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ACCT3583 Management Accounting 2
Topic 6 Managing Customer Value
and Relationships
ACCT3583 Management Accounting 2
ACCT3583: Topic 6 Administration
2
Topic 6: Course content overview
Strategy implementation and resource management
At the end of this seminar, I will provide some
Syndicate Case Project guidance by answering
questions.
Resource management
Topic 6
Topic 7
Managing customer
value and
relationships
Managing
supplier
relationships and
strategic
outsourcing
Topic 8
Topic 9
Managing knowledge
as a strategic
resource
Th
The environment
and engaging in
corporate social
responsibility
Topic 10
Topic 11
Managing strategic risks
ACCT3583 Management Accounting 2
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ACCT3583 Management Accounting 2
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Overview of managing customer value and
relationships seminar
Topic 6: Desired Learning outcomes
Management Controls
In Topic 6, we aim to be able to:
Appreciate the importance of managing customer
value and understand its drivers
Explain and apply concepts associated with customer
relationship management
relationship management
Calculate and analyse customer profitability
Use Customer Profitability Analysis (CPA) information
in decisions on managing customer relationships, and
understand its strengths and limitations
Understand and apply the concept of Lifetime Value and
how this complements CPA
Evaluate the merits of customer relationship
management (CRM) practices
ACCT3583 Management Accounting 2
Measuring Customer Value
5
Managing Customer Value
Managing Customer Value
Bring the two together
ACCT3583 Management Accounting 2
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The Importance of
Managing Customer Value
1. Managing
customer value
Naumanns components of Customer Value
Customers are a key driver of organisational value generation
A firm cannot generate much shareholder value without
customers!
Moreover, customers are becoming increasingly
demanding as they become more informed
demanding as they become more informed
Consequently, business agendas such as Customer Relationship
Management (CRM) are being given increased emphasis.
However:
CRM activities can be resource intensive - are adequate
returns achieved from these investments?
The social ethics of CRM practices have also been questioned
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Naumanns components of Customer Value
continued
Quality of services associated with core product or service
delivered
Elements contributing to service quality may include sales
staff availability and product knowledge, effectiveness of
after sales service or complaint management
Source: Naumann, White paper
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Represents the markets perceptions of the
companys customer value proposition - is
often used as a proxy for product or service
quality (easier to evaluate)
Image can also be valued in its own right by
customers e.g. conspicuous consumption
could involve purchasing brand clothing and
the like to project affluence
As customers repeatedly interact with firm representatives,
more personal relationships may develop, creating a customer
attachment to the firm
This element is likely to be more crucial in businesses where
there is an ongoing interaction between customer and supplier
this will be examined in greater detail in Topic 8
ACCT3583 Management Accounting 2
Source: Naumann, White paper
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Introducing CRM
Reflect on our own experiences as a
customer. Give an example of a recent
experience that you have had where a
company delivered on one or number of
company delivered on one or a number of
the components of customer value.
When did you find a company lacking in
these areas?
ACCT3583 Management Accounting 2
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Relationship
Seminar Exercise 1: Customer Value
Source: Naumann, White paper (1995)
Image
Total cost of the product to the customer
Includes ongoing product usage costs (eg scheduled
servicing and maintenance costs); and any potential
disposal costs at end of prod
disposal costs at end of products useful life
life
ACCT3583 Management Accounting 2
ACCT3583 Management Accounting 2
Service Quality
Performance: How well does the product function?
Aesthetics: Appealing appearance?
Serviceability: Ease of maintenance, repair and servicing?
Reliability: Will it continue to perform as intended
for its expected life cycle?
Durability: How long will it continue to function
satisfactorily?
Conformance: Meets design specifications?
Fitness for use: Suitable for fulfilling its intended
purposes?
Naumanns components of Customer Value
continued
Price
Tangible features of the product that are important to the
customer
The dimensions of quality:
Naumann has suggested there are five dimensions of
customer value lets look at each component
ACCT3583 Management Accounting 2
Product Quality
[CRM is] the process by which
companies manage their
interactions with customers*
CRM refers to collecting and
analysing data to understand
individual customers behaviour
patterns and needs, and to develop
strong relationships with customers**
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ACCT3583 Management Accounting 2
Sources: * Berson et al. (2000)
** Langfield-Smith et al. (2003)
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Introducing CRM continued
Why undertake CRM?
But what exactly is CRM?
Simply defined, it is the process of
acquiring retaining and growing
acquiring, retaining and growing
profitable customers.
It requires a clear focus on the service
attributed that represent value to the
customer and that create loyalty
Source: Handen (2000)
ACCT3583 Management Accounting 2
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Possible objectives for CRM initiatives
Cross-selling or upselling to increase share of
wallet (amount customer spends with you)
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Significant investment in technology and human
capital to be more customer centric
Long lead times in developing infrastructure
Cross functional co-operation and co-ordination,
functional co
and co
as it may incorporate the following activities:
Channel management
Pricing
Segmentation
Development of IT
infrastructure
ACCT3583 Management Accounting 2
Increases effectiveness of marketing expenditure
Easier to target customers and focus on their
specific needs
Easier to track effectiveness of sales and marketing
to track effectiveness of sales and marketing
campaigns
Mitigates overspending on low value customers or
underspending on high value ones
Improves use of customer interactions
ACCT3583 Management Accounting 2
Source: Handen (2000)
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Here are some examples of Australian CRM
programs from the automotive retailers
However, CRM initiatives are not without cost
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Espoused benefits include
most profitable for the business
inherently loyal
able to provide a high level of net revenue
well-suited by the differentiating aspects of your services
from your competitors (ie fit with your value proposition)
ACCT3583 Management Accounting 2
Winning back former customers;
Retaining existing customers;
Prospecting for new customers that
demonstrate valuable qualities
ACCT3583 Management Accounting 2
CRM aims to target the right customers with the
limited resources available to the organisation
It targets those customers that are:
Developing front line customer
interactions
Product development/improvement
Collection, collation and analysis of
customer profitability and other
customer related information
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In Australia, Lexus operate the owner loyalty program Lexus Encore
a unique program of services and luxury lifestyle indulgences - exclusive to
owners of new and Certified Lexus Vehicles
A menu of privileges which perfectly match the Lexus owners individuality with
experiences money just cant buy
Collection/delivery of vehicle from home/office on appointed service days
Priority seating, complementary parking/drinks and a VIP welcome at
various cultural and entertainment venues (e SOH and VAC)
various cultural and entertainment venues (e.g. SOH and VAC)
Members only series of golf days
Specially negotiated luxury holiday packages at over 400 locations in over
40 countries
Roadside assistance - including accident recovery costs, car hire etc.
ACCT3583 Management Accounting 2
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3
Here are some examples of Australian CRM
programs from the automotive retailers
In Australia, Honda operate the loyalty program HondaONE
If you haven't yet clicked with HondaONE, maybe it's time you joined the
15,000+ happy owners who have. Its the owners club for the communications
age, and best of all it doesnt cost you a cent!
Whats in it for you.
Quite a lot, actually.
Think of it as your personal interface with Honda:
Online service history
service history
Downloads
Holiday & accommodation deals
Email service reminders
ACCT3583 Management Accounting 2
Seminar Exercise 2: CRM
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Overview of managing customer value and
relationships seminar
ACCT3583 Management Accounting 2
Considering Customer
Profitability
Managing Customer Value
In order to enhance their customer value
proposition, firms collect information about
their customers and their experiences
Reflect on our own experiences as a
on our own experiences as
customer. What information have various
companies attempted to collect about you
and your customer experiences with them?
Describe two (2) specific corporate
examples
M easur Cus omer Value
Measuringing tCustomer Value
2.
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Customer Profitability Analysis
Customer Profitability Analysis (CPA)
Lifetime Value Analysis (LTV)
ACCT3583 Management Accounting 2
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CPA facilitates decisions including:
CPA is based on the principles of ActivityBased Costing (ABC)
In considering customer profitability, CPA
takes into account the profitability of the
takes into account the profitability of the
product mix purchased by customers and
customer-driven costs generated by servicing
these customers (or customer segments)
Another way to understand how resources can be allocated
most effectively to cultivate the most profitable customers
Ability to price on basis of cost to serve a particular
customer or segment (Kaplan & Cooper, 1998)
Nature and targeting of advertising and marketing
campaigns (to target profitable customer segments)
Reconfiguring & classifying a firms customer portfolio:
ACCT3583 Management Accounting 2
2. Measuring
customer value
Given the growth of importance in
customer-centric strategic management,
companies are recognising the need to
understand customer profitability and value
understand customer profitability and value
Two general approaches are utilised:
1.
ACCT3583 Management Accounting 2
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Dropping or addressing how to change the relationship held with
unprofitable customers;
Formulating a value proposition for customer segments; and
Nature and level of CRM that an organisation should be engaged in
for specific customer segments
ACCT3583 Management Accounting 2
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Examples of High vs. Low
Cost to Serve Customers
Seminar Exercise 3:
Funcorp CPA analysis Part A
High-Cost Customers
Low Customers
RETAILER
TERMINATOR
Sales Cost Volume
ASSASSIN
Sales Volume
Customised product
features
Standardised product
features
Toys R Us
8,000
3,500
World 4 Kids
7,000
4,000
Order Entry
Salesperson manually
processes small orders
Customer electronically
submits order
Toyworld
4,000
2,000
Distribution
Overnight delivery
Delayed delivery
Credit
Collection
Delayed payment;
manual payment
Timely payment,
electronic deposit
Technical
Support
Requires frequent and
support; training for
customer staff demanded
Customer has in-house
support infrastructure
Activity
Manufacturing
TERMINATOR
ASSASSIN
Price per unit
$90
$60
Cost of goods sold per unit
$50
$30
Gross profit per unit
$40
$30
Sales and General Administrative Expenses
ACCT3583 Management Accounting 2
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Seminar Exercise 3:
Funcorp CPA analysis Part A continued
$500,000
ACCT3583 Management Accounting 2
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Seminar Exercise 3:
Funcorp CPA analysis Part A
SALES DOLLARS
Please calculate net customer profitability of
each customer that is, Customers gross profit
less Customers share of SG&A expense
Terminator
Solution
template
Assassin
TOTAL
Toys R Us
World 4 Kids
Toyworld
TOTAL
Note: You should allocate customer-related
expenses (SG&A expense) on the basis of sales
revenue ($s)
CUSTOMER PROFITABILITY
Toys R Us
World 4 Kids
Toyworld
TOTAL
Gross Profit
Share of SG&A expense
Net customer profitability
% contribution to profit
ACCT3583 Management Accounting 2
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Seminar Exercise 3:
Funcorp CPA analysis Part B
ACTIVITY DRIVERS
ACCT3583 Management Accounting 2
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Seminar Exercise 3:
Funcorp CPA analysis Part B continued
FTE
SG&A Attributable
Activity Driver
Customer Service
30
300,000
No. of service requests
Sales Order Processing
12
120,000
No. of sales orders
8
80,000
No. of ads placed
50
500,000
Advertising Support
TOTAL
ACTIVITY VOLUMES
Toys R Us
World 4 Kids
Toyworld
TOTAL
No. of service requests
20
10
120
Please calculate net customer profitability of
each customer that is, Customers gross
profit less Customers share of SG&A expense
150
No. of sales orders
20
10
270
300
No. of ads placed
30
15
75
120
TOTAL
70
35
465
Note: You should allocate customer-related
expenses (SG&A expense) on the basis of
activity information
570
Sales and General Administrative Expenses
ACCT3583 Management Accounting 2
$500,000
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ACCT3583 Management Accounting 2
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5
Classifying customers
-Customer Profitability Matrix
Solution
template
Seminar Exercise 3:
Funcorp CPA analysis Part B
CUSTOMER PROFITABILITY
Toys R Us
World 4 Kids
Toyworld
TOTAL
Gross Profit
$425,000
$400,000
$220,000
$1,045,000
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Passive
High
Savvy
Share of SG&A expense
Customer Service
Service
Sales Order Processing
Advertising Support
Subtotal
Net customer profitability
% contribution to profit
%
%
%
Gross
margin
(profitability)
Cheap
%
Low
ACCT3583 Management Accounting 2
Strengths & Weaknesses of CPA
World
4
Kids
Strengths of CPA
Relate to setting the strategic direction of the organisation to focus
better on customers or customer groups and generate greater SHV:
Gross margin
(profitability)
Toyworld
Low
Low
Cost to serve
Optimise allocation of scarce resources (impacts working and fixed
capital)
Pricing decisions (eg re-pricing - may assist in maintaining profit margin)
decisions (eg re
may assist in maintaining profit margin)
Discount, where necessary, to gain share (increase sales, reduce margin)
Concede permanent loss customers (may reduce working capital without
losing income)
Weaknesses of CPA
Static, single period snapshot of customer profitability
Historical performance only
Does not consider how customer profitability may change over time
High
ACCT3583 Management Accounting 2
Lifetime Value
34
Lifetime Value continued
An alternative approach to looking at customer
value
Focuses on multi-period, future-oriented economic
value rather than single period profitability of a
customer/segment
LTV is measured as the present value of net
expected future cash flows that are expected over
the lifetime of a firms relationship with a customer
The LTV idea: Profit-per-customer grows over
time. Determined by 6 factors:
Acquisition costs
e.g. McDonalds;
Unchanged but with yrs (relative to investment).
Per customer revenue growth
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e.g. discounts mobile phone packages, commissions
paid to sales force and new stores openings
paid to sales force and new stores openings
Base profit
ACCT3583 Management Accounting 2
High
32
Toys
R Us
Cost to serve
31
Customer Profitability Matrix:
Funcorp
High
Aggressive
Low
e.g. loans (upgrade); coffee at Quad;
Managing customer growth (e.g. customer loyalty
programs Qantas and Coles)
ACCT3583 Management Accounting 2
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6
Lifetime Value continued
Why Loyal Customers are More Profitable
The LTV idea: Profit-per-customer grows over
time. Determined by 6 factors (cont.):
Efficiency with long-term customers (e.g. hair stylists
and Amex).
Cost Savings
80
60
Referred customers are of higher quality! (e.g. Intuit
maker of Quicken program)
Revenue
Growth
40
Price premium
Referrals
100
Referrals
Price Premium
Operating costs
120
Annual Customer Profit
Components of LTV
20
Base Profit
Old customers pay more because of familiarity with
products/services
0
0
Acquisition
Cost
-20
0
1
2
3
4
5
6
7
Year
ACCT3583 Management Accounting 2
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ACCT3583 Management Accounting 2
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Another way to classify customers
Pros and Cons of LTV
Advantages
Future oriented
Multi-period analysis
Considers relative profitability changes according to the
customers lifecycle stage with the firm
lif
th fi
Considers impact of tenure on value a customer
represents
High
profitability
Low
Profitability
Limitations
Not as well-grounded as CPA (based on ABC concepts)
Difficult to estimate impact of LTV factors
Difficult to operationalise some of LTV factors
ACCT3583 Management Accounting 2
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Overview of managing customer value and
relationships seminar
Managing Customer Value
Measuring Customer Value
True Friends
Good fit between companys
offerings and customers needs
Highest profit potential
Actions
Communicate consistently but not
too often
Build both attitudinal and behavioural
loyalty
Delight these customers to nurture,
defend and retain them
Strangers
Little fit between companys
offerings and customers needs
Lowest profit potential
Actions
Make no investment in these
relationships
Make profit on every transaction
Barnacles
Limited fit between companys
offerings and customers needs
Low profit potential
Actions
Measure both the size and share of
wallet
If share of wallet is low, focus on
cross-selling and up-selling
If size of wallet is small, impose strict
cost controls
Short-term
Customers
ACCT3583 Management Accounting 2
CRM and ethical
business practice
Butterflies
Good fit between companys
offerings and customers needs
High profit potential
Actions
Aim to achieve transactional
satisfaction, not attitudinal loyalty
Milk the accounts only as long as they
are active
Key challenge is to cease investing
soon enough
Long-term
Customers
Source: Reinartz and Kumar (2002)
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3. Bringing the
two together
Reichheld (1996): Loyalty-based management
is a Sunday school teachers dream come true an ethical approach to business that pays so
well it puts the unscrupulous approaches to
shame. It calls for companies to create
tremendous value for customersSharing
value really does create value
Bring the two together
Bringing the two together
ACCT3583 Management Accounting 2
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ACCT3583 Management Accounting 2
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Seminar Exercise 4:
CRM and ethical business practice cont.
In summary, desirable customers are...
Direct profit implications
Boyce (2000): .they use this data to categorise
people. They can also use it to exclude whole
categories of customers from their strategies. The lowvalue poor are, naturally, excluded from their target
markets
markets.Depressed and needy regions and the
and needy regions and the
poor, along with disadvantaged people in general, do
not offer profit-oriented big businesses much value
Strategic considerations
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ACCT3583: Topic 6 Review
Questions
b)
c)
d)
E.g. Mercury Energy in NZ (end May 2007)
Entering into a market for strategic reasons? (e.g. high
GM IT systems)
ACCT3583 Management Accounting 2
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Topic 6: Review of
Desired Learning outcomes
What are the 5 main components of customer value
as outlined by Naumman?
Which of the following is FALSE with respect to CPA:
a)
E.g. reputation for quality and credibility, and learning
Does the company have a social obligation to these
customers?
ACCT3583 Management Accounting 2
Do these customers add to the companys reputation
(e MNCs) and capabilities (e Toyota)?
(e.g. MNCs) and capabilities (e.g. Toyota)?
QUESTION: Given the pervasive role financial services
have in contemporary society, do the banks have a social
responsibility to provide products to facilitate basic
financial transactions at minimal cost? Or do they have a
right to charge based on cost to serve?
Profitability now (CPA) and in the future (LTV)
CPA provides increased awareness of the drivers of
customer-specific costs
CPA includes an analysis of how customer revenues may
grow into the future
CPA allows management to understand which customers are
profitable and which are not
CPA allows managers to be more informed when entering
pricing negotiations with customers
Identify some key strengths and weaknesses of LTV
ACCT3583 Management Accounting 2
Based on Topic 7, you should be able to:
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ACCT3583: Where to from here?
Appreciate the importance of managing customer value
and understand its drivers
Explain and apply concepts associated with customer
relationship management
relationship management
Calculate and analyse customer profitability
Use Customer Profitability Analysis (CPA) information in
decisions on managing customer relationships, and
understand its strengths and limitations
Understand and apply the concept of Lifetime Value and
how this complements CPA
Evaluate the merits of customer relationship management
(CRM) practices
ACCT3583 Management Accounting 2
46
ACCT3583: Topic 6 Administration
Strategy implementation and resource management
Syndicate Case Project questions?
Resource management
Topic 6
Topic 7
Managing customer
value and
relationships
Managing
supplier
relationships and
strategic
outsourcing
Topic 8
Topic 9
Managing knowledge
as a strategic
resource
Th
The environment
and engaging in
corporate social
responsibility
Topic 10
Topic 11
Managing strategic risks
ACCT3583 Management Accounting 2
Management Controls
47
ACCT3583 Management Accounting 2
48
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