What is Customer Network Value

“If you do build a great experience, customers tell each other about that. Word of mouth is very powerful.” – Jeff Bezos.

Customer Network Value is the Value generated from the network (Both social and professional) by the acquisition of new customers through word of mouth advertising.

Jeff Bezos, the founder, president, chief executive officer and chairman of the board of Amazon.com never said anything truer when it came to realize Customer Network Value. Typically it has been seen that for both B2B products and especially for B2C products, word of mouth proves to be a better media for advertising than most other media, and actually the returns on investments are that much higher.

Typically every customer has their own Customer Life-time Value (CLTV) to the firm. But very few managers realize that this is only a small fraction of the value that can be generated from a customer. The social and professional network provides another great source of value to the firm, potentially called the Customer Network Value.
Customers, on an average, through their network can potentially rope in, 2-5 times their own life time value (revenue), from their network, if they are satisfied. A satisfied customer, on an average, brings in 2.8 new customers to your firm, in the B2C segment, through word of mouth.

Not only by creating customer satisfaction, you are increasing his life tme value to the firm, by increasing customer loyalty, but also you will increase the customers network value and rope in new customers.

And all this extra network value for almost zero cost of acquisition. This is of prime importance in today’s business scenario since typically, cost of new customer acquisition is 5 times than to retain an old one. Although it is difficult to determine the exact origins of this value claim, the earliest sources that we can find attribute it to research conducted by the Technical Assistance Research Project (TARP) in Washington, D.C. in the late 1980s. Around the same time, other loyalty pundits claimed exactly the same findings as their own (for example, the Customer Service Institute, Consumer Connections Corp., and ITEM Group).

How ever big may be the multiplicity value, it boils down to one thing, Customer’s network value cannot be rejected in current times.

 

By the way, did you read our article on customer lifetime value estimation and management?

You have to have your heart in the business and the business in your heart

Thomas J. Watson as always comes up with a great one liner. So what does he mean?

Its obvious that you need to be passionate about what you do to be successful in your endeavors, but it appears he is also talking about the famous Shakespearean “nature” vs “nurture” dogma here also. Are successful entrepreneurs born and not made? In that case, a lot of B-School education would fall flat on its face. Is this quote indicating that formal training provides one only a platform to move on in business?

Another great quote flashes to the mind: “Great leaders are born and not made”.

By the way, do check out Cornerstone LMS. They offer great learning solutions.

Any suggestions on these viewpoints on success of entrepreneurs and leadership?

A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain

Ever heard of private banks financing the needs of the really needy? They don’t. That’s because the really needy customers will never have the monetary disposition to pay off the interest which is applicable for their risk profile. Isn’t that a tragedy of errors for these financial institutions?

Customer Knowledge Management

Coined in 2002 by García-Murillo and Annabi, customer knowledge management is the newest thing in the series of customer value management (See customer life time value management & customer network value management). Gathering,  managing,  and  sharing  customer  knowledge  can be a highly valuable  competitive  tool that  companies  and scholars have not yet considered to the extent possible it can be done. Today, the insights of the customers should be used right from the very beginning from the product development stage to the final stages of the product life cycle. García-Murillo and Annabi (2002) gives a pretty comprehensive framework of knowledge management, across the entire continuum, that a firm needs to practice throughout the  value chain to deliver value for the potential customers.

Customer_Knowledge_Management

Having customer insights and managing the same through good processes and is important for getting  better and more timely design of new products and services; early warning of possible turbulence and competitive intelligence; customer commitment and loyalty; and deriving the maximum benefits from the synergy of collaboration. So how should one manage the insights customers may have effectively to draw the maximum value for the firm?

Today, a lot of informal knowledge lies in the knowledge portals available in the web.  There are so many blogs and online forums where there is a high level of potential customer engagement, through mutual exchanges of information and discussions. Knowledge management through the mining of such unstructured data is one of the surest way to capture the customer sentiments and knowledge. If the insights can be successfully incorporated into the processes while the firm is developing a product, it may be a sure gateway to success.

Today many companies are incorporating a higher degree of customer engagement activities in their relationship management strategies. It is being felt that active voice of a customer can have an effect beyond the customer’s lifetime value and the customer’s network value. The insights can be actually incorporated within the product finalization stage itself, so that the customer can be engaged and bound into a relationship, even before the product is formally launched into the market. Not only this tactic draws higher brand recognition, it paves the path for a higher relationship development of the firm with its customers. Gibbert et al. provides an excellent framework for managing the knowledge of customers through three focused strategies, namely, Prosumerism, Team based co-learning and mutual innovation.

Customer_knowledge_Management_Framework

  • Alvin Toffler (1980) first used the expression “prosumer” to denote that the customer could fill the dual roles of producer and consumer. The CKM process transforms the customer into a co-value creator, endowing them with new competencies and benefaction opportunities.  It liberates the customer from the platform of only past, accumulated knowledge by stimulating the knowledge within them for the co-production of value.
  • In team based co-learning, the inter-linkages with the customer base and their interactive joint learning with the customers require a higher level of engagement of the firm with the customers. Customer may be actively involved in the product refinement itself.
  • Mutual innovation is possible when the firm actually starts incentivising the potential customers for the mutual creation of value. This is often feasible only if custom made products are being manufactured, and less feasible for standardized products.

In all the three cases, it is evident that there is immense benefits that can be reaped if customer knowledge management can be done to co-create value with the customers. The insights of the customers can be of extreme significance to sustainably market a product throughout the product life cycle. Hopefully, in the future, a higher degree of customer engagement will be available while developing the product itself and throughout the PLC curve.

The GE-McKinsey matrix and its Limitations for Business Portfolio analysis

A business portfolio is defined as a collection of Strategic Business Units, commonly called SBUs, that make up a firm or a corporation. The optimal business portfolio (a dream for all organizations) is the combination of multiple SBUs such that it helps to exploit the most attractive industries or markets, keeping in mind the competitive strength and weaknesses of the parent corporation or the firm. A SBU can either be an entire company or a division of a large firm, that formulates its own strategy and has separate objectives from the parent organization. Continue reading “The GE-McKinsey matrix and its Limitations for Business Portfolio analysis”

Questions To Ask When Choosing A Primary Business

If you are familiar with online marketing, you are well aware that there are hundreds of different network marketing companies out there with representatives who claim to have the best compensation plan, full-proof training and a way to make you money fast.

Unfortunately, several companies and marketers don’t follow through on these promises. Too often I’ve heard stories of new marketers who don’t receive adequate training, don’t have a support group or mentor to help guide them and haven’t made a single commission after weeks and months since starting their business. Continue reading “Questions To Ask When Choosing A Primary Business”

Corruption is Business:Part 2

This is a sequel to the article with the same name and is meant to provide some of the possible counter-arguments to the arguments provided in the previous article. Thus this article is meant to prove why the practices like black-marketing of movie tickets and forced donations demanded by some schools are corrupt practices. Continue reading “Corruption is Business:Part 2”

How e-markets affect the supply chain

E-markets have been established in many industries as a sourcing option for buyers. Research  has implied that the e-markets have substitutional effect on the traditional supply chain, yet in many situations, e-markets are used by buyers as a benchmarking tool in negotiations with traditional suppliers.  The late 1990s and early 2000s have seen the rise and fall of many e‑marketplaces. Despite being hyped for their ability to benefit firms through dynamic pricing as well as lower transaction costs, most e‑markets failed, never reaching their expected potential. Continue reading “How e-markets affect the supply chain”