Cgmacustomer Value Part2

7/28/2019 Cgmacustomer Value Part2

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How to managecustomer value

CGMA TOOLS


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Two o the worlds most prestigious accounting bodies, AICPA and CIMA,have ormed a joint venture to establish the Chartered Global Management

Accountant (CGMA) designation to elevate the proession o managementaccounting. The designation recognises the most talented and committedmanagement accountants with the discipline and skill to drive strongbusiness perormance.

Contents - Part 2

Measure customer lietime value

Measure customer impact

Manage customer proftability

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CGMA TOOLS How to manage customer value2

Customer lietime value (CLV) introduces a new dimension to understanding the value acustomer provides to the company. The lietime value o the customer reects the present

value o all uture ows associated with the customer. Although the specifc ormulationsvary, CLV calculations all share three essential components: profts, retention rate anddiscount rate. Box 3 details the specifc components o the CLV ormula.

Manage customer lietime value

Customer retention and customer loyalty areimportant concepts or companies seeking toeectively measure and manage lietime value. Theretention rate, as included in the CLV calculation,reers to the probability that a customer will continuedoing business with the company in uture relevant

periods. Customer loyalty reers to a customers levelo satisaction with the company or brand, as well asthat customers intention to make uture purchases.Understanding the loyalty o customers in asegment is important or CLV calculations. The proftcomponent o CLV is based on estimates o howmuch customers will purchase in the uture, and howmuch it will cost to serve and retain these customers.

Companies begin incurring costs when they spend

money to acquire customers. As the customer makespurchases, the acquisition costs are recovered, andthe company earns increasing profts rom customersales margins as sales recur over time. Additionalcosts to serve the customer over time include ongoingpromotional and service costs and retention costs,which include the costs o maintaining the customerrelationship over time. In addition to recurringmargins rom repeat sales, companies can gainadditional profts through selling upgraded or new

types o products and services to existing customers.

Together, all o the costs associated with servingthe customer over time are netted against the totalmargins the company expects to gain through salesto that customer. The result is the CLV. It representsthe present value to the frm o a customers lietimestream o profts. The CLV model thus views thecustomer as an asset that generates revenuesthroughout the lie o the relationship, and also draws

resources as it is acquired, maintained and, possibly,retired.

Box 3: Customer lietime valueormula

The ormula or calculating CLV is as ollows: CLV= (proftt1 x retention ratet1 x discount actort1) +

(pt2 x rt2 x dt2) + + (ptn x rtn x dtn)

CLVis the sum o profts earned in timeperiods 1 through to n, where n representsthe last period the company deems relevantor proftability analysis. Expected customerprofts in each period are adjusted to reectthe expected customer retention rate duringthe period and discounted to the present timeperiod, t0.

Prot(p)is the proft earned during the timeperiod. Profts include gross proft, and takeinto account lietime costs and revenues such asacquisition costs and growth in margins overtime.

Retentionrate(r) is the rate at whichcustomers in the segment maintain theirrelationship with the company and continue

uture purchases. This could also include the netdierence between new customer acquisitionsand customer exits within the segment.

Discountfactor(d) is the multiplier used todiscount uture profts to their present value.The discount actor is based on the companyshurdle rate (oten the ater-tax cost o capital).


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The fnal component o value provided by the customer is customer impact.O course, profts resulting rom current or uture sales to customers are the

most signifcant source o value or most customer segments. But value canbe created (or destroyed) by customers in many other ways that all outsidethe reach o CLV and other methods o assessing customer value.

Measure customer impact

The power o customers is greater than ever andcontinues to increase due to a variety o actors. Inaddition to their own value-generating behaviours,customers have the capacity to aect corporateproftability by inuencing the perceptions and

behaviours o others.

The most widely recognised source o customerinuence comes in the orm o product reerrals.Customers who are satisfed with a product mightencourage other customers to try the product, orwhen dissatisfed, they may dissuade customers rombuying it.

Another important source o inuence is wielded

by customers who possess high levels o power orprestige. These customers may inuence others by

serving as expert users, legitimising the products useor other customers. Some customers inuence othersby serving as a role model. High-profle customerssuch as celebrity, sports or political fgures can servethis unction, as can inuentials opinion leaders

who inuence the thoughts and actions o others.

Customers also contribute value by providing useulinormation to the company and its stakeholders.Customers who post product reviews provide valueto potential customers. Other customers may activelyshare their technical knowledge and expertise,providing tips or eective use o the product andsolving problems or other customers. Leadingcompanies are crowd-sourcing inormation rom

their customers in order to improve their products andservices.


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CGMA TOOLS How to manage customer value4

Customer proft margins in each period during thecustomer relationship make up the largest share ocustomer lietime value or many segments. Thus,improving proft margins on individual transactionsis a logical starting point or companies.

In addition to normal revenues and costs,companies can increase the lietime value ocustomers by (a) improving customer retention, (b)reducing the costs o acquiring and maintainingcustomer relationships and (c) improving customerproftability through expanded purchasing.

Companies can also take measures to enhancecustomer impact by (a) increasing customerreerrals, (b) cultivating highly inuential customersand (c) capturing and using customer knowledge.

To translate these strategies into action, companiesmust use the inormation provided by proftabilityanalyses to inorm decisions and develop metrics thatcan be incorporated into incentive programmes.

By developing a more complete picture o the value o a customer orsegment, a company can improve overall proftability by improving

proft margins, increasing the lietime value o customers and enhancingcustomer impact. Box 4 outlines strategies or managing customerproftability. In summary:

Manage customer proftablity

Box 4: Strategies or managing customer proftabilityManaging customer proft margins Managing customer lietime value Managing customer impact

Re-price products and servicesImprove retention and acquisition

ratesIncrease reerrals

Reduce customer costs (reduce cost per

service and reduce services available)

Upgrade customer profts (share o

wallet, up-selling and cross-selling)Pursue inuential customers

Manage cost drivers (policy changes

and charge or services)

Reduce liecycle costs (acquisition,

ongoing promotions)

Enhance data capture (capture every

interaction)

Measuring, improving and managing

customer satisaction

Increase customer participation

(communities, direct requests,

employees)

Use data eectively (experimentation,

innovation and customisation)


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The inormation and any opinions expressed in this material

do not represent ofcial pronouncements o or on behal o

AICPA, CIMA, the CGMA designation or the Association

o International Certifed Proessional Accountants. This

material is oered with the understanding that it does not

constitute legal, accounting, or other proessional services

or advice. I legal advice or other expert assistance is

required, the services o a competent proessional should be

Copyright 2012 American Institute o CPAs. All rights reserved.

sought. The inormation contained herein is provided to

assist the reader in developing a general understanding

o the topics discussed but no attempt has been made

to cover the subjects or issues exhaustively. While every

attempt to veriy the timeliness and accuracy o the

inormation herein as o the date o issuance has been

made, no guarantee is or can be given regarding the

applicability o the inormation ound within to any givenset o acts and circumstances.

The inormation herein was adapted rom Managing

Customer Value by Marc J. Epstein and Kristi Yuthas.

Copyright 2007 by The Society o Management

Accountants o Canada (CMA Canada), the American

Institute o Certifed Public Accountants, Inc. (AICPA)

and The Chartered Institute o Management Accountants

(CIMA).


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December 2012

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The Association o International Certifed Proessional Accountants, a joint

venture o AICPA and CIMA, established the CGMA designation to elevate

the proession o management accounting globally.

Cgmacustomer Value Part2

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