Category Archives: Marketing Finance

How CFOs can use a customer culture to deliver $15m to the bottom line!

Internal Customer Culture

A lot of the discussion about building a more customer focused organization centers on the customer facing parts of a business. While there is no doubt major improvements can be driven by sales, marketing and customer service, the real turbo boost to organizational performance comes from support functions that creates a culture around their internal customers.

“If your not serving customers make sure you are serving someone that does”

 Corporate Support functions like Finance, IT and Operations have the potential for releasing huge gains to the business in terms of cost savings and profit improvement. How? By developing a culture where they see their internal stakeholders – that is those to whom they provide their services – as customers.

When they develop a “customer” mindset they think about the value (or lack of) they are providing. They stop delivering reports or services that have no value to their customers and focus on things that will increase value.

John Stanhope, CFO of Telstra, a $25 billion Australian telecommunications business set out to transform his Finance & Administration Group of 2500 people into a support group that would create new value, provide top service and be seen to be valuable by its customers. He painted a vision of what he called a “Value Service Culture” (known as VSC) in which he wanted all his staff to identify their internal (to Telstra) customers and deliver services of value to them. This journey from 2008 to 2012 was an outstanding success.

“We have delivered $15 million per annum in recurring gains from stopping non-value services and activities while creating more value in those services that were needed by our customers. This translates to an additional $55 million added to the value of our business.” – John Stanhope, CFO, Telstra Corporation, 2012.

An investigation by Telstra’s Finance & Administration group of estimated gains and savings conducted in 2010 showed annualized gains and cost savings of $15 million for 2009 representing added value to the business of $55 million.

These gains were derived from analysis of specific initiatives by:

a)    Credit Management acting to collaborate with Telstra customers to reduce bad debts, cost savings from less follow-up calls and longer customer retention periods.

b)   Risk Management & Assurance collaborating with internal customers through an education initiative clarifying compliance requirements and streamlined processes for reducing work for both parties. Cost savings from labor savings.

c)    Corporate Security and Investigations working with Telstra retail shops to provide better processes, follow-up and liaison with those shops most targeted by consumer fraud. Reduction of fraud yielded large cost savings.

d)   All finance and administration groups engaged in activities to reduce duplication and eliminate non value-add activities and reports resulting in measurable savings.

Care was taken to attribute only those gains and savings that could be aligned with VSC initiatives to do with understanding customer needs, providing greater value for customers, monitoring customer feedback and collaborating with customers to deliver the Group’s fiduciary responsibilities more efficiently. Later analysis showed these gains were continued over 2010 to 2012.

Stay tuned for my next blog post in which I will summarize the actions vital to Telstra’s VSC success and the lessons learned from this transformation experience.

How to get the CFO on marketing’s side

I recently ran a session in Chicago on Strategic Return on Marketing Investment (ROMI) and one of the questions that came up during the session was related to defending the marketing budget with the CFO.

If you were asked the question, what would be the impact on marketing’s results if we cut your budget by 25%, would you have an answer?

This is a key challenge for marketers everywhere, what is the value of marketing and what if we just stop doing it?

Without a strong understanding of the underlying financial drivers of marketing there is no way to answer the first question with anything other than an opinion. But in today’s world that’s not enough we need facts and data to support those opinions no matter how challenging that maybe.

In the case of defending our budgets to the CFO this is even more important as CFOs like facts and data and more to the point they like numbers.

Step 1: Positioning Marketing Investments in CFO terms.

CFOs understand return on investment, margins, discount cash flows, risk and can even deal with probabilities as long as the probability is for a positive ROI and profit!

This means you need metrics that CFOs understand. They are typically outcome related metrics that tie closely with revenues and profits. What if I can’t tie my marketing activities to revenue or profits? Then keep trying, if there really is no way to link them to these metrics then you have to ask why the activities are necessary at all.

Even investments in advertising and awareness building can be at least correlated with movements in sales and revenues. Do the research necessary to understand these relationships, it will give you the insights, expertise and confidence to answer the tough questions.

Step 2. Measure, test and learn from every marketing activity

CFO’s understand risk. If you can demonstrate the processes marketing uses to measure its key investments, manage risk by testing and demonstrate how you close the loop with key learnings it will demystify marketing.

Step 3. Leverage the CFO

CFO’s have their own unique functional expertise that can add new perspectives on marketing. They look at the world in a different way, see different things. Involve the CFO and their team in the marketing process and you will build a collaborative rather than combative relationship that will benefit both parties.

Part 2: Calculating Lifetime Value of Customers – a simple example

At the most basic level calculating the lifetime value of customers can be done using some assumptions and a simple spreadsheet like the one below:

In the above example I have used a yoga studio as an example with 100 customers in its first year. To keep things simple I have not leveraged all the data for the calculations but you can draw a couple of key points from the data:

Firstly – The lifetime value of a customer to a yoga studio can be very significant, the average customer in this example is spending almost $2.5k over a four year period! Understanding this bigger picture allows us to make better decisions about the value and importance of even a single customer to our business.

Secondly -Acquisition costs a usually higher than retention costs, in this example it costs a full 100% more to acquire a customer than to retain one. The economics demonstrate the value of customer retention. Of course this will vary from business to business but regardless this is an important data point to understand.

Calculating your own lifetime value of customers

The key inputs relate to estimating the probabilities of the impact of our sales and marketing activities on customer acquisition and retention.We then marry this with some hard data, i.e, the costs associated with these activities.

So what information do we need to begin the analysis?

1. What is the average revenue (spend) and gross margin per customer?

2. What does it cost to acquire a new customer for the first time?

3. What does it cost to retain a customer each year?

4. How often do customers purchase in a given year?

5. How many customers do you have right now and how many do you gain and lose each year?

Note: For this example I did not use a discount rate but as a side note we should be accounting for the time value of money. In other words a dollar today is worth more than a dollar in a year or 5 years time.

If you would like access to the spreadsheet you can sign up for free at our easyLearn website here.

Part 1: Understanding Lifetime Value of Customers

This is a simple business concept that is not necessarily that widely known. Intuitively we understand that customers that are loyal and keep coming back are the heart of business. However when was the last time you quantified this value? When you take a look at the numbers if becomes clear that managing customers as real assets is a powerful way to grow profitably.

Take the following chart for example:

You can see that if you provide a product or service with real tangible value to customers they will not only buy more from you but tell everyone they know to buy more from you. They also tend to be more interested in other products and services you offer. Plus as they become familiar with you it costs you less to service their business as they know how you operate.

The very best modern example of this on a mass scale is Apple, customers are attracted by the iPod, transition to an iPhone and or an iPad then get interested in a Mac computer… a virtuous cycle that has seen Apple’s revenue and profit grow exponentially over the past 5 years with no signs of slowing.

In the next post we will take a look at how you can calculate this for yourself.