Topic: Measure and Management Customer Value
In contemporary company, all managers have already realized that maintenance customer value is becoming one of the most important things of business. Most of company goals cannot be achieved without satisfy customer first. However balancing between deriving value from customer and providing customer value has proved challenging to most modern organisations. Especially management accountants, they have to analysis and design product cost and price carefully, because customer value is a complex concept which include tangible and intangible factors. So this essay will discuss how a management accountant can measure and manage customer value.
According to Smith, Thorne and Hilton (2007), they defined “Customer value is the difference between the value that a customer gains by owning and using the product, and the price paid for the product.” (p. 961). This is very similar with an economic theory called consumer surplus. It is explained as the amount a buyer is willing to pay minus the amount the buyer actually pays (Mankiw, 2007, p. 138-142). Company can maximum profit throughout price discrimination and minimum consumer surplus . However, the problem is how company determine the product value to customer. To answering this question, company should process highly customer-focused strategy. In Epstein and Yuthas report (2007), they formed a ‘customer value management cycle' to explain that how to measure and management customer value. It includes five steps which are manage customer segmentation, measure customer margins, measure customer lifetime value, measure customer impact and manage customer profitability. Next will analysis each of these steps and discuss how they assist management accountant measure customer value.
Manage Customer Segmentation
It is easy to understand that customer segmentation means company divide customers into different groups throughout their function. By using segmentation, company can target their market more effectively and design proper products for specific group. According to Griffin and Lowenstein (2001), segmentation focuses from demographics and attribute, to value-based segmentation in recently years (p. 115). Therefore company now concentrate on divide customers by the profit customers generate, and cost to build and keep relationships. Under new segmentation method, company have to develop more complicated system to define different customer groups. Anderson and Narus (2004) summarised some progressive bases of segmentation, such as application, customer capabilities and business priorities, usage situation, and customer profitability (p. 47). Leppard and Molyneux (1994) also described how to understand customers in three steps: segmentation of the basis of what is bought, who buys and why buys (p. 20-22). According to categorize customers into groups, company will realize what customers need in each group and design particular products. Then management accountant can estimate cost and profit base on each group.
Measure Customer Margins
Customer margin is the second step to understanding customer value. Many companies evaluate the profitability of customers by analysis customer margin. Managers can calculate customer margin according to their revenue, or include all cost driven by customer to calculating more accurate figure (Epstein & Yuthas, 2007, p. 9). In Murby article (2008), he suggest that Activity-based costing system can help company to calculate and assign costs and thereby calculate the profitability of each customer. Under this method, accountants can analysis true cost drivers and estimate how many products or services demand. Moreover, one important thing is that ABC also include non-product costs analyse, it not only deal with direct cost, but also identify indirect cost. (Epstein & Yuthas, 2007, p. 15). When analyse whole relevant costs, managers generally should cover five levels which are order-level, customer level, channel level, market-level and enterprise-level. They consider both product and non-product cost. The reason why include non-product cost is sometimes it will cause loss for company, such as too much after-sale services (figure 3).
Measure Customer Lifetime Value
After managers defined profits from customer activity, they are going to analysis customer in long-term, such as a valuable asset. Thus CLV values customer on the basis of their expected future incoming-generating potential (Epstein & Yuthas, 2007, p. 18). In this step, it is more complicated than previous since it includes many variations. Kumar (2007) summarized process into a flowchart to illustrate calculating CLV (figure 4). According to his explanation, CLV can be calculated in two levels, aggregate and individual (p. 16-21). However, either way put CLV as present value of profits over the customer lifetime. Although the specific formulations vary, CLV calculations all include three necessary components: profits, retention rate and discount rate (figure 5). In figure 6, it shows various components of revenues and costs that are commonly incorporated in customer profit calculations used for determining CLV. Therefore, as a management accountant, should consider this entire situation when they predict CLV in future period, such as cash flow from customers and keep relationship costs.
Measure Customer Impact
The final component of value provide by customer is customer impact. Different from previous steps, here has more interaction with customers. In Epstein and Yuthas article (2007), they mentioned two sources included in customer impact – customer influence and customer knowledge (p. 23). Generally, these two sources deal with how customer affects each other behaviours or mind, and how their actionable knowledge can be gained by company for improve products. Kotler and Keller (2006) discussed in their book that customer normally introduce product each other, and world-of-mouth advertising is very important in marketing. Thus company has to understand how much power their customers may have on the purchase behaviour of others. Company also need fully use customer knowledge, since only customer selves aware what they exactly need (Piercy & Lane, 2009). Gibbert, Leibold and Probst (2002) summarized five styles of customer knowledge management, which include Prosumerism, Team-based co-learning, Mutual innovation, Communities of creation and Joint intellectual property (p. 459-469). CKM enables companies benefit from recognize customer power.
Manage for improved Customer Profitability
Epstein summarized strategies for managing customer profitability in his article (figure 7). So this step actually covers and analysis all previous elements. Managers should start with establishing proper objectives for each segment. Then enhance customer value by understanding needs or reduce cost, and maintain relationship (Ryals, 2008, p. 29). ABC and customer profitability analysis provide the basis for managerial decision making and actions (Epstein, 2000, 23). They can help company to understanding and managing the expected profitability of customers. Managers also can accurate estimate of the value that each segment provides through normal purchasing and usage. Base on ABC method, managers can understand customer cost structure, then figure out what cost for company is unnecessary. Then company can realize which segment is their major customer and working out the cost of maintaining customer relationships, such as discount or promotion. Finally manager has to awareness customer interaction. Company need a monitor system to observe how customers feel their products and how they use it, so that company can save many cost from R&D.
To sum up, as a management accountant, first thing should to understand is what customers want. Then they can measure and management customer value through five steps mentioned above by using specific method such as ABC system. According to these five steps, accountants can realize customer value in quality way, and design more accurate cost structure for company.
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