Recently we have been working with a number of service providers building out their channel and XaaS offerings. The first part of the process is helping them to clearly define their target customer, and as a result what will be the best type of partner to acquire and service this customer. The second thing we do is look at what are the relevant metrics or measures to track their progress in an annuity world. This article looks at understanding the potential value of the customer over a period of time, not just at the initial sale value.
Recognising Customer Value
In a perpetual world the value of the customer was as simple as “what is their IT capex budget?” A slightly more sophisticated approach was “what hardware, software and services can I sell them this year?” In looking at today’s trends however and what lies ahead, customer value looks to be set around annual IT budgets and/or the immediate sales targets.
In an annuity world, assuming everything goes well, the billing will go often for a contracted period of time. Presently 3 years seems to be a common length, but theoretically it could be ad infinitum, or at least while the credit card is still valid! Therefore, the value of the customer needs to be thought of in terms of not just the immediate monthly bill. Rather it needs to be considered in terms of either the annual, contracted or potentially contracted value. i.e. not just what I am billing but what else could I bill, and for how long.
There has been significant and complex academic mathematical modelling done by insurance companies and telcos around the customer lifetime value. For the purposes of this article, let’s use a simple version with fewer variables. Step one is to look at what you have with a single product.
CV= MPV x BP x T or
Customer Value = Monthly Product Value x Billed Product numbers x Time
$900 = $25 x 1 x 36 (months).
This simple calculation is also known as the Total Contract Value, (TCV) assuming the customer is signed on a fixed term. We will use the term TCV from now on. Some organisations will also include in the TCV number any one off or setup costs, but here we will only look to include the recurring revenue amount.
The customer value from the sales or marketing manager’s perspective should be not only what is being billed now (TCV), but more importantly what else potentially could be billed. Therefore:
PCV = TCV + (PP X AMPV x T)
Potential Customer Value = TCV plus Potential Products x Ave. Monthly Product Value x Time
Using the example above but with 2 additional products with an average value of $30pm each, changes the value of the customer from a TCV of $900 to a PCV of $3,060.
$3,060 = ($25 x 1 x 36) + (2 x 30 x36)
We can see here with this example that with a little bit of digging the true value of the customer is potentially more than 3 times the current billing value. Considering this, we might want to give them a little more attention, and of course develop a strategy to capture the unbilled amount.
While focused on TCV & PCV I want to make sure these measures are not confused with another common term ARPU, or Average Revenue Per User. These are significantly different indicators and as such it is important to differentiate between them. ARPU (total revenue dived by total number of customers) is a measure that can and should be tracked at regular intervals over time. Doing so provides a snap shot as to the value of the customers, and if your sales efforts are working or not i.e. is ARPU increasing or decreasing?
TCV is easy to measure as it is essentially measuring the value of “the sale” as outlined earlier, which may not be what is actually billed. The reasons why this is so are a little more in depth and we will cover another time in another article.
PCV is understanding the potential or future revenue opportunities with the customer.
Discovering the actual value of PCV is more difficult to do. Ideally it should be built into the initial sales discovery process so as to uncover future sales opportunities as well as short term needs. Alternatively, as we wrote about in our article Customer Lifecycle Management and The Cloud several months ago, a robust customer lifecycle management process such as our Dynamic Customer Lifecycle Model ™ would capture PCV as part of the 4 step Assess, Deliver, Manage, Adjust process.
Understanding PCV is also very important at a marketing and corporate level in order to target the “right” customers. Do you really want to be targeting a customer that has need for only 1 of your products? A number of the telcos have lost a lot of money when they had their product range “cherry picked” and the customer eventually left without purchasing any more.
PCV should be part of the tactical thinking when building the composition of the product offers and the associated marketing message. I.e. what do they have now?, what additional products can I cross sell, or re-contract up sell to capture the maximum PCV for this customer segment so as to increase my ARPU?
One challenge is of course that sales people are usually measured and motivated by short term activities, which would be TCV. The only practical way to include PCV into the sales culture is to ensure that along with cross selling, the revenue or ARPU number is included in the territory or the company target, as increasing these is the ultimate end result you are after.
Right now with the growth of managed services, cloud, and XaaS most partners or service providers we are working with are really focused on growing their billing customer base as their number one priority.
However, some are now starting to think longer term and to look at their customers through the lens of PCV and ARPU, not just TCV. This means having a deeper understanding of what the customers’ needs are, building attractive bundles and creating upgrade/cross sales offers as part of an active customer lifecycle management approach. They understand it is not just what you have today, but what else can be added on to grow the billing, increase customer satisfaction and of course boost customer “stickiness”.
Conclusion and Tips
Using the right annuity metrics will provide the business with insight as well as assist in developing the right sales and marketing culture necessary in the cloud and XaaS world. Here are my top tips:
- Understand (or research) the PCV when initially segmenting your customers.
- Log expiring contract dates or future sales opportunities to capture PCV into a CRM.
- Where possible use bundles or a customer lifecycle management approach to ensure you get the PCV, not your competitors.
- Monitor APRU as frequently as necessary to track your sales offers & PCV progress.
- Set incentives against both TCV (sales) and revenue (or ARPU) goals.