Use new metric to calculate customer value, says CRM guru

Founding member of Pepper & Rogers, Don Peppers, recommends a new measure that equates a company's value to how it maximizes customers as assets.

SINGAPORE--Companies should use a new metric, which a CRM expert calls "returns on customer", to calculate the value of a client across his lifetime with the service provider.

Treating customers the company's scarcest resource, and working toward getting the maximum possible value out of this asset over its lifetime, is paramount in measuring the value of a company, said Don Peppers, founding member of CRM (customer relationship management) consultancy Peppers & Rogers Group.

"This metric is analogous to calculating ROI (returns on investment), when you want to calculate what you get as dividends from your stocks," Peppers told ZDNet Asia. "The returns on customer are the profits I make from the customer today, as well as the change in the customer's lifetime value, divided by the beginning value of the customer."

In using the metric, he said: "I can get you to tell you what you want, and every time I get better at giving you what you want, you would get better at staying with me (as a customer). The customer loyalty increases in value."

Peppers, recently in town to speak at a CRM seminar organized by SAP, noted that with today's analytics technology, the ability to get deeper insights into the lifetime value of a customer is "really possible".

Three technology trends have also made this progress possible, he said.

The first is the advent of the Internet, which has made interactivity between companies and customers more cost-effective. Second is the increased sophistication of database software today, followed by what Peppers described as the "technology of mass customization".

This, he explained, is the ability for an organization to look at its customer information in its database and "change how I treat you based on what I know about you".

So how has the face of CRM changed during the days of the Internet boom, compared to what it is today?

Peppers said: "It was definitely hype in the 1990s. That was fanned by vendors who wanted people to buy more software… But you can't just buy software. Most companies are taking a much more balanced view now. Every company needs a balanced CRM system."

One big challenge for companies today is fighting customers' increasing levels of cynicism, he added.

"Customers are a click away from the competition now, and they do a lot more price and service comparison," he said. "Outbound marketing has become like insecticide that customers (acquire a) resistant to, therefore companies have to engage (in) relationships to create growth."

CRM still white-hot
Even though CRM has gone beyond the hype stage, it remains one of the biggest growth drivers in the software sector today, and will remain so until 2010, said Thomas Halliday, director of CRM at SAP Asia Pacific.

Halliday said SAP has seen a 41.7 percent growth in sales of its CRM software from the start of this year to the third quarter. "All companies which have to look at their supply chains, look at (implementing CRM) as a standard," he said.

This is also in line with AMR Research's report in August, which predicted that CRM software sales is poised to expand this year over 2004.