Booth Morgan Consulting CVA

Auditing Customer Value
Simple in Theory, Difficult in Practice

As a reliable leading indicator of future corporate performance, customer value merits auditing as much as any hard asset or strategic investment. In many companies, lifetime customer value makes a greater contribution to corporate value than regularly audited tangible assets. In other words, customer value exerts greater influence on stock price than does book value. Ironically, much effort is expended to accurately quantify book value, while the market is left to intuit the value of a firm’s customer portfolio. The Customer Value Audit fills this vacuum.

The initial CV Audit establishes the baseline metrics that will be used to monitor, safeguard and improve the overall value of the customer portfolio. Some of these metrics are also used to compile a customer value analysis that can be unveiled in annual reports. This analysis distinguishes a company in the market by providing additional insights on its capacity to create future value for investors.

The CV Audit views the customer essentially as an investment asset, not unlike other assets in which the corporation invests. A corporation makes a certain investment in attracting, servicing, and retaining each customer. Regardless of whether this investment is a capital or operating expense, the return is likely to vary depending on how customers behave and how long they remain customers. As with other corporate investment analyses, the corporation should explicitly consider alternative investments in different customers and make those investment decisions which yield the highest return to shareholders. The CV Audit enables this high-value investment allocation.

Auditing customer value requires a forward-looking accounting apparatus that considers the lifetime economic profit of the customer portfolio. Traditional accounting, as well as more recent cost-of-capital approaches, provide a retrospective picture of the financial health of a company. They are not designed to consider the annuity value of intangible assets such as customer relationships. A critical objective of the initial customer value audit is to build a horizontal, fully-cost-loaded, lifetime-oriented monitoring apparatus. Once this footprint has been established, the governance imperative of customer value management can be fulfilled.

The initial customer value audit is the most difficult because the basic building blocks to complete the audit are rarely in place. Many companies are not organized with customers in mind. Vital information about customers often sits dormant in data streams owned by different functional areas residing in multiple repositories. Customer revenue and direct expense allocations are often tracked vertically within a business unit or product category, rather than horizontally across business units, product categories and channels. As a result, the audit team often needs to create a customer-centric framework or build a virtual data repository to accurately compute customer value.

Customer Value Audit Key Outcomes
	The lifetime economic profit of the customer portfolio is computed. In industries with large, complex customer portfolios, this measure is the single most reliable predictor of future performance.
	The customer portfolio is segmented by lifetime economic profit tier and total customer costs incurred by tier. This segmentation enables management to invest in attracting and retaining the most economically profitable customers and to evolve unprofitable customers to profitable status.
	Current and lifetime profit profiles are drawn at the individual customer level, using individual customer transaction and total customer cost data. The CV Audit lays down a “footprint” for these data to be drawn together on an as-needed basis for future analysis.
	The company’s customer “Stocks & Flows” are mapped. Customer stocks are analogous to a point-in-time “snapshot” of the number of customers by segment, cohort, channel, product, or profitability band. Customer flows are the “moving picture” of the changes in customer stocks over time. The map shows the location of defection “hot spots” in these flows and how they effect lifetime economic cash flows.
	A comprehensive inventory and quality assessment of all customer listening and communications channels is performed.
	A profile of discreet customer groups within each value tier is drawn. This profile includes an exhaustive list of product, service, and price attributes. Profiles are presented vis-à-vis the relevant competitive set and a customer perceived ideal.
	A 360^o profile of each customer in the portfolio is drawn using all available transactional, total cost, demographic, and perception of value information.
	A brand valuation identifies and measures the tangible and perceptual sources of brand value. This brand equity calculation begins with individual customers and then aggregates to the segment, tier, and corporate levels.
	The audit culminates with a precise plan for simultaneously creating customer value and optimizing corporate value. The plan quantifies the size of the opportunity, pinpoints where unrealized value is to be found and what needs to be done to capture it.