Page 63 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Customer Relationship Management

Notes preceding stages only produce costs. Creation of value solely emerges from economic exchange
in business relations.
Against this background, it appears sensible to consider the concept of customer value with
regard to tactical decisions and, more importantly, as a strategic metric to assess the overall
value of a firm, for example in the context of mergers and acquisitions.

The concept of customer value represents the link between the customer as the external factor
with regard to a company’s revenue and the internal processes representing the costs of a
company. Thus, it serves as a useful tool in determining the free cash flow in a more
market-oriented way by disaggregating the sales market into different partial profit streams
yielded by the customers. Consequently, if corporate valuation is based on the single value-
enhancing customer activities (up selling, cross selling, referrals etc.) and the marketing costs
incurred to induce these effects, a more realistic and precise determination of the free cash flow
is assured. We suggest that long-term values of customers are more stable and relevant metrics
of firm value than market capitalization or price-earnings-ratios. The latter are difficult to
utilize when a company has negative earnings, as is typical in the early periods of internet-
based businesses

Example: Our unit efforts are aimed at the synthesis of the customer value concept and
the shareholder value concept in a corporate valuation framework. It is not within the scope of
this unit to explore the causal relationships between the two constructs in order to contribute to
the implementation of the value management process (for a review of this unit stream see
Payne/Holt/Frow2001). Instead, this unit seeks to formally infuse the customer value concept
into the shareholder value model by developing an integrated, marketing-based method for the
calculation of corporate value. Since both concepts are methodically analogous, this approach
seems to be beneficial. Both concepts calculate the value of a particular decision unit by discounting
the forecasted net cash flows by the risk-adjusted cost of capital. Nevertheless, as Payne/Holt/
Frow (2001) indicates, customer value and shareholder value have been treated as separate
constructs in individual unit streams. Consequently, an integrative modelling of this topic has
been neglected so far.
Customer lifetime value (CLV) is rapidly gaining acceptance as a metric to acquire, grow, and
retain he “right” customers in customer relationship man- (CRM). However, many companies
do not use CLV measurements judiciously. Either they work with undesirable customers to
begin with, or they do not know how to customize the customer’s experience to create the
highest value (Thompson 2001). The challenge that most marketing managers currently face is
to achieve convergence between marketing actions (e.g., contacts across various channels) and
CRM. Specifically, they need to take all the data they have collected about customers and integrate
them with how the firm interacts with its customers. In the academic literature, Berger and
colleagues (2002) support the allocation of resources to maximize the value of the customer
base, and they strongly argue that such resource allocation models are needed.

Self Assessment

Fill in the blanks:
1. Full form of CPM is …………………….
2. Full form of ROI is …………………….

3. Data mining provides better understanding of …………………….
4. …………………… means effectively assessing the value of particular customers.

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