The "Moneyball" Effect on Customer Management. Download PDF
The "Moneyball" Effect on Customer Management
By Chad McCloud, Executive Director - Jabian Consulting
Did you get to see Moneyball - the film based on the 2003 best-selling book by Michael Lewis? It's a story about the general manager of the Oakland A's, who battles conventional wisdom and his low payroll to find players in the market who are undervalued by other teams. I'm a big fan of the book's message, and my wife (needless to say) is a big fan of the film's leading man, Brad Pitt.
The central theme of Moneyball is that, when it comes to placing value on things, there are times when the market just gets it wrong. Billy Beane, the protagonist, argues that the conventional "batting average" metric used in baseball for decades doesn't tell the whole story of a player's value. A player can also safely get on base by drawing a "walk," for example - which isn't measured in the batting average metric - and the walk has the added bonus of wearing down the opposing pitcher in the process. Beane begins using metrics that better describe the value of the players they're drafting, and finds he can get the players he wants without giving away the farm. The result is a team that wins far more often than their budget says they should.
The comparisons that can be made here to corporate America and its customers are almost too numerous to count. Healthcare insurers bend over backwards to land The Big Account, then customize a plan that their systems can't come close to managing efficiently. Telecom companies spend hours supporting customers that will never be completely satisfied with their service or profitable in the long view. Consumer packaged goods companies negotiate large-volume discounts for major retailers that provide zero breathing room in their margins should something go wrong. Lower budgets in a down economy raise the stakes for managing customers the right way.
Just like baseball before the Moneyball phenomenon, businesses get distracted by the wrong metrics, too. And as in baseball, companies need an intellectually curious management team and an eager business intelligence team to find true customer profitability. If you've ever worked in a company where the top revenue generators are the most important customers, you know what I'm talking about. Revenue, like "batting average," is just the tip of the iceberg. Below the surface are the hidden metrics of cost-to-sell and cost-to-support, not to mention the opportunity costs of pursuing the wrong customers.
Customer profitability metrics are well-documented in industry, but Moneyball just might inspire an entirely new set of measures that translate to the customer management world. The following metrics are meant to be tongue-in-cheek, but might they be examples of how managers could think about their world differently?
VORC - Value Over Replacement Customer
This demonstrates the opportunity cost of customer pursuit. Baseball GMs now measure VORP (Value Over Replacement Player) to describe how much better or worse a player is in comparison to the average person at their position. This becomes a quick-and-dirty way to help teams determine how much more or less they should spend in acquiring players. If your company is spending a lot of resources acquiring or retaining customers with less value than the average, is it time to focus on different customers?
SC - Sales Created
Baseball uses Runs Created to measure all of the intangibles of a player putting runs on the scoreboard. Customers can affect the top line with more than just their own revenue, too. An advocate of your company who heavily influences others in the marketplace may have a hand in future sales of follower customers. Recommendations are becoming more influential through the transparency brought by social media. Can you attribute customer acquisition to ones who are vocally loyal?
OPS - On-Base Plus Slugging
Maybe there's no perfect equivalent to this widely used baseball metric. The spirit of the metric, however, applies perfectly to customer management. To help tell the whole story of players whose worth may not be reflected in batting average alone, OPS measures whether players get on base by any means necessary, and whether they get more bases through home runs, etc. Similarly, revenue doesn't tell the whole story of a customer. The customer who buys high-margin services, produces predictable revenue, and costs relatively little to service should be more value than the more difficult or unreliable customer bringing in the same revenue. What's the OPS equivalent in your industry?
While you may not think of Brad Pitt when you look at your business intelligence team, you should let the Moneyball concept spur new conversations about customer management. Who knows, maybe the key metric you come up with will revolutionize how your industry views the marketplace. And like Billy Beane, the one who gets there first certainly has the advantage.
CHAD MCCLOUD (email@example.com) is an Executive Director at Jabian. He spends his time at the intersection of Customer and Product, designing customer-driven strategies and leading new product innovation efforts that deepen the relationships that Atlanta-based companies have with their customers.