By Ron Swift, VP Strategic Customer Relationships, Teradata

As we were driving home after a family reunion around the Fourth of July timeframe, my mind wanders when heading down I-95 on a very hot summer's day. When a car flies past me I first think about our speed, trooper presence, dangers of life and any poor vision or knowledge of the future roadway, etc. After a moment or two, however, and with the state's finest nowhere in sight, I smile because the passing car is the same as mine. Exactly the same manufacturer, color, engine, tires, wheels and even the personally placed USA flag in the side window.

Wonder if we got the same deal on the car?

Another loose connection? Perhaps. But consider this: Even though we're not the same individuals, we actually may have gotten almost the same price. Why? Because too many companies, including some of the biggest and well-known, aren't looking closely enough at customer relationships to develop resultant pricing and servicing down to the level where long-term profitability actually occurs.

That said, many great and well-run companies, including the aforementioned autos, as well as telecomm, major retailers and others, are using their data warehouses to examine current and potential clientele to make offers to provide long-term profitability. Often, I hear thoughts along the lines of "We understand how we make money down to each LOB," or "down to each product," or "store location" or "region." On and on.

Too seldom, however, do I hear "down to the person or customer." Or what would be best - and doable, mind you - "profitability from the bottom up." Yes, friends, that's how profit flows - from the bottom up. And if you're good, it flows freely, genuinely and with quid pro quo over a solid relationship's lifetime.

What is Lifetime Value?

Traditionally, companies have measured success through profit and loss statements. This approach captures revenue factors of summarized costs and expenses, and determines a bottom line: net income.

While the P&L continues to be the common approach, measurement processes have been changing over time: Corporations are looking to strengthen profitability measurements to translate the activities and values of the past into future - or lifetime - calculations.

Lifetime values are estimated by calculating the "present value" of objects, such as customers, accounts, products, cash flows, households and channels, as well as estimating the value of the object in the future. The process of calculating the present value of the current object is referred to as the Net Present Value. The process of determining the current value of the object in the future is referred to as the Future Value. Both of these components are used to indicate the Lifetime Value of any object. In the case of me and the guy who flew past me on the interstate, we're customers, and the value of our relationships with the manufacturer should be based on intelligence about out our specific behaviors and habits. Read more at http://www.teradata.com/t/go.aspx/?id=35132

But too often, hundreds or even many thousands of folks are lumped into categories and offered similar relationships even though we may have little in common. We're really talking about segmented or mass marketing and its relation to product development, product presentation and service offerings.

But the bigger the "mass or large-segment view" of customer relationships, the more contradictory resulting activity may be to developing strong lifetime value. For example, when some companies sell a large number of service contracts, profit actually may be eroded over time. An example: A cell phone organization sells 5,000 service contracts via a distributor in a particular region. Sounds great, right? But let's also say the local distributor subsequently steps out of the picture after offering 80 percent off on service to sell a high volume of new clients and get its commissions. In the end, that's not a great deal for the cell communications enterprise.

Banks, too, often look at long-term value in skewed light. Fees, for example, are almost always based on summarized numbers and don't include the actual cost of servicing individual accounts. Another example is in the world of travel. These companies tend to base decisions on a traveler's miles, but ignore things like seat-change tendencies and the number of bags an individual might predictably bring along. In both cases, certain patrons might appear profitable when they are in fact a drain - and vice versa. In both cases, the data flows not from the bottom up, but from as close to the bottom as an organization cares to get.

In the end, consider this. Would your company change its product offerings, costs, service contracts, fees, etc. based on whether or not a specific customer is accurately understood:

• Highly profitable?
• Medium?
• Low?
• Below zero - actually costing money to maintain?

Well, of course: YES ! ...And more and more firms are getting it right. Many customers are, at best, only marginally profitable and a disproportionate share of profit comes from a relative handful of relationships. Identifying and catering to them is a vital task. The trick is to use your data warehouse and business intelligence to know who's who and act accordingly to optimize crucial data. Also read: "The New Economic Opportunity for Business - Creating Increased Profitability through CRM."

Optimizing Relationships

A company optimizes its relationships by understanding what its individual customer's value is and then responding relevantly and effectively. The intelligence required to do this comes from the vast data that pumps through the enterprise.

Analytical CRM makes this intelligence "actionable." It involves tracking and evaluating data, examining complex patterns and trends. It expands on traditional data mining by applying statistical and reporting techniques and tools to information culled from customer contacts - often within seconds or minutes of the customer interaction - referred to as real-time analytics. It includes segmentation studies, customer migration analysis, cross- and up-sell analysis, new customer models, customer contact optimization, merchandising analysis, customer attrition and churn models, credit-risk scoring and the kind of lifetime value modeling we've been talking about. All told, this allows for customer-specific planning and action.

The problem, though, is that most marketers offer and promote to customers based on current value. But customer value changes over time. With advanced CRM analytics, a company is capable of predicting which direction and how quickly specific customers can reasonably be expected to move. A company can then take action to modify customer movement in a mutually satisfying direction. Customer migration analysis, for instance, can help companies better communicate and market to their customers in ways that move them up the value chain. With advanced CRM analytics, marketers and business analysts can:

• Segment customers by business value and perform detailed customer value analysis
• Perform a marketing influencers' analysis to identify which customers can be influenced in their value migration
• Make accurate assessments of each customer's affinity to a message, timing, your product or your services
• Manage frequency of customer contact and integrate event-based action
• Build/Use a knowledge system that encompasses continuous learning and abilities to derive value from customer relationships by "knowing" the lifecycle, business cycles, project affinities, payment actions and satisfaction criteria.

Of course, it is critical that your systems capture and centralize data streams across all channels and customer touch points - so that the marketing knowledge base delivers an holistic and integrated view of customers. An holistic view includes everything - customer transactions, interactions, service history, profiles, interactive survey data, click-stream/ browsing behavior (from tracking systems), references, demographics, psychographics and in fact all available and useful data surrounding that customer. This includes data from every department - and from outside your business in some cases.

Based on an holistic approach, your company's different departments - sales, marketing, service, finance, and operations - can conduct business sharing the same view of each customer. As a result, each individual customer experience with the company is consistent - and customer equity can be more effectively managed and measured. Read this article to get some ideas and cases: "Accentuating Profitability for Increased Shareholder Value: How Analytical CRM Drives Customer Equity."

Driving Realities

Perhaps I'm cynical to think that I and the driver of that oh-so-similar car (save its traveling way too fast during holiday time) weren't "understood" as individuals when we made our purchases or signed those service agreements or even threatened to take our business elsewhere. In the end, though, as a consumer that got what I wanted for the price I wanted to pay, it's all okay with me. Whether or not the company took a close enough look at me and took action to build a lifetime relationship is their business.

Ron Swift is a visionary, strategist, consultant and author. As part of the Teradata executive team he provides insight and direction to many clients. His column appears on an ongoing basis in Business Management Report. He can be reached at ron.swift@teradata-ncr.com. His highly-rated book, Accelerating Customer Relationships, can be purchased at Amazon.com and the audio summary version at Audio-Tech.