Strategic value is the total profit a firm could realize from a customer if it developed a strategy or took some marketing initiative with that particular customer. Strategic value represents the customer's potential business, much of which may never be realized. To understand the difference between actual and strategic value, imagine that you run a retail bank and that you have a banking customer who has a checking account, savings account and car loan with you. This customer provides a certain regular profit to your bank each month, generated by transaction fees and the investment spread between what your borrowing and lending rates are and the rates the customer pays you. You have modeled your customers and expect this one to remain with your bank for a number of years, thereby giving you a continuing income stream. The net present value of this continuing income stream represents that customer's LTV--the lifetime value loss you would suffer if that customer defected to another bank.
Suppose that in addition to the accounts at your bank, this customer also has a home mortgage at a competitive bank. For your competitor, the profit on the home loan represents the customer's actual value. However, to you, it is only an unrealized potential. The expected profit from that home loan represents one aspect of this customer's strategic value to you.
Additionally, if this customer owns a computer and a modem and does not participate in your bank's home banking services or if the customer is presently attending law school and has few current assets but the promise of high future earnings, then each of these factors also represents different aspects of his/her strategic value to your bank.
There are three aspects of a customer's strategic value to an enterprise. They are:
Competitive Business. This is business that could be yours if you could convince the customer to give it to you rather than to a competitor.
Behavior Change. This involves situations where you could earn a higher profit by convincing your customer to behave differently. This could be convincing the customer to participate in an added service or even manage his/her own business differently. For a retail bank, it could mean encouraging the customer to use a modem to conduct more banking from home or getting the customer to begin a regular savings investment program.
Customer Growth. The strategic value of a customer also encompasses the potential that customer has as it grows--for example, the law school student who becomes a practicing attorney and turns to the bank for additional services.
The customers with the highest actual value, or LTV, are the customers most worth keeping. The customers most likely to grow represent the highest unrealized potential (the biggest difference between strategic value and actual value). Usually, it is more expensive--and more profitable--to grow a customer than it is to just keep a customer.
Figure 1 illustrates a useful "Customer Valuation Topology." MVCs are "Most Valuable Customers" and an organization's objective with these customers should be customer retention. MGCs are "Most Growable Customers" and the objective should be customer growth. BZs are "Below Zero" customers and the objective should be to get rid of these customers.
"Most Valuable Customers" represent the core of an organization's current business. "Most Growable Customers" are those with the highest unrealized potential. "Below-Zero" customers are those who will probably never earn enough profit to justify the expense involved in serving them.
By identifying the value (strategic and actual) of all customers, an organization can begin to develop a customer retention/growth strategy.
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