Analyst Perspectives

You would think that all organizations would want to maximize the value of every customer relationship, but my research over the last couple of years suggests otherwise. Three particular insights stick in my mind. My research into customer analytics shows that overall customer lifetime value ranked only sixth most important customer-related metric, compared to the highest-ranked, customer service costs, which was selected by 54 percent of respondents versus 31 percent for customer lifetime value. Executives had it second highest-ranked, but as you move down the organization it falls off in importance. This lack of focus is also reflected in my research into customer relationship maturity, where customer value was again ranked only the sixth most important customer-related metric, this time behind the top-ranked metric of overall revenue (62% versus 25%).

The same research shows my second insight, in that only just under half (45%) of companies have a single source of customer data, and worse still, fewer than a third (31%) have a single set of reports and analysis about their customers.  For those that do have reports and analysis containing customer information, once more customer value is only the fifth-ranked type of information, behind customer satisfaction scores, which are top-ranked (64% compared to 51%).

My final insight arises from my research in to the agent desktop, which shows that in terms of overall customer service objectives, improving customer lifetime value was ranked fourth highest, with the top priority being to enable customers to communicate through more channels of communication (19% compared to 12%).

Those vendors with customer value in mind have begun to change their business models in order to address a key end-customer requirement and increase the chances of lengthening the customer relationship and overall customer lifetime value. Consider the software industry. Not many years ago virtually all software was sourced as a one-off license purchase, followed by an annual maintenance fee. To gain further revenues, vendors had to rely on professional service fees, which again typically were earned as a one-off at the beginning of the project. Increasingly, companies find it hard to justify such large one-off payments, so they look to hosted or cloud-based vendors that provide their software as a service and charge on a recurring, usage-related basis. For the user company, this softens the up-front costs and spreads other costs over the length of the contract. For the vendor, it reduces the up-front fees but extends the relationship with the customer over the life of the contract and typically generates revenues that are linked to usage, through, for example, the number of active users.

In the communications industry, where customer invoices are based on a recurring fee plus usage charges, vendors providing hardware “in the cloud” where fees can be based on an access fee and the amount of hardware used. Companies provide online access to entertainment services that go beyond typical subscription services, because they include more than a regular subscription fee. They are typically based on a fixed duration contract that might also include one-off, up-front charges, other recurring changes (annual upgrade fee), or, most importantly, usage-based fees that scale up and down based on different parameters, such as calls made, active uses, volume of hardware used or number of items downloaded.

Moving to this model of doing business introduces a number of complexities for companies:

• Setting up and maintaining the catalogue of products or services
• Creating innovative bundles of products and  services that appeal to different customer segments
• Monitoring and collecting usage information
• Producing customer bills and making billing and payment collection possible through a range of communication channels
• Providing customer service that meets customer expectations and ensures customers remain loyal throughout the duration of the contract
• Monitoring customer usage so that, where appropriate, companies can take advantage of up-sell opportunities.

To manage these types of relationships, companies need to look beyond traditional CRM systems. These focus mainly on supporting marketing, sales and customer case (ticket) management and don’t support the process of setting up a catalogue, collecting and pricing usage data, and producing invoices. To do this, companies need to look for a specialist subscription billing system that includes usage rating. They might also want it to include invoice production and delivery, plus payment collection, or alternatively a system that provides two-way integration with their finance system. It is also vital that the information from such a billing system be available to contact center agents and self-service channels so that customers can be provided with up-to-date information should they engage with the company. Companies should also review their customer-facing activities and processes to ensure customers get a consistent experience at every touch point and that they maximize every option for cross-selling or ensuring customer retention.

Subscription-based business is seen by more and more companies as the way to ensure customer longevity and maximize customer value. It does however fundamentally change companies’ relationships with customers, requiring them to be more proactive over a longer period. Companies should therefore ensure they get their processes, people, metrics and systems aligned to support such a business model, because, if done correctly, it can ensure business success.

What is your experience with subscription-based business? Please let us know and come collaborate with me on this topic.

Regards,

Richard J. Snow

VP & Research Director