• [01:02] Core dimensions for go-to-market measurement
• [05:02] Customer Satisfaction: Net Promoter Score
• [07:10] Customer Equity: Measuring Investments in Building Customer Relationships
• [09:13] Using Customer Equity Analysis to Guide Go-to-Market Investments
• [11:12] The Four Core Customer Equity Metrics

12-Assessing Marketing Performance

You’re focused a lot on profitability, and the balanced scorecard metrics, in the simulation, which I love. I think that they are a great demonstration of how thinking about the go to market questions lead to overall business profitability.

I did want to spend a little bit of time on these two metrics, customer satisfaction and customer equity, because they are ones that often live in the marketing department. Customer satisfaction is used everywhere. Customer equity is fairly widely used in subscription-based models and more and more of our lives seem to be turning into subscriptions.

That’s why I included in the course. Even though the simulation doesn’t look at subscriptions, you can buy bicycles by the hour. Right? There’s plenty of companies out there that will sell you bicycles by the hour. The one area where we don’t see a lot of use of customer equity models is in durable goods purchases like bicycles.

So I think by giving you a little bit of readings to do on customer equity, on customer lifetime value modeling, I was trying to give you a little balance of how we think about metrics for marketing across all businesses.

[00:01:02] Core dimensions for go-to-market measurement

If you take one thing away from go to market, including the time you’re spending on the simulation and the content it’s go to market is where we start merging that focus that we had in desirability for customers and creating value for customers from the first half of the class, the kind of finding product market fit question. Go to market we are bringing in feasibility and viability. How can we actually create value for both of us?

That’s one of the reasons to include these two metrics, as you read about in the customer management reading from HBS, we want to have a metric that focuses on value for customers, the customer experience. And we want to have a metric that focuses on value for us.

Customer profitability, measured by customer equity because we’re making investments in customer relationships over time.

Just looking at quarterly profitability may not be the best metric if we are making substantial investments in growing the experience for our customers over time, creating relationships with customers. We have to invest upfront in activities to attract them to our brand and make our products available for sale. Those investments are going to precede the revenues that we get from doing that. So like any other investment model that you’ve seen in finance, we want to use an investment modeling framework to think about how we do that.

But here’s a very simple two by two, that you can use regardless of what measure of customer profitability you’re looking at. How are customers lining up? How do our evaluations line up along customer experience and how do our customers line up along profitability? Not surprisingly, we’d love to have lots of customers that love us and are very profitable.

We can call those our stars, right? These are our people that we shower with love and we encourage to promote us. These are the people we’d like to get word of mouth from and really highlight them.

Then we have people, that are having a lousy experience and they’re also not profitable.

These are often lost causes. We’re going to lose them to somebody else, or if we don’t figure out how to solve this problem of low profitability and low customer experience, we’re a lost cause.

So, it’s clear what to do about customers in the green box and customers in the red box or customer segments that we’re serving that are in the green box and customer segments that are red box.

The challenge is on the off-axis. When we have people that are having an amazing customer experience, but they’re not profitable to us you can consider those as being free-riders. They’re getting value from us that we are not getting in return. We have to figure out how to get more value from them. That might be by raising prices to them.

But it also might be by having them do more work for us. For example, we might have customers who don’t actually have enough demand to be profitable themselves, but can provide value for us by promoting us to other people. If you’re in the business of hiring social media influencers, every Instagram influencer, they can’t buy enough product to justify the costs that we shower on them. We get value from them based on the fact that they influence other people.

The big one to worry about is this vulnerable group. The people who are very profitable for us, but aren’t having this tremendous customer experience. These are the ones that are vulnerable to leaving. Vulnerable to being picked up by competition. Vulnerable to another method of solving the problem, doing the job that we have been doing for them.

This is the quadrant that strong marketers are spending their time thinking about. What is it about customers that are relatively profitable for us, where’s the mismatch between their experience and our profitability?

Sometimes people are here because of switching costs. They don’t like the experience, but it’s too painful to switch to somebody else. That feels good in the short-term you feel like you have people locked in, but that’s not a great long-term strategy.

We have to simultaneously create value for customers and value for us over time in a competitive market. And so we want to have a set of metrics that help us calibrate that.

[00:05:02] Customer Satisfaction: Net Promoter Score

Customer satisfaction. We use net promoter score. You see it everywhere. On a scale of one to 10, how likely are you to recommend us to friends and family? How likely are you to recommend us to colleagues? This promoter score has been validated in lots of industries.

Or at least it was validated until people started gaming it. I just had my car serviced the other day. As I was leaving the dealership for getting the car serviced, they said “you’re going to be getting a survey… and if there’s anything that would keep you from giving us a 10, can you let us know now.” Which at some level you’re like, “Well that’s good, right? They’re trying to make sure that I’m satisfied before I walk out the door. Great.”

But they’re doing it they’re being measured too heavily on this direct customer satisfaction score. One of the challenges of using customer satisfaction scores to measure performance is they are often gamed if they are set to be too powerful of a performance metric. There’s just too much pressure to game them.

And that combines with the fact that we don’t, in general, like to give people bad news. So the preponderance of Uber drivers have five stars. The preponderance things sold on Amazon have five or 4.7 or 4.8 stars. These scores are skewed, which is why the net promoter score is designed the way it is to be so highly skewed that you have to get to a nine for it to be considered a promoter.

Two things to take away. The first is definitely good to use. Relative to other metrics of customer satisfaction, willingness to recommend is the strongest correlation, the most valuable thing that you can measure. That’s number one point.

Number two point: be cautious about how directly you incentivize your frontline workers with that measurement. It becomes a situation that is quite prone to distortion.

Why is it so prominent? Because we do see this correlation with five-year revenue growth. Revenue growth is a super important metric. The original study that highlighted the net promoter score by the people that sell the service of evaluating it. Their focus was revenue growth. There’s other metrics that we know that are important to us. You’re measuring some of those in the balanced scorecard.

[00:07:10] Customer Equity: Measuring Investments in Building Customer Relationships

We use this set of tools called customer equity analysis assessing financial return in building customer relationships.

There are basically three ways that we can grow. All of which are measured by this metric, which is one of the reasons that it is so useful.

We can grow by serving more customers. And a lot of what we’ve been focused on in the simulation is serving more customers. Because we’re selling something that’s a durable good, the more customers that we can serve, the more customers actually buy bikes, the more profitable we are.

In an ongoing relationship business model, in a subscription-based business model or any sort of business model where we are investing in building brand equity that we’re hoping the specific customers return again, we are also looking at these other two ways of growing.

We can expand the margin per customer by having them buy different things from us. And then we can retain that relationship longer. Even with durable goods, like bicycles, it’s worth investing in a brand because the next time someone goes to buy a bicycle, we might get their second bicycle. The auto industry has a lot of research that looks at how likely people are to buy the brand over and over again.

Every business focuses on serving more customers. Businesses that are focused on building relationships with customers, also build metrics around expanding margin and retaining customers longer. The more that you can link those things together into an overall metric, the better picture that you have of the health of your relationship assets with customers.

And these are financial assets. You can equate them to something like goodwill. When you buy goodwill, you’re buying the likelihood of customers to maintain this relationship: the brand value that goes to making it easier to serve more customers and expand relationships and maintain them.

So as a reminder, the simulation does not use customer equity. They only use profitability. They just use this portion of the customer equity model, they don’t consider the lifetime value.

[00:09:13] Using Customer Equity Analysis to Guide Go-to-Market Investments

We primarily use customer equity analysis to think about go-to market investments. In particular, what kinds of campaigns and customer experience investments will help us attract, convert and close new customers? And then satisfy, retain and grow existing ones.

This balance of investments to attract customers and investments to retain and grow them, is one of the things, that customer equity analysis helps us focus on as.

Unfortunately, GAAP accounting considers all marketing costs as period costs. So investments that we’re making in brand-building and period one are dropping to the bottom line in period one. We don’t capitalize them and amortize them over time. So, it’s useful to have a metric like customer equity analysis as a complimentary metric to our GAAP profitability analysis, to give us a sense of where we’re headed.

So how do we build it? We build it by counting the number of people that we’re serving in a particular segment. We calculate the average lifetime value of a customer in that segment. And then we subtract the sales and marketing costs that we had to initially establish that relate.

And those costs are things that you’re dealing with right now in the simulation. They’re costs like how much it costs to open a store and staff a store. And how much it costs to create ads and place those ads in the marketplace, and manage your digital presence. Any of those that are intended to initially establish a customer relationship, which is basically all of them in our simulation, those all add up to this customer acquisitions costs.

So what you might be finding in your results, that your gross margins were fine, that your unit economics was fine. The product itself was profitable, but the acquisition costs to get that customer: to attract them, to get to them to come into the store, to serve them in the store, so that they walk out with a bike, they were forward facing investments in some cases, and they are ongoing investments in others.

[00:11:12] The Four Core Customer Equity Metrics

This focus on customer acquisition costs, it’s getting a little bit more focused as more and more companies are going to subscription-based models. Casper, they sell mattresses, right? So they’re close to bicycles. They came to market as a brand new way of building relationships with customers. We’re going to get rid of all of the costs of selling mattresses through traditional channels, we’re going to go directly to customers. It was all great. They open stores. They IPO, they were almost a unicorn IPO. It’s just in the paper that they are going private for less than half the IPO price. Their challenge was not in margin. Their product is profitable. The actual cost of making the mattress and actually making and delivering the mattress to an individual customer is profitable.

They only sell one in general. So their margin multiple is one. They don’t have any sort of add on sales. They were struggling. They were trying to figure out ways to generate, add-on sales from existing customers. And they’re just, they haven’t been able to yet.

And the big challenge was that their customer acquisition costs were high. They absorbed a lot of the channel costs that their channel partners had been taking on using the economics that we looked at last week.

And they gave away a lot of that to customers, which was great for them to get lots of customers, but it also resulted in them having ongoing losses. And the prices kept getting higher.

This is an issue that’s starting to affect a lot of direct to consumer brands like Warby Parker. There’s just so many lookalike startups– their business model is to source something overseas, historically from China, not so much anymore. And advertise on Facebook. Advertise in social media directly. Not new stores, And for a while, that was a pretty profitable business model.

But the cost of acquisition, the cost to acquire a customer on Facebook, average prices right now are $200-300 a customer. That varies widely. Facebook seems cheap because the cost per ad itself is cheap. It’s hard to attract attention on Facebook. So the numbers are looking more in that several hundred dollars. If you’re starting a business and your product isn’t worth several hundred dollars, or you can’t get customers to come back and purchase from you over and over again, you will not have a profitable business model.

And this is where even this simple four part customer equity model is worth putting in your toolkit.

There’s really complex customer lifetime value modeling. It is a complex area of analytics. There’s lots of challenges to it, not least being the fact that you are building a model that has selection bias inherently built into it. You’re building something that is selecting for what customers who purchased from you favor, which doesn’t necessarily, tell you what customers who didn’t purchase you are not interested in. It’s selecting on the dependent variable.

But for intuition– thinking about the value you’re creating in terms of the number of customers you’re serving, the margin per segment, the likelihood of these people coming back again, and how much it costs to acquire them. Having those four metrics in your toolkit in some form or fashion is a really useful way to approach measuring marketing.