to allocate each and every penny. This blog outlines a solid framework & analysis toolbox to ensure smooth sailing.

The size of the pie – The strategic concept of Customer Equity

In our previous blog, we explained how to strengthen your focus. Now, we need to determine the potential size of the pie: your Customer Equity. Customer Equity is a strategic term that refers to the combined future worth of all current and potential customers over their lifetime.
The size of the customer base, average order value and your customers’ loyalty to your brand jointly determine your Customer Equity. The better the customer needs are understood, the better the customer is served, the more value can be extracted from them. Therefore, understanding and reaching customers effectively is the key component to success.

The sweetest parts of the pie – Improving your Customer Equity

In these volatile times, companies must make sure to understand these changing needs and know how to respond to their customer’s new reality. Customer Equity analyses can help companies to understand how permanent the changed needs and consumption patterns are, how to define strategic priorities and maximize the value from their customers using data.

The ultimate goal is to pick the sweetest parts of the pie. Therefore, it is necessary to understand how the pie is built up and we need to understand the levers to improve Customer Equity. It can be improved through acquiring new customers (Acquire in Exhibit 2), or creating more value with current customers (Retain, Grow & Optimize in Exhibit 3). Strategic priorities should be defined based on the improvement potential of each of the levers: Acquire new customers, Retain your current customer base, Grow the average customer demand, and / or Optimize the margin per customer.

Let us imagine a hypothetical company: ‘British Brewery’, a chain beer retailer in the UK, is struggling with low sales ever since the start of COVID-19. Ever since the pandemic, the chain has seen a huge shift to digital as its main sales channel. Normally, ‘British Brewery’ prides itself in providing tailored advice and service, which is traditionally done in a face-to-face manner. Now, the average customer has less face-to-face touchpoints with the Brewery and customers visiting the Brewery offline or online are buying fewer items per purchase, or stick to the simple beer (unaware of specialty beers). However, the biggest issue for ‘British Brewery’ is not the average basket size, but the lack of customers in general ever since the physical stores became less crowded. Even though the Brewery is located in a region known for its passion for beer & snacks, its addressable customer base is not appropriately reached anymore. This is due to the numerous online alternatives and switching of the drinking styles (i.e. people drinking in smaller groups, and pre-purchase drinks at super markets due to the shift to the ‘new normal’).

Focusing on Customer Equity enables companies, such as ‘British Brewery’, to thrive in volatile times by clearly defining the best strategic options. If sufficient data is available, analytics boosts the definition of strategic options as well as the execution of the strategy (as it is more precise, actionable, scalable).

Icing on the cake – Laser-focused Customer Equity enhancement

The ‘British Brewery’ conducted an assessment on the external market as well as their own customer base, which indicated that the Customer Equity lever with the highest potential is “Grow” due to an alarming decline in the average basket size ever since the COVID lockdown. Furthermore, the initial assessment has shown that there were remarkable differences in the spend of customers with similar characteristics, so there should be potential to move spending levels of the customers that spend less towards the spending levels of their look-a-likes. In this case, some customer segments showed an upsell potential that could be achieved with laser-focus on their needs in each potential point of contact.

After this focus was established, the next step boiled down to finding a way to automate the process of selecting concrete propositions for each customer to provide them with the right experience. This was possible by a data-driven tool called an affinity model. An affinity model predicts the likelihood of a customer to purchase a product, selection of products, or what products are mostly bought with another in a pre-selected period of time. Besides connecting the products, the models incorporate the distinct customer features (sociodemographic information, customer profile, purchase and/or interaction history) to adapt the offer in the best way. These type of models are used for purposes such as cross-, up-, and deep-selling, and building promotion & loyalty plans.
The product affinity model is compiled through advanced deep learning methods such as random forest, xgBoost, and Neural networks leveraging structured and unstructured sources. To make it as successful as possible, complex data sources such as app, on-website behavior, and google search data can be used, and, whenever possible, coupled with internal transaction/customer data.

The affinity model resulted in a list of products that have the highest potential to be sold to each customer. This helped ‘British Brewery’ to push high-end products (like specialty beers) to the right customer and improve their Customer Equity.

This is an example of improving the ‘Grow’ lever using an affinity model. For each of the four Customer Equity levers, there are various analytical solutions available to explore (as indicated in the table above). To conclude, Customer Equity driven strategies enhanced with the right analytics tools can support companies to thrive in these exceptional volatile times.

In the next blog we will introduce how strategic cost transformation provides you with unbeatable advantages in volatile times.

More information?

For more information about 'Using analytics to fuel strengthened focus in volatile times' and/or the ‘Confronting Uncertainty Intelligently’ blog series, please do not hesitate to contact Stefan, Randy or Nils via the contact details below.

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