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Return on Relationship

The Key to Turning Customer Engagement into Organic Growth

SINCE THE TRADITIONAL CUSTOMER value proposition fails to tap the potential of what customers can bring to a company’s growth, the value proposition I’m describing in these pages provides a system not only for tapping customers’ hidden wealth but also for measuring it. Measurement is critical because just as you want to understand who your most profitable purchasing customers are, you’ll also want to understand who your most valuable advocates, influencers, and contributors (AICs) are. As we’ll see, you’re likely to find that only a few of your customer AICs are contributing the lion’s share of value—and that they aren’t necessarily who you think they are.

That’s the subject of this chapter. We’ll use a pragmatic, easily installed measurement system—based on the concept of return on relationship (ROR)—that will help focus your company on uncovering and realizing the full value of your customer AICs. But first I’ll illustrate how this works.

The Hidden Wealth in Your Midst

Let’s return to Catie, our rock star customer from chapter 1. Catie runs a small business, placing her in one of your most important markets, the small and medium business (SMB) market, which presents significant opportunities for growth for your firm.

Catie is not a particularly big revenue customer as far as your business model goes—she spends about $6,000 per year, and generates $2,400 in profit. But she’s a potential gold mine nonetheless. To begin with, she’s loyal, easy to service, not price sensitive, and, as a result, is solidly profitable—unlike many of your higher-revenue but short-term or difficult-to-work-with customers.

Much more significant, however, is her tremendous hidden wealth. She has a great story to tell about the value your firm provides to her business, typical of what you could be doing for many other businesses in this important market. She consistently selects “9” or “10” on Net Promoter Score (NPS) surveys, indicating that she would be highly likely to recommend your firm to a colleague or friend.

She participates in your online customer community and in other networks attractive to your business. The people who get to know her in these communities appear to respect and engage with her insights and opinions. People pay attention to, comment on, and click the links she provides when she posts or comments on community sites.

She’s been to a couple of your live events, and though she tends to say little unless asked, when she does answer, people listen and ask for more. After the events, she hangs around to answer questions from your company’s prospects, who are eager to learn from her. Indeed, many of them wind up becoming customers, and if you asked, they’d say Catie was an important reason why. Some would even say that without her influence, they wouldn’t have purchased.

Another thing about Catie: she’s quite engaged with members of her business network on social media. She keeps a blog, has active LinkedIn and Facebook pages along with a Twitter account, and frequently blogs, tweets, or comments on developments in her industry as well as profession. A straightforward analysis of her social media presence shows that she’s an influencer with attractive ties to excellent prospects for your firm’s products and services—many of whom you and your salespeople would love to connect with. Her network on LinkedIn in particular is enough to make your sales and marketing department drool.

Despite all this, your firm, like many firms, doesn’t engage with Catie to help market and sell your offerings. The truth is, you’re not even aware of her and many others like her. Despite saying quite plainly in NPS surveys that she’d be highly likely to recommend you, that information never makes it from your customer intelligence group to the right sales and marketing people, so Catie is never asked to provide a reference to help further or close a deal. Neither has she provided any referrals to your firm—primarily because no one has asked her to do so.

If you think this couldn’t happen at your firm, check out the story about Coleen Kaiser and SAP in chapter 3. Indeed, studies have shown that Catie is typical of customers who score high in NPS surveys: perhaps only 10 percent or so actually refer a colleague or friend who turns out to be a profitable customer.¹ Many more likely would do so if someone would just ask them in the right way.

One other thing about Catie: as you would discover if only your sales and marketing people were building a relationship with her, she’s quite ambitious and eager to promote her own stature in her profession, and she wants to extend her growing network of peer and industry relationships. She’s interested in overcoming her stage fright and speaking at industry events. She’d be wide open to collaborating on case studies, videos, white papers, interviews with the media, and whatever else could help her grow her network and build her reputation. She would love to tell her peers and customers the great things your firm and she are doing together—because that makes her look good too—if someone would just ask her to do it.

In short, Catie is a potential “rock star” advocate for your firm—the sort of customer who powers the growth of firms such as Salesforce.com, Amazon.com, Hitachi Data Systems, Facebook, and others. She can drive organic growth that “sticks” and bring in new customers who benefit immensely from the value you provide. Your firm could be engaging with her to build a remarkable new exchange of exceptional value, in which you work with her to make her an increasingly powerful evangelist for your firm while helping her build her network, her reputation, and her business. Firms that miss this opportunity—or undermine it by offering poorly disguised bribes to get their customers to advocate for them—are leaving a lot of value, a lot of profits, on the table.

Next we’ll look at specific ways that customers like Catie provide value to companies; then I’ll show you how to calculate the return on relationship—the impact on firm growth—that such customers can create.

The Hidden Potential of Your Advocates, Influencers, and Contributors

Innovative firms are regularly finding new ways to bring customers into their growth processes—a trend that will likely accelerate as these firms become more adept at finding and engaging with their most fertile customers. To get a handle on this process, let’s look at the activities in which customers in our three broad categories—advocates, influencers, and contributors—already engage, or could engage with your encouragement. (Note that these aren’t intended as exhaustive lists.)

Advocates

Customer advocates like Catie provide positive information and experiences about your firm to colleagues, their networks, and industry audiences. Here are just some of the things advocates can provide for you:

Influencers

Unlike advocates, influencers are often thought of as experts who take a neutral or objective view. Based on their own test runs or regular use of your products or services, they influence the broader discussion about the jobs or goals that your customers or prospects are trying to achieve, and for which your offerings are intended to help.

Calling or treating an influencer as an advocate can be a bad idea. His objectivity and reputation for objectivity are essential both to him and to the value he can provide to you. This would be the case, for instance, with journalists, analysts, and some bloggers who think of themselves in a similar way. That said, some of your customers who are unabashed fans also wield influence through blogging, article writing, interviews, and so forth. Note that all influencers can be thought of as “customers” in an extended sense, because your goal is to engage in a mutual exchange of value with them.

Influencers disseminate their expert opinions through things such as the following:

Contributors

Contributors provide insights or knowledge in a variety of ways, often for free, that helps companies. Contributors can include traditional purchasing customers—such as the book buyers who provide reviews and whose purchases generate data that creates remarkably accurate recommendations useful to other buyers on Amazon.com. They can include law firms that provide firm financial data to Westlaw in exchange for receiving aggregated firm financial data from other firms to help them run their businesses. Customer contributors (and “extended” customers) can also include “lead users,” who craft high-value changes to your products or services or outright innovations that they’ll often share with your firm, hoping you’ll develop them further.

Contributors will offer you tangible help such as the following:

Unleashing Catie’s Hidden Wealth

Catie, as we saw earlier, shows obvious signs of being an outstanding customer advocate and influencer. Not only does she self-identify as a “promoter” of your company in your NPS surveys, but also she’s a sophisticated user of social media, and judging by the conversations she generates, her opinions are respected by her peers and those in her extended industry networks—networks that are of high interest to your firm. (In subsequent chapters we’ll learn more about the specific behaviors and attitudes that indicate high-potential advocacy.)

Now, instead of assuming Catie will engage in promoting your firm, you implement a system that maximizes the value customers like her can create. How to actually do so—the various programs and processes you’ll need—will be covered in subsequent chapters. For now, we’ll see what they result in from the customer’s experience and point of view.

You may, for example, designate a group—such as a customer reference program—to intentionally reach out and begin building a relationship with Catie and other customers like her. As your team gets to know more about her, ideally in ways that include old-fashioned human-to-human conversations, you learn about her personal and business aspirations and you begin working with her to create a vibrant, reciprocal exchange of value. When you discover that Catie also hopes to expand her entrepreneurial presence in several businesses across her industry that are also relevant to you, you’ve identified Catie as a potential rock star customer.

In return, Catie reveals that she’s quite open to playing an advocacy role for you, based on her personal and professional goals. Note: This is not about crass rewards or bribes to encourage an ambivalent customer to say great things about you. It’s about working with customers who are passionate about the value you provide.

As you begin to send Catie new product and industry information—including thought leadership from your internal experts that’s relevant to her, her audience, and their businesses—Catie spreads the word through her blogs and tweets. Affirming comments about you increase on the Internet and in the media, and you arrange to produce a video of Catie talking about the important work she’s doing, with your help, that’s growing her business. Catie touts the video to her network and through posts on her Web site, driving more traffic to your site, and the video becomes one of the most viewed click-ons there. You and Catie go on to create a Webinar that she promotes to her network because, again, the focus isn’t on your firm or its products and services but on how her business is succeeding due to smart choices she’s made—with your valuable help. The Webinar is a big draw, including new prospects from Catie’s network.

As you find and cultivate more customers like Catie, you decide to do more local events to bring such advocates together with prospects and some media people. Catie is quite open to this too, wanting to speak more and build media relationships as well. Those events turn out to be terrific sales vehicles, and, as other companies such as SFDC and Hitachi Data Systems have found, your close rates are significantly higher for prospects who attend the events. You also find, as you survey participants, that what matters most to them is the chance to talk to their peers, confirming that it’s customers like Catie who are closing these deals.

As time goes on, you bring Catie and others like her to your annual customer conference, where the same basic dynamic occurs. As with local events, customers and prospects want to speak to each other, and when they do, deals get closed, contracts get renewed, share of wallet increases, and over time, the total amount spent by customers increases.

Meanwhile, your thought-leadership feeds to Catie continue to draw on your knowledge of her industry to show how she can succeed—rather than focusing mainly on your products and services. This leads you to work with Catie to create a presentation for her industry association meetings, which creates substantial interest and yet more new prospects for your firm. She also becomes much more active in your customer communities, commenting, posting, and building her reputation along with awareness of the many offerings and services you provide that even your existing customers weren’t aware of.

That information alone would be enough to convince many executives of Catie’s value to your firm. But it’s not really convincing—yet. Some customers engaged in such activities, however energetic and beneficial to your firm they may appear, aren’t generating actual profits. She may not actually be bringing in customers. Or she may be bringing in the wrong customers—customers who aren’t generating significant revenue or profits. To uncover which customers really are doing so, you need to take the next step. You need to find out and track this information from time to time. (See the sidebar “Customer Value Creation and the 80/20 Rule.”)

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Customer Value Creation and the 80/20 Rule

Among the great ironies of modern business is that although the prosperity of most firms relies entirely on customers, many firms have no idea of how much real economic value their customers contribute. When they do find out, they’re often shocked. Some firms—traditional enterprise software firms provide a good example—learn this when initial rapid growth stalls, sending their stock price into a tailspin. Why? Because the true economic value of the firm’s customers is actually quite small or even negative. But that’s masked on financial statements by rapidly growing apparent profits due to large up-front payments from a fast-growing base of customers. Such “profits,” of course, disappear when growth simply slows down a bit, to the shock and consternation of investors.

Other, luckier firms learn they have the problem before their stock price tanks, by performing a relatively easy diagnostic of the true economic value of their customers. What they often find is a version of the 80/20 rule (see “Customer value and the 80/20 rule”). Only 10 percent to 20 percent of their customers are contributing significant value to the firm—and they’re often not who the firm thinks they are. If companies don’t have a good grip on who those 10 percent or 20 percent are, they can wind up wasting millions of dollars on marketing to, pursuing, and servicing the “wrong” 70 percent to 80 percent.

The 80/20 rule appears to apply not only to the value generated by customers from their purchasing but also to the hidden value they generate—in the form of such things as referrals. That, in a nutshell, is why it’s critical to measure customer value.

Customer value and the 80/20 rule

The term customer value applies to all value generated by customers—including purchasing as well as value generated by referrals, word of mouth, influencer behavior, and contributions to knowledge.

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Capturing the Value Catie Creates

There are essentially five things a customer advocate, influencer, or contributor can do to make an impact on the growth and profitability of your business. He or she can help do the following:

When determining how much credit should go to customer AICs for generating profits in these ways, two possibilities exist:

Here’s what you learn when you analyze the data for our hypothetical customer, Catie. As a result of the valuable new-product release and industry information you provided to Catie, her blogging and social media activities drove 12 leads to your Web site and call center during the year. Her Webinar drove another 10 leads. Her outstanding customer video engaged another 12 leads and moved them deeper into the buy cycle. The average close rate for the 34 leads generated by her blogging, social media, and customer video was about 34 percent (figure 2-1), for a total of 12 new customers generated.

Note that Catie doesn’t get credit for the profits generated by all 12 buyers. Other marketing and sales factors likely played a role as well, so for each group she’s assigned an appropriate “partial credit factor.” For the customers generated by her Webinar, who were not already in your database, she gets credit for 100 percent of their profits. For the customers generated (in part) by her blogging, social media activities, and customer video, she gets less credit because other factors contributed, such as efforts of the sales team or the use of a broader marketing campaign.

FIGURE 2-1

How customer advocates, influencers, and contributors generate economic value

*Customers can increase margins by helping you reduce your costs or reduce the capital required to acquire or serve your customers.

If we take a look at the three types of live events in which she participated—the local events, the annual customer conference, and her professional association meeting, where she did some combination of promoting to her network, speaking, responding to questions, blogging during the event, meeting with prospects, and the like—she received partial credit for five, four, and eight customers, respectively, making 17 more. She was particularly effective in generating customers for you in her presentation at her own professional association.

Because of her growing participation in your advocacy efforts along with her growing reputation and influence, several new customers gave Catie credit for referring them. In particular, three direct-referral customers reported that they would not have otherwise purchased except for Catie, for which she gets 100 percent credit for the profits they generated. Five other customers cited her as their referral source as well, but said they would likely have purchased from you eventually even if Catie had not referred them, so for those Catie gets partial credit (40 percent) for reducing their cost of acquisition.

That’s the kind of information you need in order to fully develop the hidden wealth of customers like Catie. I’ll conclude this chapter by showing how to do so in a relatively simple way.

Capture the Data

Catie’s involvement in the activities described above are easily captured in your customer relationship management (CRM) system, particularly when you have staff dedicated to uncovering and nurturing such advocacy and influencer relationships with customers like Catie.

But remember, the second important piece is to make sure Catie is attracting the right customers to your firm—those who generate significant profits. It’s critical to look not just at the revenue such customers contribute, but also at their profitability to your firm. As discussed earlier, a rapidly growing software firm may think it’s generating tremendous profits that turn out to be dangerously illusory. Or you may have a few large, high-revenue customers whose demands for price concessions, additional services, or high inventory levels may squeeze margins down to the vanishing point. So you want to make sure Catie is bringing in customers that are not just generating robust revenues but also robust profit margins.

Also recall that we want the data to distinguish between those customers for which Catie gets full credit for bringing them to you and those for which she gets partial credit in situations where she’s just a part of an overall marketing campaign. We’ll want to assess how significant a part she played. A dedicated “hidden wealth-building” staff can provide an educated judgment on what such partial credit should be.

Table 2-1 illustrates how this data can be captured and displayed in your CRM system. In particular, the table shows how the raw figures outlined above measure up in terms of profit impact generated by Catie, based on revenue generated by the new customers she brings in, adjusted by their profit margins, and then adjusted by appropriate partial credit factors for Catie.

TABLE 2-1

Table 2-1 shows in a single glance the scale of the tremendous hidden—and for too many companies, unrealized—wealth that customers like Catie can unleash. Catie generated a total of 76 leads, 36 of which became customers generating more than $200,000 in revenue. After adjusting for the profits they generated and appropriate partial credit factors for her, Catie wound up generating $60,321 in profits for the year. Finally, we adjust for the allocated portion of the cost of administering the AIC programs that support customers such as Catie (at $5,000) to arrive at her net profit impact on the company of $55,321. That results in an ROR of 11.1 for Catie. Not bad for a customer whose actual purchases generate only $2,400 in profit per year. By intentionally nurturing her far-greater potential hidden wealth as an advocate and influencer, she’s generating 23 times as much in profits from her advocacy and influence as she is from her purchasing.

In the rest of this book, using dozens of case studies, we’ll see the tremendous variety of ways in which companies are uncovering and unleashing the hidden wealth of customers like Catie. Let’s start in the next chapter with a look at how customers can help you sell your products.

Key Tasks

Using Return on Relationship to Turn Customer Engagement into Organic Growth.