Economic indicators for the U.S. and the state of Utah pointed upwards last week, with both the Conference Board’s release of its monthly Leading Economic Index (LEI) and the Wall Street Journal’s state-by-state report on the U.S. 5-year employment growth outlook. These small economic steps in the right direction have been earned as companies are winning hard-fought improvements in how they go to market, according to a number of leading research firms.
The Conference Board’s September LEI rose again in September by a very modest 0.2 percent, which marks the fifth month of consecutive growth. The LEI, which is a composite measure of ten variables that includes everything from weekly manufacturing labor hours and manufacturing orders placed to interest rate and consumer confidence metrics, shows that people and businesses are crawling out of their shell and beginning to produce and transact more.
The State of Utah’s prospects for growth were emboldened as well when the Wall Street Journal published insights from forecasting firm IHS Global Insight on which states are projecting to have the strongest employment growth through 2017. The State of Utah ranked highest in a tie with Arizona with a projected job growth of 2.3 percent. Considering Utah’s already-low unemployment rate as compared to the national average, the Beehive State is well poised to profit from this slow economic rebound. Utah’s employment grew 2.8 percent in the 12-month span from September 2010 to September 2011, with trade, transportation and manufacturing leading the way.
According to several large national research firms, the companies that are gaining financial ground during this rebound and causing these upticks in economic growth are those that are actively executing on strategies that seek to gain more share of wallet and more share of market from specific target markets. Notably, companies who are employing more analytically based customer segmentation strategies to drive more targeted, one-on-one communications with existing and prospective customers are those firms that are outperforming the rest of their peer groups.
The Peppers & Rogers Group, the national marketing research and one-to-one marketing consultancy, reveals in its Q3 2011 edition of the must-read Customer Strategist that several firms are employing a revenue growth tool that is an oldie but a goodie. In the article titled “A Segmentation Framework That Works,” Peppers & Rogers outlines how companies are employing a customer financial value model that segments and values both existing and prospective customers according to likely returns and then manages those relationships like an investment banker would manage its portfolio of investments. These tools enable faster growth and help these firms eek out gains from the right customers as well as limit transactions with unprofitable customers.
Employing these approaches requires that companies first change their philosophy from a product management approach to a customer management approach. The idea that a firm should manage their customer relationships just as a savvy investment banker manages a portfolio of different stocks and assets with different returns on investments is not new. The landmark 1997 book Customer Connections by Robert Wayland and Paul Cole presented a number of valuable and now time-proven concepts for how companies can re-evaluate the nature of their transaction with a customer and use customer value segmentation to modify their marketing approach according to their dimensions of relationship value. According to Wayland and Cole, there are four dimensions of relationship value. In Customer Connection’s “Value Compass,” these four dimensions are illustrated as points along a compass, points by which companies should re-evaluate their customer relationships. Those points are (1) the degree of reward and risk sharing in the customer relationship; (2) the level of value proposition created in the relationship (i.e. does your firm provide a core input product, or a fully integrated solution to your customer’s largest problems?); 3) the degree to which a firm has a value-added role in the customer’s organization (i.e. do you merely deliver a product or do you have a role in actively managing a key part of your customer’s business or life?). Once companies understand and document the nature of their relationship, executives are better positioned to segment customers into homogenous groups and reassert their companies’ value proposition according to the four points on the Value Compass.
A fair warning is that segementation does require some analytical skill. As Peppers & Rogers points out, analytically grouping customers into homgeneous segments according to their financial value and then evaluating these segments according to their relationship value requires two key statistical skills. The most common and generally accessible to even mid-sized businesses are logistic regression and CHAID analysis. Logisitic regression reveals which customer attributes are most predictive of the outcome a company is trying to predict (namely, financial value). CHAID analysis (or Chi-squared Automatic Interaction Detector) is a type of decision tree analysis that then groups these customers according to the set of attributes that most uniquely defines them. The outcome of these processes are homogeneous customer segments whose financial value is individually quantified and that are readily identifiable in broader target market through accessible marketing intelligence sources.
As the volume of U.S. economic activity is projected to only slightly improve, companies must find a way to generate more returns from essentially the same volume of economic transactions within their industry. Understanding the economic value of each individual customer relationship and targeting customers according to the dimensions of relationship value is how top companies can outperform their peers in a slow growth environment.