Brand Is Dead

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20/09/2005

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essential customer genius

by Clive Humby

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17/12/2004

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A true understanding of brand value should be at the heart of every organisation. It should inform every element of strategic decision making from product development to customer service initiatives. But traditional measurements of brand value are fundamentally flawed and marketing mistakes are endemic across every business sector, argues Clive Humby in this challenging but accessible look at where so many organisations are going wrong. ‘Brand is dead, long live the Customer’ offers a new way of measuring brand value. It is an approach based on insight driven by customer behaviour rather than outdated and irrelevant qualitative measures. Measuring real customer behaviour through buying patterns, argues Humby, is the only way organisations can create an accurate brand measurement that reflects the three cornerstones of brand value: contribution, commitment and championing. Clive Humby is one of the major influences behind the spectacular success of the Tesco Clubcard and a world-renowned expert in challenging accepted marketing ‘wisdom’. In this book he demonstrates clearly how widespread misconceptions, a sustained focus on the non-existent ‘average’ customer and a refusal to accept that marketing can have negative as well as positive effects is undermining not just brand but corporate value. Despite a decade of one-to-one marketing hype, Humby challenges the persistent commitment to mass mailings and ill thought-out call centre investments that fail to boost customer satisfaction. ‘Brand is dead, long live the Customer’ – explains the dangers inherent in traditional measurements of brand value – reveals the value of measuring the customer to achieve a brand understanding that is both accurate and truly representative of a business – develops a methodology for using this new brand measurement to support strategic decision making. As market-leading businesses see years of brand value eroded almost overnight, it is clear that traditional marketing is no longer working. For any business looking to maximise its marketing, product development and customer service spend, it is time to tear up the rulebook.

Clive Humby, Chairman

Clive works with dunnhumby’s clients on the strategic issues that affect their businesses and on the systems and strategy of the company itself. He is also leading the company’s work in the development of innovative media measurement techniques. Co-author of Scoring Points, the compelling story behind Tesco’s phenomenally successful loyalty scheme, Clive travels the world advising organisations how to win and sustain long-term competitive advantage by linking continuous understanding of customers with relevant responses.

Brand is dead, long live the Customer* An essential guide for organisations who want to understand their customers and take the guesswork out of marketing.

by

Clive Humby

* Yes, we know brand isn’t really dead – but its life is in jeopardy in organisations that pay more attention to brand image than customer behaviour.

© dunnhumby Limited 2005 All rights reserved. Except for the quotation of short passages for the purposes of criticism and review, or as otherwise permitted under the Copyright, Designs and Patents Act 1988, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any other form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of dunnhumby Limited. The right of Clive Humby to be identified as author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1998. dunnhumby Limited is not connected in any way with, or in any way endorsed by, any of the companies whose products are listed following. Any registered trademarks used are acknowledged and recognised as being the property of the organisations to which they belong. Fable by Suzanne Cadisch Illustrations by Neil Chapman, Beehive Illustration, 42A Cricklade Street, Cirencester, Gloucestershire GL7 1JH, UK Designed and produced by Information Technology PR Limited, Premier House, Gogmore Lane, Chertsey, Surrey KT16 9AP http://www.itpr.co.uk Typeset and printed by Infotype Ltd, Eynsham, Oxford, UK

but first …….

A Tale of Two Kings A fable for business today

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A TALE OF TWO KINGS

A FABLE FOR BUSINESS TODAY

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nce upon a time, in a faraway land, there lived a King whose reign was as untroubled as his father’s, his grandfather’s and his great-grandfather’s before him. Like his ancestors, King Talkandtell followed the Royal Book of Rules for Contentment in the Kingdom, which had guided his family for generations. The King was popular with his subjects. He was clever and strong, he looked after them and he used their taxes well. Once a year he issued a special proclamation to spread goodwill across the land. “Hear ye! Hear ye!” his heralds would trumpet. “King Talkandtell hereby decrees that for this month of June there shall be no taxes payable to the Crown!”

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Or they would announce: “Hear ye! Hear ye! King Talkandtell hereby decrees that from this day forth, the last week of September shall be a public holiday.” Or they would declare: “Hear ye! Hear ye! King Talkandtell hereby bestows upon every subject in the land the right to gather fallen apples from the Royal Orchards.” King Talkandtell’s courtiers told him how clever he was and how his people loved him for his bountiful ways. Sometimes they came up with new ideas for keeping the people contented. “Your subjects are a simple people,” they told the King. “They will love you more if you double the size of the cakes baked in the Royal Ovens but charge the same price for them.” And sure enough, everyone who ate cake loved the King even more. They told the Royal Baker as much whenever they visited the Royal Bakery. So the King decided to distribute a free cake to every household in the land to show his subjects how much he cared for each and every one of them.

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“I am doing a grand job here,” thought King Talkandtell, “just as my father, my grandfather and my great-grandfather did before me. They would surely be proud of how I have followed the Royal Book of Rules to keep this kingdom happy and prosperous.” But not everybody in the kingdom was quite as contented as the King’s courtiers led him to believe. There were some people who would have preferred their tax holiday at Christmas instead of in June. There were others who would have liked to pay a bit less all year round. Not all the King’s subjects wanted a week off in September either. Some wanted time to play in the snows of deep winter and others wanted to bask in the high summer sunshine. Then there were people who couldn’t get to a Royal orchard to collect fallen apples and people who always ate pears. And all over the land there were people who just didn’t like cake. But King Talkandtell did not know any of this. He sat on his throne in the Royal Palace, surrounded by his courtiers who told him: “All the people we know are very happy to live in a land ruled by such a great and generous King.” And the taxes flowed in to the Royal Counting House and King Talkandtell supposed that all was well in his kingdom.

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ar to the north, across the valley and over the lake, lay another peaceful land ruled by King Talkandtell’s distant cousin King Askandhear. He too was popular with his subjects. He was wise and strong, he looked after them and he used their taxes well. King Askandhear also had a copy of his family’s Royal Book of Rules for Contentment in the Kingdom but he kept it locked away in the Royal Archives. He had vowed never to look at it again after making a Royal Tour of his lands soon after he acceded to the throne. What happened was this. The journey was long and arduous. It took King Askandhear to the farthest reaches of the land; to the gentle mountain people of the north, to the wealthy lakeside settlers of the south, to the fierce cave dwellers of the east and to the poor forest folk of the west.

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And King Askandhear discovered that his subjects were very different from one another and lived their lives in different ways. “If I am going to keep my subjects happy,” thought wise King Askandhear, “I cannot treat them as one people. I must find out what they want me to do for them before I issue any proclamations to spread goodwill across the land.” So he locked away the Royal Book of Rules and thought instead about a Plan for Pleasing the People. This is what he did. Each month, King Askandhear sent heralds into every corner of the land to find out if anything was troubling his subjects and what would make them happy. When the heralds came back to the Palace, King Askandhear listened to their reports carefully. Then he sent them back to the mountains, to the lake, to the caves and to the forest with Royal Messages and Royal Gifts for his subjects.

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But the messages and gifts he sent the mountain people were different from the messages and gifts he sent the lakeside settlers. And the messages and gifts he sent the cave dwellers were different from the messages and gifts he sent the forest folk. What King Askandhear did, made his subjects very happy. They told the heralds: “Truly, our King is doing a grand job keeping this kingdom happy and prosperous. He shows his loyalty to us with these thoughtful acts and gifts and he deserves our loyalty in return. “We are happy to live in a land ruled by a King who so clearly cares about us and understands our lives.” And the taxes flowed into the Royal Counting House and King Askandhear knew that all was well in his kingdom.

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A FABLE FOR BUSINESS TODAY

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ar to the south, over the lake and across the valley, in the land ruled by King Talkandtell, the Royal Treasurer was scratching his head. It was his job to keep every chamber of the Royal Counting House filled floor to ceiling with the King’s money but, in one or two chambers, gaps had started to appear between the pile and the roof. “How strange,” he thought. “Perhaps I have stacked the money the wrong way up.” So he spent a long time re-stacking the money but found that if anything the gaps seemed a little bigger when he had finished. Eventually the Royal Treasurer went to the King with the only explanation he could find. “Your Highness,” he said. “It seems that the Royal Counting House is receiving less in taxes than it is costing to run the Kingdom. You must act to stop the piles of money getting any smaller.”

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King Talkandtell was not worried. He opened the Royal Book of Rules for Contentment in the Kingdom to see what his father, his grandfather and his great grandfather before him would have done and he summoned the Magic Man of Mystic Mountain to the Palace. “Tell me what I can do to make my people happy to live here and happy to pay their taxes so the piles of money I need to run my Kingdom don’t get any smaller,” he commanded the Magic Man. So the Magic Man went back to Mystic Mountain to perform the ancient Rite of Riches and conjure up a vision of how the King could make his people happier. A month later he returned to the Palace to tell the King about his revelation.

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“You must do three things Your Highness,” he said. “First, you must give your subjects a two week holiday in September. Secondly, you must build new Royal Ovens to bake Royal Biscuits as well as your famous cakes. And thirdly, you must let the people pick apples from the trees in the Royal Orchards.” “That will cost the Crown a great deal of money,” thought King Talkandtell. “But if the ancient Rite of Riches has revealed that this is what I must do to make the people love me more and be content to pay their taxes, then so be it.” And King Talkandtell issued new proclamations giving his subjects a two week holiday in September, announcing the new Royal Biscuits and bestowing the right to pick apples in the Royal Orchards. Sitting on his throne in the Royal Palace, King Talkandtell basked in the praise of his courtiers. They told him: “All the people we know are even happier to be living in a land ruled by such a great and generous King.”

A FABLE FOR BUSINESS TODAY

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ne year later the Royal Treasurer again went to see the King. This time he was in great distress. He was wringing his hands and weeping as he told King Talkandtell: “I have grave news Your Majesty. One entire chamber in the Royal Counting House is EMPTY! “The vision, as revealed to the Magic Man of Mystic Mountain, has not produced the results that you were promised.” What had happened was this. In the north, close to the lake, lay a tiny fishing village, far, far away from the Royal Orchards and further still from the Royal Bakery. That year the catches had been poor and the people were struggling to make ends meet.

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One day, the villagers had an idea. “If we move to the other side of the lake where the fishing is better our lives will certainly improve,” they reasoned. “King Talkandtell knows so little about us we will surely not be missed.” So they packed up their homes, loaded their boats and sailed to the land across the lake. By giving his subjects a two-week holiday in September the King had made it possible for more of his people to visit distant lands. Some liked what they found and decided not to return to the land of King Talkandtell.

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And by allowing everyone to pick free apples from the trees in the Royal Orchards, the King had upset one of his oldest friends, Lord Corecore, the richest apple-grower in the land whose taxes filled one whole chamber of the Royal Counting House. Lord Corecore decided that he didn’t like King Talkandtell much any more and he no longer wanted to live in a land where nobody would buy his apples. So he packed up his household and moved north, across the valley and over the lake, to settle in the land of King Askandhear where he told anyone who would listen that King Talkandtell had lost his way. And that was when the first tiny gap appeared between the top of one of King Talkandtell’s piles of money and the roof of the chamber in the Royal Counting House. All along the borders of the kingdom – far, far away from the Royal Orchards and further still from the Royal Bakery – lay other poor villages. Here too the people believed they were of little value to their King and one by one they left the land of King Talkandtell to seek a better life elsewhere.

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Sitting on his throne in the Royal Palace surrounded by courtiers who knew only the people living in the heart of the kingdom, King Talkandtell did not know that his subjects in the furthest flung reaches had been leaving the land for pastures new. He did not know his proclamations to spread goodwill across the land were of little worth to these villagers. And he did not know that they felt of little value to the kingdom. But it was worse than that. Some of the measures the King had taken to keep the people happy, as revealed to the Magic Man of Mystic Mountain through the ancient Rite of Riches, had started to work against him. And King Talkandtell didn’t know about that either.

A FABLE FOR BUSINESS TODAY

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And that was when the Royal Treasurer discovered that one whole chamber in the Royal Counting House was empty. King Talkandtell once again summoned the Magic Man of Mystic Mountain to the Palace. “Why are my subjects deserting me?” he demanded. “Who is leaving my kingdom for pastures new? What can I do to stop them?” Once again the Magic Man returned to Mystic Mountain to perform the ancient Rite of Riches, hoping it would reveal the answers to the King’s questions. Again and again he performed the ritual but the mists would not clear and the revelation the King desired would not come into focus. Finally he was forced to admit to the King: “Your Highness, my powers have failed me. I cannot answer the first of your questions, nor the second.

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“As for the third, the ancient Rite of Riches, as practised by my father, my grandfather and my great-grandfather before me, has shown me a tried and trusted path, as followed by your father, your grandfather and your great-grandfather before you, to ensure contentment in the kingdom. “You must declare the whole of September a national holiday, you must bake yet more biscuits and you must start to grow pears as well as apples in the Royal Orchards.” But King Talkandtell had lost his faith in the Magic Man of Mystic Mountain. And he was worried that there was not enough money left in the Royal Counting House to put into action yet another plan that had served his father, his grandfather and his great-grandfather before him but which might fail him.

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“Where have I gone wrong?” he thought. “Where have I gone wrong? “Why is it that far to the north, across the valley and over the lake, in the land of King Askandhear, the Royal Counting House is bursting at the seams? “What does my cousin do to make his people so happy? “What do my subjects like so much about his kingdom that they wish to live there instead of remaining loyal to me?” And being a clever King, he decided to find out…………. THE END

Brand is dead, long live the Customer Contents Fallacies and failures

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The customer is king

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No such thing as the average customer

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Different customers deliver different value

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Different customers require different approaches

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Negative outcomes matter

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It’s time to tear up the rulebook

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Think about it

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Successful strategies are based on facts not supposition.

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Fallacies and failures Assessment of brand value determines almost every decision in business. It governs investment choices and strategy from the ground up. So measurement of brand value has to be spot on. If it is skewed then decisions based on it will be flawed. Imagine for a moment that you are a small biscuit manufacturer. People buy your biscuits so you know your brand has value. You decide to build a second factory. But what exactly is the value of your brand? If you knew most of your customers were about to switch to cake would you build that second biscuit factory? Of course not. You would build a cake factory. The value of your brand is rooted squarely in your customers. Your decision was wrong because you didn’t know what they wanted. You can only be sure that strategic business decisions are correct if your measurement of brand value is accurate. And that value is revealed not in last year’s biscuit sales, not in the number of factories you have or the size of your workforce and certainly not by any disinterested focus group asked about their theoretical biscuit-eating habits. It is revealed in the actual, real-time behaviour of your customers today. Gauge brand value any other way and those all-important business decisions, from product development to customer service initiatives, will be based on supposition rather than fact. Brand value is determined by customers. It is their behaviour – contribution, commitment and championing – that underpins that value. Customer assets are a brand’s assets. And a business that doesn’t fully understand what its customers are thinking and doing, is operating with one hand tied behind its back.

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Effective marketing is a response to customer insight not a conjuring trick.

FALLACIES AND FAILURES

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Marketing mistakes Effective marketing strategy can’t be conjured out of thin air. It has to be a response to customer insight. You need to know your customers, not make educated guesses about them. The key to maintaining brand value is knowing not only what they want but what they don’t want. Too much marketing activity puts the cart before the horse. It looks at the business proposition and tries to sell it in the marketplace. It takes the biscuits and markets them, even if the people don’t want biscuits any more. Doesn’t it make more sense to find out that what they really want is cake and focus your energy on making that instead?

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Focus on only one part of the picture and your perception will be distorted.

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Measuring the wrong things Once you realise that value is actually rooted in real customer behaviour, the flaws in traditional measurements of an organisation’s worth are plain to see. You can’t know for sure that the assets of a business are going to generate the same earnings in the future. If its customers are disaffected those assets could prove relatively worthless. And why base any view – or decision come to that – on ‘intelligence’ garnered from a focus group? Think about it. You gather together a bunch of people who might or might not be interested in your product or service. But they’re being paid to say something so they take a view. To base what might be a significant investment decision on what they say simply makes no sense. You need to get inside the heads of the people who really matter – your customers. Say you’re a supermarket and you are thinking about extending your range of organic produce. Obviously, your goal is to increase revenue. Ask a focus group of non-customers what they think and, whatever they tell you, ask yourself why that is relevant to your business? You might win a few new customers by increasing brand awareness but it’s a drop in the ocean. But ask the people who are already buying organic produce from you and you will find out whether they would buy more if it was available and therefore whether extending the range would actually increase revenue.

Undermining business success If you measure the wrong things then your evaluation of your true worth will be inaccurate. And a distorted perception of your business means you will make mistakes, many of them in marketing.

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At best your marketing activity is likely to be misdirected – at worst it will be actively damaging. There is more at risk here than cash and missed opportunities. Pushing the wrong message to the wrong people at the wrong time won’t simply fail to yield a return, it can undermine your entire business. But organisations persist in overlooking negative outcomes of marketing activity. Did that mass mailing switch some customers off altogether? Is your emphasis on brand image over pricing pushing others into a competitor’s camp? Are you ploughing money into customer service tactics that pander to the vocal few while the less-vocal many leave quietly by the back door? Without understanding how different customers perceive the brand, an organisation cannot develop winning strategies that boost brand value and deliver a great return on the marketing, customer service and operational budgets. How many organisations know how the top 20% of customers feel about the brand? The 20% of customers, that is, who contribute 80% of revenue and over 100% of profit. Is the customer satisfaction survey looking specifically at these customers? Are their responses given a higher weighting? No? Then why on earth not? Their behaviour contributes directly to the bottom line success of the organisation so surely it makes sense to know just how the current product, promotion and price mix is making them behave. Marketing activity that damages brand, damages corporate value. And there are five fallacies about marketing that help do just that: 1. 2. 3. 4. 5.

The brand is king Brand assets are distinct from customer assets There is an average customer Only positive outcomes matter Marketing campaigns can be undertaken in isolation

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A marketing strategy based on these fallacies will fail – and ultimately so will the business. It’s time to tear up the rulebook. “In the coming decade marketing will be re-engineered from A to Z. There is little doubt that markets and marketing will operate on quite different principles in the early years of the 21st century.” PHILIP KOTLER

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The winning strategy puts customers on the pedestal.

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The Customer is king While many organisations pay lip service to the notion that the customer is king, all too often it is a philosophy that only the customer service departments actually live by. Elsewhere the emphasis is on brand image. What is brand image? Is it right? Exactly how is it characterised? Should it be honed in this direction or tweaked in that? The highly-polished brand is on the pedestal and customers are expected to pay homage. Enthroned and revered internally, brand image rules every aspect of marketing activity. But it is the customers who should be on that pedestal. It is their contribution, commitment and championing that the brand is aiming to win. Without them, the brand has no real value. Every organisation spends time and money measuring brand value to justify marketing initiatives and support strategic planning. But how often is that value expressed in terms of the customer? Brand assets and customer assets are one and the same thing. • A brand is described as ‘premium’ – that relates to the willingness of the customer to pay more for a specific lifestyle. • A brand has ‘longevity’ – customers are with the brand for life, resisting competitive offers. • A brand engenders ‘trust’ – its customers are a ready market for new products or ranges. Some organisations have few financial assets apart from their customers. Buy the business and you are, in effect, buying its customers.

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And brand value can change fast. Customers, however loyal at any given moment, are essentially fickle. They make rapid decisions. They won’t stay loyal if they perceive any dilution of a brand’s promises about cost or quality. So brand value cannot be aligned with customer behaviour in the past. It’s what is happening now and what will happen in the future that count. It is customers, not brands that drive future revenue. Every choice a business makes in terms of product development, pricing, promotion and customer service has an impact on its customer assets. Why then does traditional marketing activity focus so heavily on The Brand? This emphasis is entirely at odds with what seems to be widespread acceptance of the value of personalised customer communications. Marketing departments must adopt the mantra of their customer service colleagues – ‘The Customer is King’. Look at what happens when a leading brand discounts price for example. Sales go up yes. But the big picture is far more complicated than that – and it’s all about the different behaviour of different customers. • Customers who normally buy Own Label goods trade up to the premium brand at this new affordable price. • Customers of a major competitor switch allegiance to buy this brand at deep discount – they could remain customers or churn back when prices return to normal. • Loyal customers stock up on their favourite brand at a great price. • Customers who would never normally consider this brand are tempted to try it. • Premium customers are put off by deep discounting, perceiving the brand to have gone down market. Now imagine if you knew which customers had reacted in what way. Your next piece of marketing could be targeted so much more effectively to capitalise on advantages won and minimise potential for any negative outcome.

THE CUSTOMER IS KING

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The big picture is all about customer behaviour. It is customers, not the brand, who must be at the epicentre of all marketing activity. “Marketing as we have known it for the last 100 years has been all about helping sellers to sell. Now a new and very different win-win system of buyer-centric marketing is emerging.” ALAN MITCHELL

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All customers are different.

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No such thing as the average customer Organisations do of course look at their customers when assessing brand value and devising business strategies. They look at satisfaction, affinity, preferences, bonding – all vital pieces of the jigsaw. There’s just one problem. These measurements treat all customers as one large homogenous group. Every one of them is based on the concept of the average customer. Finance looks at ‘profit per customer’. Most marketing initiatives assume every customer has the same emotional response to the brand. Quite clearly, in the real world, the ‘average customer’ doesn’t actually exist – or at best forms only the same tiny fraction of the customer base as any other handful of individuals whose profit contribution and feelings about the brand are identical. Individual customers are just that – individuals. Each one is a brand asset – but each has a different value. Some may be high spenders but liable to switch loyalties at any time. Others may contribute little in financial terms but may champion the brand at every opportunity. It’s a rich, endlessly diverse mix. And just as different customers contribute different value, they also respond to different initiatives. So why do organisations base evaluations and strategies on the non-existent ‘average customer’? Because to do anything else seems too complicated and costly. But what is it costing to ignore the key differences between customer groups? In opportunities lost alone, the cost is high. It is higher still when you take into account the negative impact of certain pieces of marketing activity on certain segments of the customer base. Different customers will have different perceptions of the brand and therefore need different treatment. A business that ignores that will never extract maximum value from its customers.

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Some customers are worth far more than others.

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Different customers deliver different value The Pareto Principle maintains that around 80% of revenue is derived from 20% of customers. The exact ratio will vary of course but the principle that a small percentage of customers contributes a disproportionate amount of revenue is widely accepted. All the more reason then to distinguish between one customer and another. Just how important to your business is the customer you risk alienating by a particular piece of marketing? How much do you want to invest in a group of customers whose contribution is far less valuable? The Pareto Principle also states that 80% of variable customer costs come from 20% of customers (clearly not the same 20% who are responsible for the biggest proportion of revenue). Investment decisions based on the non-existent ‘average customer’ have foundations of sand, as graphically illustrated by the example of the call centre. The business argument for setting up a call centre might run like this. If the ‘average customer’ is worth £300 per year and the call centre results in an annual saving of £20 per customer, then ‘average customer’ value is boosted to £320 per year. But each customer isn’t worth £300. The few truly profitable customers are worth significantly more than that and are likely to be low level users of the call centre. It is the least profitable customers who use the call centre the most. Take a utility company. Only one customer in 30 will contact its call centre each year but these customers will call four, five, even ten times asking for payment to be deferred, arguing over accuracy, insisting a new bill is issued because the automated reading is out by a few units. The behaviour of these customers – who are likely to be the customers with the smallest bills – adds significantly to the cost of running the business. So the call centre has been set up to service perhaps 20% of revenue. Its creation may reduce the cost per customer service

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call but it certainly won’t deliver the value expected by the board as promised by the ‘average customer’ argument. Investment decisions based on the ‘average customer’ concept are quite simply unsound.

Contribution is not the only measurement Customers generate income, of course they do. But an individual’s true value to your business cannot be measured in financial contribution alone. How loyal is one individual against another? A relatively lowspender who sticks with you in the face of deep discounting by a competitor might prove more valuable in the long term than a high-spending customer who chops and changes allegiance at the drop of a hat. What about the low spender who is ultra-receptive to a new line simply because it bears the name of your brand, the name he trusts? Or the low-spender who recommends your brand at every opportunity? It’s that big picture again. All these values count. And they need to be measured. Imagine if you knew where individual customers fell in this dynamic. How effectively could you target your marketing then?

The Customer Value Cube Customer value is three dimensional – contribution, commitment and championing. Contribution is the profit delivered by each customer. But that profit is dependent on both revenue and cost so it is how a customer behaves that determines the bottom line contribution. And contribution certainly doesn’t reflect loyalty. Commitment determines future income to be derived from a customer. For brands in a fiercely competitive world awash with new product development and promotions, commitment is a key

DIFFERENT CUSTOMERS DELIVER DIFFERENT VALUE

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measure since it indicates ability to retain market share against strong promotion or discounting by rival brands. The long-term value of a customer’s commitment may well exceed his sales value. This measure is all about loyalty. If you know who your most committed customers are then you can take steps both to secure that loyalty and to exploit it. Championing is the generation of recommendation, active support and trust.

value

through

Low-spending ambassadors might recruit higher value customers. And brand champions are open to cross-selling and brand extensions. Targeting a new line at your brand champions is relatively low-risk and requires less marketing investment. Knowing how many customers require little marketing effort to change behaviour – compared with the number likely to be tougher nuts to crack – is a vital key to marketing success. Imagine a three-dimensional cube. Its three axes measure contribution, commitment and championing. A customer’s position within the cube is determined by those three things.

Customer Value Cube

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Obviously, a brand’s customers will be widely distributed within the Customer Value Cube. It is this distribution that reveals a brand’s true strength and value. The relative importance of the different axes to your organisation will depend on a number of factors. For example, how do customers choose between brands in your field? A utility company or a mobile phone network for instance is likely to be an exclusive supplier for a period of time whereas customers of, say, a supermarket will probably use different organisations concurrently. What is the brand experience? Is it mostly about customer service, performance of the product, or image? A premium car brand will focus more on commitment and championing while a biscuit manufacturer will look for contribution and commitment. Whatever the emphasis, understanding where different groups of customers fall within the cube enables highly-targeted, and therefore highly-effective, marketing. It shows you which types of customers need what type of attention. But it is only looking at actual customer activity that reveals this. If you can pinpoint a group of customers that buys a product on promotion but not at full price, you have highlighted a commitment issue – and the people you need to tackle. Identifying customers who have bought brand extensions in the past offers exciting, low-risk marketing opportunities. And if you can see which customers always buy a product whatever the price, you might choose to direct marketing spend away from them. Plotting groups of customers within the cube reveals challenges as well as opportunities. If you can see most of your champions are high-spenders, how can you improve your profile among the low-spenders? But if you don’t know which customers deliver what value and in what proportion, you won’t know this is an area for action.

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Any company looking to maximise the lifetime value of customers needs to understand each of the three customer asset measurements – contribution, commitment and championing. And it needs to monitor those shifting measurements not just today, not just this year, but always.

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Different customers respond to different initiatives.

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Different customers require different approaches “What creates loyalty is how much we understand your life and what we do about it that helps your life.” SIR TERRY LEAHY

When it comes to marketing, one size most definitely does not fit all. Different characteristics of the brand need to be emphasised to different groups of customers. Different customers respond to different initiatives. And negative outcomes matter. You figure out who needs what from you by breaking down your customer base into truly meaningful segments. Segmentation is the key to all this customer insight.

Effective segmentation First of all you need to look at existing, actual customer behaviour. Then you can start putting customers into distinctively different groups – groups that are dictated by behaviour, not by simple demographics. Next you begin looking at how different groups respond to different initiatives. Measuring that response is the key to being able to target your marketing activity with ever-increasing accuracy. It’s an on-going process of fine-tuning. With the measurement tools in place, you never stop learning more about your customers. You never stop honing the relevance of your offer to specific groups.

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You can see how a piece of direct marketing or a particular innovation enhances commitment in one segment but leaves another segment cold – or worse. Pretty soon you can tailor marketing strategies in ways that make your customers feel as if you really do know them personally. There are four key rules to segmentation: i. ii. iii. iv.

Segments must be based on real customer behaviour They must be distinctive There mustn’t be too many of them The customers in any one segment must have enough in common

It is discovering similarities between customers that makes segmentation such a powerful tool. Effective segmentation offers insights that allow a business to exploit its strengths and address its weaknesses. It offers a means for measuring accurately the contribution, commitment and championing of different groups of customers. In short, it takes understanding to a whole new level. And that means decisions about customer service, product development and promotions will probably be right.

One size doesn’t fit all An excellent example of how detailed knowledge of customers offers an in-depth understanding of a customer service initiative is provided by Tesco’s ‘One in Front’ policy. ‘One in Front’ promises customers that if there is more than one person ahead of them in the queue, the store will open another checkout. But the initiative could easily have backfired if customers perceived it as costly and therefore likely to impact on prices, especially if they were used to having to queue in other stores. Tesco knew from customer research that busy, time-poor shoppers would welcome the move to cut queuing times. But

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it also knew that its more cost conscious customers would see it as an expensive policy and fear price hikes as a result. Crucial to the assessment of the initiative was one simple question. Was there a correlation between when time-poor customers were in the store and when queues were long? Again, detailed customer data provided the answer. Time-poor customers who would most value ‘One in Front’ shopped at the busiest times – Thursday nights, Friday nights and Saturdays – when the most price-sensitive customers were least likely to be in the store. Tesco therefore knew exactly how to use ‘One in Front’ for best results – apply the initiative at specific times to please one group of customers without alienating another.

Understand and predict Once you start accumulating real insights into actual customer behaviour, you begin to acquire a deep understanding of how different groups will react to different initiatives. Accurate analysis of customer data enables you to monitor positive and negative outcomes of marketing activity. Take the example of a television company that offers its customers unlimited tariff changes as part of the package. One low value customer uses this facility to change tariff each week depending on whether a particular football team is playing at home or away. This costs the company far more in administration than the customer offers in profit so the policy is changed to limit the number of tariff changes. But then another customer, who also likes to change tariff but still remains profitable, takes umbrage and goes to the competition. The change in marketing proposition has destroyed value. Understanding how your customers behave and why is the key to accurate predictions about the overall success of a marketing activity. Without it, you’re shooting in the dark.

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Does one negative result of marketing activity outweigh all the positives?

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Negative outcomes matter Misplaced marketing activity can undermine business success – a fact that is overlooked in many organisations. Take the airline club. A valuable frequent-flyer with ABC Air is awarded the perks of Gold membership, which makes him feel valued in return and boosts his commitment and loyalty to the brand. But then this customer has to make a series of trips to destinations not served by ABC. His temporary reduction in custom – which would have been revealed by an examination of the air miles he was continuing to collect – triggers downgrading of his club membership to Silver. This brand champion, whose business is still of high value to ABC, feels he has been pushed out of the club. His commitment to the airline plummets and he switches all flights to another carrier. ABC Air has lost value in every direction – contribution, commitment and championing. Better understanding of customer behaviour could have prevented that. When it comes to measuring the success of marketing initiatives, too many businesses focus only on the positive outcomes. But if one high-value customer leaves as a result of marketing activity, that might actually outweigh the benefits of the initiative in other groups. Take the example of a financial services company that bombards its customers with repeated offers for loans or credit cards. The marketing department is likely to deem as irrelevant the reaction of those customers who fail to respond.

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But it needs to know if this mass mailing is irritating some of those unresponsive customers to the point where it impacts commitment and championing. Has it prompted some customers to take their custom elsewhere? That’s the problem with defecting customers. They don’t just disappear. They become somebody else’s asset.

Measure what has not happened As well as measuring actual negative outcomes, organisations must look at what has not happened as a result of marketing activity. Segmentation is the key to that too. By tracking groups of similar customers over time you can see whether a specific marketing activity has done what it set out to do. The true value of a marketing initiative is revealed by three measurements: i. Has it affected the behaviour of the target customer group? ii. Has it changed the behaviour of any other segment? iii. Has it provoked a negative response anywhere within the business?

Campaigns cannot be undertaken in isolation For a marketing campaign to carry any guarantee of a net gain to the business, it has to be viewed as part of the big picture. Organisations must look at its potential impact – positive, negative and everything in between – on the business overall. Say for example a department store decides to sell-off its financial services division. It must take into consideration the role that financial services plays in customer perception of the company.

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But to do that it needs to know what value customers place on this element of the business. Will the sale make some feel disenfranchised and affect their contribution and commitment? Does the sell-off therefore risk damaging the company’s overall proposition? Making any business decision in isolation and without understanding its full consequences is extremely dangerous.

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Just because something worked in the past doesn’t mean it works today.

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It’s time to tear up the rulebook The ability to measure and demonstrate customer and brand value is becoming increasingly important in business today. Some companies are beginning to talk about different segments of the customer base in annual reports. City analysts are looking not only at increases in customer numbers but also at attrition. Boards are demanding ever-more accountability from their marketing departments. They want to see the value delivered by escalating marketing budgets. And they want that information presented in crystal-clear business language. Bring real customer behaviour into sharp focus and true brand value will be revealed. That information can then be used to drive pinpoint accurate marketing strategies, which will increase both brand and shareholder value. If you could retain an extra 5% of your most valuable customers and persuade them to buy 5% more and reduce the cost of acquiring new customers wouldn’t that make the board sit up and listen? When you segment your customers into meaningful groups you can target your spending, justify your decisions and measure your success. The ‘average customer’ does not exist. Organisations that continue to pursue him will continue to make bad decisions that waste money, dilute the brand and damage corporate value. Organisations that understand the Customer Value Cube will see the balance between contribution, commitment and championing within each segment and can make changes where they count. That sort of insight offers clear competitive advantage.

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It takes the guesswork out of marketing. Successful marketing isn’t an art – it’s a science, with creative bits around the edges.

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Think about it … • Does your organisation talk about customers as a generic group? • Can you identify your most valuable customers? • Do you know what they most value about you? • Do you know where their value to you lies in terms of contribution, commitment and championing? • Do you ever question how closely your offer is aligned with what your customers want? • Have you tried changing customer behaviour by changing your offer? • If you could talk to each and every one of your customers on a regular basis, what would you ask them? • Who are you rewarding in your business? Your brand and creative agencies? The people managing your customer relationships? Or your customers?

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Notes

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dunnhumby is an international marketing consultancy and services company that has developed revolutionary customer management and analysis techniques to drive powerful business strategies. The dunnhumby discipline is a combination of IT, data analysis, creative skills and business expertise that enables a client to create a relevant response derived from unprecedented insights into customer behaviour. dunnhumby’s clients include Tesco, Kroger, Gillette, P&G, GlaxoSmithKline, Mu¨ller, Nestle and AirMiles.

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A true understanding of brand value should be at the heart of every organisation. It should inform every element of strategic decision making from product development to customer service initiatives. But traditional measurements of brand value are fundamentally flawed and marketing mistakes are endemic across every business sector, argues Clive Humby in this challenging but accessible look at where so many organisations are going wrong. ‘Brand is dead, long live the Customer’ offers a new way of measuring brand value. It is an approach based on insight driven by customer behaviour rather than outdated and irrelevant qualitative measures. Measuring real customer behaviour through buying patterns, argues Humby, is the only way organisations can create an accurate brand measurement that reflects the three cornerstones of brand value: contribution, commitment and championing. Clive Humby is one of the major influences behind the spectacular success of the Tesco Clubcard and a world-renowned expert in challenging accepted marketing ‘wisdom’. In this book he demonstrates clearly how widespread misconceptions, a sustained focus on the non-existent ‘average’ customer and a refusal to accept that marketing can have negative as well as positive effects is undermining not just brand but corporate value. Despite a decade of one-to-one marketing hype, Humby challenges the persistent commitment to mass mailings and ill thought-out call centre investments that fail to boost customer satisfaction. ‘Brand is dead, long live the Customer’ – explains the dangers inherent in traditional measurements of brand value – reveals the value of measuring the customer to achieve a brand understanding that is both accurate and truly representative of a business – develops a methodology for using this new brand measurement to support strategic decision making. As market-leading businesses see years of brand value eroded almost overnight, it is clear that traditional marketing is no longer working. For any business looking to maximise its marketing, product development and customer service spend, it is time to tear up the rulebook.

Clive Humby, Chairman

Clive works with dunnhumby’s clients on the strategic issues that affect their businesses and on the systems and strategy of the company itself. He is also leading the company’s work in the development of innovative media measurement techniques. Co-author of Scoring Points, the compelling story behind Tesco’s phenomenally successful loyalty scheme, Clive travels the world advising organisations how to win and sustain long-term competitive advantage by linking continuous understanding of customers with relevant responses.