May 1996
Measuring the Customer's Variation In Value
by Kenneth M. Culpepper
Direct Marketing Magazine, May 1996, pp.28-30
Does your organization measure the variation in value that its customers have for its products or services? Does it include any measurement of variation in value anywhere in the marketing strategy? Does it attempt to go beyond the segmentation of transactional data? If not, your organization is not alone. In the past few months, I have consulted with several organizations that have either underestimated, did not understand or neglected the use of information regarding their customers' variation in value. Other organizations understood the importance of measuring variation in value but did not know how and where to begin. These organizations represent various industries, including utility, manufacturer, retailer, cataloger, wholesaler, hospital, publisher, fast-food restaurant and cable television. Although all are from different industries, they lack the same important element of marketing: measuring the variation in value a customer presently has for their product or service. This occurs frequently even though more organizations are starting to see the benefits of database marketing. Interestingly, it neither appears to matter where an organization is located on the sophistication barometer of direct marketing. Measuring the customer's variation in value is seldom incorporated into the marketing strategy.
What Is Variation In Value?
Variation in value is the identifiable difference in customer's perceived benefits from a product or service. To measure this benefit, it must be demonstrated that the product or service correlates with the customer's response to a specific offer. Occasionally, variation in value is present when the difference in a perceived benefit exists, but is not identifiable. However, without any identification of the benefit, variation in value cannot be measured.
Examples of identifiable values include durability, prestige, customer service, price sensitivity, generic equivalent, cutting edge, domestic, all-natural, health-certified, and satisfaction guaranteed. Obviously, there are many others that specifically pertain to the product or service category of an organization. This article explores three factors that must be incorporated when measuring a customer's variation in value: it is perpetual, systematic and must continuously determine the current measurement of success.
Variation In Value is Perpetual
All customers do not value a product or service the same, and rarely do they keep the same value throughout their lifetime. In fact, even most targeted groups of customers consist of smaller segments with different values for the product or service (behavioral segments). Usually, behavioral segments have historically responded to an offer of the product or service differently, depending upon the benefit that the offer has made exchangeable. Behavioral segments are often too small for the product or service to reflect a behavioral value by itself, thus, marketers usually include information from an entire product or service category. As the marketplace and customers' lives constantly change, so does the value for the product or service. Thus, measuring value is perpetual and specific to each customer or customer segment. Furthermore, the frequency with which it changes depends upon the benefit of the product or service.
For example, the customers of a fast-food restaurant change their values of its products and services much more frequently than those of a hospital or utility. Customer values for fast food sporadically change because of variables such as the temperature outside, whether it is rainy or sunny and what new fast-food cuisine trend tickles their taste buds this week. However, customer values for receiving hospital services change less often. The variables that typically correlate with this change of values include lifestage event, type of health insurance and physician change.
Collecting information from customers regarding these types of variables depends upon an organization's communication processes. Such an effort reemphasizes the need for engaging in a marketing dialogue with customers. By perpetually incorporating value feedback, an organization is able to plan and implement business, communications and marketing processes with a specific strategy in place.
Variation In Value is Systematic
Measuring value is also systematic. It is not just another part of database marketing enabling us to determine better ways to segment customers; it is the result of an integrated system that affects the entire organization's business, communications and marketing processes. In other words, measuring value is more than segmenting customers according to their values. This measurement becomes ingrained in the day-to-day business, communications and marketing processes, integrating them into one system.
One misconception about measuring customer value is the belief that adding up all the business, communications and marketing processes will total an understanding of their value for the product or service. Business, communications and marketing processes make up a system. A system consists of things both known and not known. We usually understand how most of the system works; however, there are happenings within it that we may never understand.
As explained by Don Schultz, professor of Integrated Marketing Communications at Northwestern University, "The marketing process is not the sum of its parts any more than the communication process is the sum of various elements being used." He compares the marketing process to that of quantum physics, "In quantum physics, the system is not the sum of its parts but the result of the system. There is synergy among the elements, and sometimes we can't even identify the elements involved in the process. It is a closed-loop system that we really don't understand and sometimes can't even find the parts to start the explanation," said Schultz.
The point is that we cannot expect to learn any empirical behavior about a customer's value for a product or service if we do not ask the right questions that pertain to the marketing, business and communications system as a whole. Asking the right questions means that we attempt to determine how to measure success.
The Measurement of Success
The measurement of success is different for all organizations. Much like the frequency with which customers variation in value change depends upon the benefit of the product or service, so does the methodology of measuring success depend on the specific organization and its current marketing knowledge of its customers. A measurement of success for one organization is not necessarily transferable to another. Each organization has to determine what methodology is best to measure its success.
For example, lifetime value analysis (LTV) -- a profitability model that allows an organization to relate the long-term profit per customer against the total cost of marketing to that customer, and the cost of acquiring that customer -- is a well-recognized method of measurement. However, it is not the method of measurement that ultimately determines success with every marketing effort. The fast-food restaurant mentioned at the beginning of this article would probably find that LTV is a poor measurement of success because the variation in value for their customers is too frequent. Furthermore, as organizations start to ask the right questions, collect better information and learn more about their customer's behavior, they discover past successes of measurement are not always transferable by the same methodology for future marketing success.
For example, a retailer sends an offer to all customers in its database who have bought products in category "x" within the past six months. The retailer has learned to target its marketing efforts with recency, a powerful predictor of response. Because this offer is redeemable by mail order as well as in store, the retailer has also learned to target this marketing effort by identifying the customers who have bought in store, by mail order or both. However, each of these targeted customers has bought something in product category "x" because of something stronger than their recency or their decision to buy by mail order or in store. They have bought something in product category "x" because they have their own perceived value of it.
This retailer should begin attempting to ask better questions about its customers. The measurement of success for them should change to include learning to measure its customer's variation in value. If they learn the customers' values for product category "x" that change, and what they change to, the offer sent to these customers would now become exchangeable for their new value(s).
For this retailer, predicting response is no longer the measurement of success. Their measurement of success should be learning why and how customers' values vary, along with the frequency of variation. This goes beyond predicting response in general to predicting a response to a specific offer for a product or service. That is measuring variation in value, and that is measurement of success.
Ken Culpepper is president of Integrated Marketing Solutions, Inc., a
knowledge-base marketing firm that
integrates tactical marketing strategy with management of multiple contacts
of businesses to their customers, prospects and channel customers. IMS incorporates
marketing business planning, long-term corporate ROI strategies, and marries
knowledge-based marketing with e-commerce strategy and systems. IMS has
offices in Atlanta, GA (770) 390-9199 and Nashville, TN (615) 782-0461.
(Web: migmar.com/ims)