About the Course
The goal of this course is to give the course participant a firm understanding of what customer loyalty is, and how to quantify the cost and benefits associated with customer loyalty in order to create shareholder value. As you go through the course, we will discuss how customer loyalty can be enhanced and how to properly measure the quantitative value of a customer. We will describe how to evaluate initiatives that seek to maximize customer loyalty, and finally, we will discuss how to create an incentive compensation plan that will reward the economic value attained through the adoption of a customer- centric program of operations.
The course is divided into five chapters. The first chapter of the course, entitled Introduction to Customer Loyalty, will discuss why customer loyalty is so important to the financial well-being of a company, and how small changes in customer retention rates can have a profound impact on customer profitability. In addition, we will discuss in detail the five factors that cause loyal customers to be more profitable and valuable to a company over time.
In the second chapter, entitled Quantifying Customer Value, we will address the issue of how to properly value customers. Our discussion will describe why net income, the traditional means of business quantification, is a flawed measurement tool to use for that purpose. We will present the three main shortcomings of net income, and then describe how Economic Profit is a superior metric to use when quantifying customer profitability and value. The Economic Profit metric will be disaggregated into its component parts (Operating Flow and Invested Capital), and a detailed discussion will describe how traditional financial statements can be used to create an Economic Profit metric. Finally, we will discuss the importance of cost of capital to value creation, and the measurement of the debt and equity components of cost of capital.
The third chapter, entitled Customer Segmentation and Profitability, deals with the ways in which a company can reconfigure its business operations to put greater emphasis on customer segments. Actual examples from the business world will be used to illustrate the customer segment concepts presented here. We will also illustrate how the concept of Economic Profit can be used to create customer profitability statements. In that regard, we will describe how operating inflows and outflows are directly attributed, semi-directly attributed, or allocated to each customer. We will also discuss how to create a Customer Value Hierarchy, and how this tool can aid a company in assessing which of its customers create value and which do not. We will also discuss techniques to improve customer profitability at whatever level it currently exists within the company.
In the fourth chapter, entitled Elements of Customer Loyalty, we discuss what factors (loyalty elements) create loyal customers. We describe how to create a Customer Loyalty Matrix, which contains a comparison of a company’s most valuable customers (using Economic Profit) with the various loyalty elements that may cause those customers to be loyal to the company. We further discuss how to create a Customer Loyalty Matrix that delineates which customer loyalty element is most valuable to each customer, and how to create a Customer Loyalty Matrix that rank orders customer loyalty elements (from most to least valuable) for each customer. Finally, we present a methodology for evaluating customer loyalty investments so that a company can understand which investments are likely to lead to shareholder value creation.
The fifth chapter, entitled Customer Loyalty and Incentive Compensation, describes the need to link customer loyalty to incentive compensation so that employees within a company a rewarded for the achievement of customer loyalty. The kinds of factors that make an incentive compensation plan an effective motivator are discussed, and an actual incentive compensation plan is designed and analyzed. The concepts of risk as well as market expectations are incorporated into the plan, and a methodology of applying the plan to customer segments is presented.
Who Should Take This Tutorial
Chief Executive Officers
Chief Financial Officers