Commentary

Time to Get Customer-Centric -- For Real

Business leaders face the most disruptive market conditions in decades as competition keeps increasing, large rivals continue to compete aggressively by buying market share, new entrants are more nimble and substitute products seem to pop up almost at every turn. These competitive forces particularly apply to the telecommunications industry, where competitors continue to slug it out for increasingly demanding customers who treat products and services as commodities and where price, unfortunately, becomes the only differentiator.

To deal with these changes, telecommunication providers -- telephone companies, cable TV companies, wireless companies and satellite TV companies -- need to change their organizational design as "inside-out" structures that put products, not customers, at the center of the organization. They need to become truly customer-centric, and to get there, they need to take these three critical steps:

1. Create a Lifetime Value Model

A lifetime value model measures customer performance and profitability to begin the organizational shift from product-focus to customer-focus. In its simplest form, customer lifetime value is the present value of a customer based on future cash flows attributed to the relationship. Essentially, the figure represents how much a company can spend acquiring and keeping your customers. This produces a net value of increasing your retention rate (or decreasing churn) and the value of increasing average revenue per unit (ARPU). Lifetime value can be calculated across the entire customer base, but to make the metric truly valuable, it should be calculated on a segment-by-segment basis, using churn rate, discount rate, ARPU, cost per gross add, cash cost per unit and total marketing cost.

2. Manage Customer Segments to Optimize Shareholder Value

A firm provides value to a customer in terms of products and services, and a customer provides value to a firm in terms of stream of profits over time. Investment in a customer today may provide benefits to the firm in the future. In that sense, customers are assets in which a firm needs to invest. At the same time, with any investment, the firm needs to assess the potential return. Since some customer segments drive profits and others do not, investment in customers should vary by their profit contribution and potential. Many executives speak of how "customer-focused" their organization is, but can't pass the three question test:

  • Who in your company "owns" the customer?
  • Who is accountable for the profitability of customer segments?
  • How significantly does your firm differentiate its interactions with different customers?

3. Organize around customers and executive competitive value propositions that align with customer value creation

Most telecoms are structured and aligned around products, not customers. For example, they have vice president-level managers responsible for specific products, including wireless, IPTV, High Speed Internet or IP Voice. These managers are measured and incented on top line revenue generation by product and thus build and execute strategy to achieve their yearly quota objective. These product-oriented strategies barely take into consideration the mutually beneficial relationship between customer and firm.

One telephone company recently described a situation where it's not uncommon for a customer to receive four to six promotions within a 30-day time period, all originating from different product managers at the organization. Contrast that to an organization that is customer-focused, with designated customer segment managers who are measured and incented on mutual value creation between the firm and customers.

Over the past 10 years, companies built around an "inside-out" mind set -- pushing out products to the marketplace based on a customer view that looks at them only through the narrow lens of products. That view has made them less competitive than organizations that have transformed to an "outside-in" mindset that puts the customer at the center of the organization and looks to deliver competitive value propositions. Outside-in orientation, strategy, operating model and execution maximizes customer lifetime value and ultimately differentiates you from your competitors.

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1 comment about "Time to Get Customer-Centric -- For Real ".
  1. Paula Lynn from Who Else Unlimited , July 20, 2010 at 9:27 a.m.

    But think how much the ivory towerers would have to take out of their profits by hiring more people. eeeeewwwwwweeeeee