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With phrases like "a single customer view," and "continuous customer conversations across channels," "targeting most profitable customers" has been echoing throughout the customer relationship management (CRM) industry for years. It seems to make sense. After all the goal of CRM is increased profitability, which suggests that a profitable customer is CRM's lifeblood. However, segmenting customers based on profitability, and blindly investing marketing resources to cross sell and up sell customers that already make money for the organization, can be a fundamentally flawed approach to CRM that destroys ROI.
 
To grow customer value most effectively, marketing resources (and really any resources that can affect customer behavior) should be allocated based on an economic analysis of where they can have the most impact. Xchange calls the range that value can be affected by marketing initiatives, a customer's "value in play" or VIP. Loosely defined, value in play is an estimate of how much a customer's profitability can increase (i.e. due to cross sell) or decrease (i.e. due to attrition). Capturing Value in Play(tm), as I'll explain, should be each marketer's top priority when investing in customers, and should dictate where marketing resources are dispersed to power CRM that impacts shareholder value.
 
Determining a customer's value in play can be done by adding a positive potential profitability gain from a cross-sell to the absolute value of a negative potential loss from Value Attrition (which is determined from predictive models as described in the next paragraph). For example, a customer that has $2,000 worth of potential profit from a cross-sell and a $1,000 potential loss from attrition caused by abandoning the use of a product has a total VIP of $3,000. $3,000 represents the future variability in profits that depend largely on marketing activities. Accurate models are obviously an important piece of predicting value in play, and should be refined for more accuracy over time.
 
It is now easy to see why VIP is a better indicator than current customer profitability is, of where marketing dollars should be invested. Profitability indicates what a customer is worth to a company's bottom line. VIP indicates how much more (or less) a customer could be worth if influenced in the right (or wrong) way by marketing, sales or service. The following example illustrates this point.
 
A Company using a conventional approach to marketing would target a high value customer and devote significant resources to building her relationship. However, a VIP analysis may reveal that the customer has a very low threat of attrition and a low opportunity for growth. VIP tells you therefor, that she should receive only minimal, maintenance resources. Likewise, VIP analysis would allow the company to focus on a high value customer with a sizeable threat of value attrition, where its resources would yield a larger ROI by preventing lost value through attrition. In the same manner, VIP analysis could identify a low value, or even unprofitable customer with a large cross-sell opportunity, indicating that even though unprofitable, that customer is worthy of higher investments of resources than the high value customer with low VIP. If a company had invested heavily in cross selling the original high value customer, at the expense of ignoring the low value customer with high potential, it would have yielded little ROI. Investing in customers based on their VIP has the opposite effect, and drives the ROI of marketing initiatives and CRM in general.
 
Calculating VIP: The key is to develop repeatable and reliable calculation of VIP and then make that information actionable through as many customer interaction points as possible. Using all available customer information and demographics, marketers rely heavily on predictive models to get a rough estimate of cross sell potential for each customer and each major product. These models can range from rough estimates, to simple regression models, neural nets, Bayesian nets, etc. and measure both probability and profitability of a customers behavior. Essentially, they multiply the likelihood of an event, by its effect on value, and find the options most likely to increase value by the highest amount. Both elements, profitability and probability, are crucial, as one would rather have a 10% shot at a $500 sale, than a 25% shot at a $40 sale. Increasing the accuracy of these models is an ongoing process that requires continuous experimentation for improvement.
 
Using VIP: Once the models have been developed the key task is to deliver this information to the places in an organization that touch the customer. This requires integrating both information but more importantly strategies and tactics across the web, phones, retail and other interaction points.
 
A further complication or opportunity comes from the fact that information captured during an interaction (what Xchange calls "in-session" data) is often the most predictive and important in determining VIP. For example if a customer views the pay-off page for a web site this can be a powerful predictor in a VIP model that should be recalculated in real time before a recommendation can be made.
 
Conclusion: It takes a savvy marketer to buck the traditional thinking associated with the old 80/20 rule: that 80% of profits come from 20% of customers, and those 20% therefor deserve the most attention. A focus on Capturing Value in Play will reap greater rewards by spreading high levels of profitability across a greater segment of customers. Marketing dollars will no longer be skewed to high value customers, but will instead be skewed to making more customers high value.
 
 
Andrew Frawley is founder and chairman of Boston-based Xchange, Inc., which enables large global companies to lower costs and maximize profits by Capturing Value in Play through continuous customer conversations across all channels.