Relationships. How do we measure the value of a relationship?
It’s not an easy question to answer.
Customer Relationships. How do we measure the value of customer relationships?
We have an answer. But I think it’s the wrong one, or at the very least an incomplete one.
If we were all in a room together, many of you likely would have shouted out words like “profitability!”, or “revenue!”. Maybe some of the more advanced thinkers would throw out “CLV!” (Customer Lifetime Value).
The problem with this lies within the root of my first question: “How do we measure the value of a relationship?”
THE MEASUREMENT OF CURRENCIES AND CAPITAL
As companies measure the value of customers, we typically only look at Dollars, or Euros, or Yen, or whatever the local currency is. We limit our evaluation and ranking of our customers to how much capital they have contributed to our organization in the denomination of monetary currency. But aren’t there other forms of capital?
You’ve heard the terms: Relational capital, Social capital, Human capital, etc.
Identifying relational value should include all the components of the value created by that relationship, but today’s CRM systems typically only include monetary measures in identifying how much a customer is worth to the company.
What about those companies or individuals who have created value for the firm by:
(1) Talking positively about them
(2) Referring potential customers
(3) Referring potential employees
(4) Providing recommendations and/or being references
(5) Introducing them to new networks
(6) Adding value in other “hard to measure” ways
There is a whole set of value being generated and given to us by not just our customers, but many members in our relationship ecosystem. The problem is that we are not measuring it. Since we are not measuring it, we don’t know what to do with it, and are likely missing opportunities to create more opportunities of value exchange.
If people are only interested in money, we call them “golddiggers”. Shouldn’t our systems enable and empower richer professional relationships than this?
Hi Brian,
Indeed it would be difficult to measure influence and referral – be it only because it would be very difficult to accurately make the link between the referral and the sale (unless you have some way of asking the customer that came in through a referral directly by who she was influenced (and this could be from multiple sources).
The only way I can see this happen readily is through an incentive system, such as when you refer the services of an artisan to a neighbour, family or whatever, you can expect a ‘commission’ from that artisan (do they have that in the States as well?). Maybe now through social media monitoring we can add another tool to do such tracking to see who has provided advice to whom and what it was…
Another remark, building trust takes time, which does not fit in the neatly organised business world of quarters, semester and years. maybe we should be looking new ways of measuring that fit the timescales that fit with the lifecycle periods (I suggest looking at Jim Novo’s writing on this).
Cheers!
Mark
Mark,
Thanks so much for stopping by and taking the time to comment.
I agree that it is difficult to track today. However, I am beginning to see the seeds of data in the social graph that will enable this sort of tracking. This is especially relevant in transactional sales whereby a customer makes a decision to buy with relatively little influence or evaluation. I saw something the other day that was very interesting and was the first tangible example of the capability that I am mentioning.
I’m looking for what is far fetched today to become possible and a strategic competitive advantage over the next decade.
Hi Brian Much of the discussion in the customer space seems to assume that all businesses are large organisations. I do a lot of work with SME’s and one of the best projects I suggest is the creation of a relationship development process. In a mid sized accountancy or legal firm this can have a dramatic effect. We take the ad hoc elements of golf, coffee, lunch etc and create a relationship deepening grid which gives a starting point for a relationship, some possible next steps and an implementation plan. We then create a relationship score for the business based on where each relationship is on a 1 – 5 “energy scale.” There are then only two ways to increase the absolute relationship score of the business, get more relationships or deepen the existing relationships. An increase in this relationship score always leads to more referrals and more business. This relationship work needs new skills, new frameworks and probably new attitudes to customers.
Ray,
Thanks for sharing your thoughts. I don’t see how the methodology that you offer is only relevant to SMBs. In fact, I think it could be leveraged by independent professionals and sales teams from all sized companies.
I am curious if you “relationship score” and “energy scale” incorporate any feedback from the customer to ultimately answer the question: “Does the customer agree with your assessment of the relationship score?”
I’d also be curious to know if you’ve been able to correlate a higher relationship score to more revenue, or some other company benefit? I think the magic in creating a system like you mention is identifying the relationship between the relationship score and benefit to the company (revenue or otherwise).
Any additional information you can share would be interesting to find out.
Thanks,
Brian
Brian,
Interesting and thought provoking. Yes, there are other vehicles for value creation. In a business context, it ultimately still has to come down to financial considerations, be they short term or long term.
When Zappos recently made a pricing mistake and honored that incorrect price, costing the the company $1.6mm. The company didn’t do this in the context of benevolence. Their business model has proven over time that short term profit motives are not as effective at driving long term sustainable profitability as are strategics focused on customer relationships, which ultimately drive loyalty, repeat business and higher share of spend among its customers.
While this list you wrote above, at first glance, might point to some higher order altruistic relationship motive, applied correctly in a a business context, also ultimately pave the road to long term sustainable profitability. Maybe not directly. And maybe not via some quant jock’s fingers on the keys hammering a financial model, but the end state, goal, potential is the same.
“Shouldn’t our systems enable and empower richer professional relationships than this?” Sure. But, again in what context. Let’s just not set profit motive up as the evil scapegoat. Its ok. Its not a dirty word. There are infinite means to accomplish that end. Some good that spawn other value creating benefits. Some others, ultimately destroy value. But, the end goal is not a bad thing.
Well done
Barry
Brian We’ve definitely shown increase in revenue from this relationship development process. We keep it very simple and look at the only two ways we can improve the relationship score, more relationships or deepen existing relationships (this gives us a “wall” with crosses denoting depth of relationship and a total absolute score that can be targeted for improvement). We have so far not gone as far as fully tracking new business but adding process, activity and defined time to “relationship building” has had a dramatic impact on folks like lawyers and accountants who have huge fears around “sales”. We are also encouraging the use of an internal clienteer to monitor, measure and encourage relationship building work and this has created even more focus and discipline. We are videoing several case studies which we will be putting up on the website with a context of sharing and “social learning”.
p.s. We have yet to correlate our energy score with that “felt” by the customer. We use discriptors for relationships as they deepen. These are selected by our client and are a five level scale leading from say “contact” (someone who is prepared to meet with us for the first time) to “friend” (someone who we could invite to a BBQ with his/her family). Each client picks their own descriptor for each level and then creates a “menu” of possible activities to move a relationship through one of the only 4 “transfer stages”. We then share experiences around what worked well, what are the blockages etc
Brian,
I just gave you a standing ovation in my cubicle.
I’m a firm believer that the ROI on a relationship goes far deeper than profits, revenues or CLV.
One of the things that we’ve lost in the past few decades (something that the social web is bringing back very quickly) is a focus on businesses building relationships with customers. When we build a friendship with someone – a real friendship – we are more likely to deal with them honestly and with integrity. When we interact with honesty and integrity, and continue to build healthy relationships, our reputation increases people tell their friends, and the financial ROI follows. That financial ROI cannot, however, be predicted or (at this point) accurately measured.
The value of a relationship goes far beyond once customers lifetime value… it really can echo through social circles and even through generations… never underestimate the true value of a relationship.
Hi Nate Couldn’t agree more. I would go even further and say that many other aspects of business would be impacted. In particular staff morale and efficiency. People like “nice” atmosphere’s, inside and outside their business. Dick Lee the business process man said to me recently “I’ve never seen a truly customer centric business with unhappy staff.” I’m reading Lior Arussy’s new book Customer Experience Strategy at the moment and he has had an attempt at valuing some of this in what he calls the RON (return on nothing as opposed to ROI). It’s not perfect but he makes some logical assumptions about what remaining blind to this customer relationship “stuff” might actually cost a business over time.