Key

Indices to Measure
Customer Relationships
Issues and Solutions
CRM Report

By
Sourobh Das
15P052

Abstract
For any business, especially a developing one, it is very important to understand who
are the best customers, how to find more customers like these and where to find them.
Customer profiling is the best strategy to accomplish this. It helps to find valuable
new customers, enhance the profitability by retaining existing customers and also
identify low valued customers so as to minimize the cost to reach them. There are
indices available that help us measure the relationships of businesses with customers.
In this paper, we have tried to see how these indices differ from one another, what
factors each takes into account and what are the limitations in the various indices.
There might be other indices in use too but these are the most prominent.
Keywords: customer equity, life time value, customer knowledge value, customer
relationship management, customer referral value, customer influence value

Introduction
Satisfying customer needs ensures the business survival for an organization. A
periodical check is required to enhance the quality of services and product to build a
quality relationship with customers. For fulfilling this goal, organizations must have a
set of rules to measure and improve this quality. Delivering best quality services to
customers is considered the most efficacious way to ensure that an organization
stands out from a group of competitors and avail the privilege to be known as best
among all. The main ingredients that are involved in a high quality relationship with a
customer are trust and commitment.
Any approach to assessing the health of a customer relationship should incorporate a
measure of the closeness of the relationship. A measure of the customer's satisfaction
with the relationship is also appropriate, in keeping with the argument that these two
constructs are interrelated; it is not possible for most customers to feel really satisfied
with a relationship without feeling some relationship closeness.
It is also important to consider the relative strength or depth of a customer
relationship. Several approaches can be employed to identify this aspect, which
indicates the likelihood of the relationship continuing. A measure of relationship
strength might also incorporate the depth of customers' interactions with the company
in question by including a measure of the share of their category business that they
give to the company. Also, we can address the extent to which they feel strongly
about the relationship by examining their perception of the likelihood that they will
still be dealing with the company in the future and whether they would recommend
the company to others.

Customer Equity
Customer equity was originally conceptualized by Blattberg and Deighton (1996) as a
way for firms to determine the optimal balance of customer acquisition and retention
spending. They state that:
to measure that equity, we first measure each customers expected contribution
toward offsetting the companys fixed costs over the expected life of that customer.
Then we discount the expected contributions to a net present value at the companys
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Key Indices to Measure Customer Relationships

target rate of return for marketing investments. Finally, we add together the
discounted, expected contributions of all current customers. (Blattberg and Deighton,
1996: 1378)
Whereas Blattberg and Deighton (1996) only included current customers in their
calculation of customer equity, Rust et al. (2004b: 110) emphasized the importance of
future potential from a marketing perspective by incorporating the discounted lifetime
values of prospective future customers into their definition of customer equity. Some
academic research shows evidence that the estimates of customer value are reasonably
close to the market valuation of the respective firms and thereby linked to the
Shareholder Value (SHV).

Drivers and Components of Customer Equity

The diagram above illustrates the drivers and components of customer equity. The
components of customer equity and Customer Lifetime Value (CLV) are affected by
the firms management of its customer assets and the subsequent changes in the
drivers of customer equity. In order to increase its customer equity, a firm naturally
needs to continuously measure its customer equity.

Customer Lifetime Value (CLV)

The CLV of an individual customer is typically comprised of the projected lifetime of
the customers relationship with the firm, often expressed as a retention rate; the cash
flows the firm expects to receive from the customer in each future period; and a
discount rate. CLV and, by extension, customer equity draws on the discounted cash
flow (DCF) approach used in finance. CLV is usually estimated at an individual
Key Indices to Measure Customer Relationships 3

customer or segment level, allowing differentiation between customers based on

profitability. CLV explicitly incorporates the possibility for future customer defection,
typically through a retention rate. If customer relationships are considered to be assets
that firms invest in, adopting a version of the DCF asset valuation technique from
finance appears logical, since a value can then be derived that estimates the present
value of the cash flows generated by the customer relationship over its lifetime,
discounted at the appropriate required rate of return.

Estimating a customers lifetime value (CLV) is relatively straightforward. There are

other indices too that have emerged to give a better or holistic measure of customer
relationships.

Customer Referral Value (CRV)

The value of any one customer does not reside only in what that person buys. In these
interconnected days, how your customers feel about you and what they are prepared
to tell others about you can influence your revenues and profits just as much.
Companies go to considerable lengths to motivate their customers to double up as
salespeople. Thus comes into play CRV.
Calculating CRV is more complicated than calculating CLV. We must first estimate
the average number of successful referrals the customer will make after we offer
him/her an incentive to do so through a marketing campaign. As we do for CLV, we
look at the past behavior, but we need to look at a period longer than a month to get
enough variance in the number of referrals for proper statistical modeling and
predictive accuracy. The appropriate time frame for analysis is different for different
industries. In addition, we need to estimate how much time can go by and still be sure
that the referrals are actually prompted by the referral incentive. Generally it will be
around a year. Next, we must estimate how many of those referrals would have
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Key Indices to Measure Customer Relationships

become customers anyway, even if no recommendations were given. The distinction

is important. These would be type-two customers vis--vis type-one customers
earlier.
CRV is the present value of the type-one referrals plus the present value of the typetwo referrals for a customer.

Customer Knowledge Value (CKV)

The goal of knowledge management is to build core competencies based on strategic
business knowledge. Therefore, the related knowledge processes within the
organization should also be directed toward market oriented factors like customer
needs, preferences and other external elements, in order to prevent core rigidity. In
other words, knowledge management should consider and integrate both strategic
business areas (market oriented view) and organizational resources and competencies
(resource based view). The improvement in customer knowledge has impact on
relationship between CRM and customer satisfaction. Measuring customer
satisfaction offers an immediate, meaningful, and objective feedback about customer
preferences and expectations.
Gibbert et al. (2002), have classified the customer knowledge, from organizations
point of view, into three types: knowledge for customers, knowledge about customers
and knowledge from customers.
Knowledge for Customers is unidirectional knowledge which is sent from
organizations to support their customers and make customers understand their
offered products better. This knowledge could help organizations to sustain their
customers by focusing on changing the customers preferences and increases their
demands compatibility with the offered product which finally leads to purchase
of product by customer.
Knowledge about customers is firms comprehension on customers background,
desires and preference on product characteristics. Customers are interacting with
organizations through multiple and different channels and based on the type of
channel that they interact; organizations can segment their customers and also
define their relationships with them. Moreover this can be done through acquired
knowledge from channels which are derived from statistical information and
Key Indices to Measure Customer Relationships 5

historical data of customers purchases or their interactions. This acquired

knowledge is considered as organizations insight on each customers demand and
preference or organizations knowledge about their customers.
Knowledge from customers is the knowledge which resides in customers, and
organizations should pay attention to this knowledge more than the two other
types. This knowledge contains information that customers have about
organizations products and services, its competitors products and services,
customers inputs for product development and innovation, and their preferred
channels of communication.

Customer Influence Value (CIV)

New product diffusion is central to marketing. Marketing scientists have been
interested in investigating how the diffusion of new product actually occurs and how
firms can actively influence it. It is well known that social contagion plays a key role
in how rapidly a new product diffuses. A customers value (CV) is the sum of his/her
purchase value (PV) and influence value (IV).
Formally stated, we have CV = PV + IV.
The calculation of IV is complicated and based on different types of influencers and
thus beyond the scope of this paper. For detailed understanding, this paper can be
referred: http://faculty.haas.berkeley.edu/hoteck/papers/CIV.pdf

Issues
CLV:
There are certain problems associated with CLV. The first, and most frequently
encountered, is the specification of objectives. The calculation of these values for
customer acquisition purposes may be very different to that for customer retention, or
up-sales, or cross-sales. Indeed, it may be necessary to calculate and employ a variety
of different models depending upon the use that is to be made of the resulting
information.
The second problem relates to organisational commitment. Managers are often very
excited by their calculations, and the strategies that they suggest. However, other staff
must also be convinced of their validity, before customer-focused plans, and the
resources required to implement them, become available.
Another issue is the management of data and the information structure within the
whole business. If the lifetime value exercise is not to be a one-off event, plans must
be made for the continued collection of the relevant data and its storage and
manipulation. New database technology may be required, or different approaches to
data-warehousing and mining. Issues of specification and the assessment of costeffectiveness immediately appear.
Another obstacle concerns the psychology of project management more than any
tangible obstacle it is the desire for absolute accuracy. It is impossible to be
absolutely certain of all the costs and all the revenues, and it is far more important to

Key Indices to Measure Customer Relationships

ensure a consistent approach and to consider the relative differences between

customer values.

CRV:
As far as correlation between CLV and CRV is concerned, If customer lifetime value
and customer referral value were simply and positively correlated, the difference
between them would not be particularly interesting from a managerial perspective.
Any action that would increase lifetime value would immediately translate into higher
referral value. But when we look into the specific referral behavior of customers with
different CLV levels, we shall find that a high CLV is not a good predictor of CRV
and so is a very questionable proxy for a customers total value.
CRV is not relevant in all situations. Customers in many B2B markets, for example,
do not make referrals because they compete with one another and would not want to
do their rivals a good turn. Nor do customers make referrals if they do not feel much
attachment to the product, which is the case with many categories in fast-moving
consumer goods markets. Managers should never make the mistake of assuming that
customers who recommend one product in their companys portfolio will necessarily
tout any other.

Conclusion
Theres a saying in business: Anyone can save 50% on marketing expenses, but
no one knows which 50%.
Consumer-facing businesses need to understand the strategic importance of CLV,
CRV, CIV etc. in enabling marketers to acquire, nurture, and retain customers who
bring in more value and profits to the company. They need to use these indices in
conjunction with each other to maximize the impact of their targeted marketing
campaigns. This will help in making better informed and effective marketing
investments. However, rather than solely continuing on the quantitative path and

attempting to value customer assets and include customer equity in a firms

financial reporting, a more fruitful exercise would be to seek to determine how
and to what extent various aspects of customer relationships and their
management can be reported, in order to provide information that can be used by
investors and other external audiences to predict the future earnings potential of the
firm.

Key Indices to Measure Customer Relationships 7

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Key Indices to Measure Customer Relationships