CIO Best Practices: Enabling Strategic Value with Information Technology

Chapter 6. How to Measure and Manage Customer Value and Customer Profitability

—BY GARY COKINS, SAS, [e-mail]

PART 1 THE RISING NEED TO FOCUS ON CUSTOMERS

Shareholder Wealth Creation Is More Than Just Growing Sales

In 2005 Best Buy, a leading "big box" retail chain stunned the business media by formally announcing that it was focusing its marketing and sales efforts to attract and grow those types of customers who were more likely to generate profits for Best Buy. This implied it would pay little or no attention to the types of customers who infrequently shopped in its stores or minimally purchased goods, or only discounted items. Some of Best Buy's competitors immediately pounced on this in an attempt to embarrass Best Buy and broadcast to the marketplace that they would cater to everyone. That reactive maneuver by competitors was a short-lived marketing campaign, and Best Buy held its ground and continued to earn above-industry average profits. Best Buy was simply pursuing what many organizations have intuitively sensed and some have actually measured— there are certain types of customers who are more profitable today and more valuable in the future with long-term potential.

Best Buy was acknowledging a shift in business thinking. It is no longer just about increasing sales but more appropriately increasing sales profitably. In short, measuring gross margin profitability on sales from products and standard-service lines is not the only metric to monitor. It is important ...