I recommend reading Managing Customers as Investments: The Strategic Value of Customers in the Long Run.  Don’t have a lot of time?  Skip the appendix which contains the “proof” of the authors’ conclusions.  The main idea is that you can measure customer lifetime value and use this knowledge to determine cost-effective ways to maximize customer value to your company.

3 inputs determine customer value.

  1. Retention Rate – The proportion of customers you keep (versus lose)
  2. Discount Rate – A highly simplified way to conceptualize the discount rate is to think of it as the relative cost of capital.  It helps companies determine whether it makes more sense to invest money in a business idea or to put it in the bank.
  3. Margin – the difference between revenue and direct costs to attain that revenue.

I’ve posted previously on the dangers of viewing customer service as a cost.  The model in the book shows that companies have the following choices to maximize customer value to the firm:

Improve the Retention Rate – Keeping customers satisfied with their initial purchase makes them likely to purchase more and more likely to recommend others to make the same purchase.

Increase Revenue – Raising prices increases the margin, provided the costs stay the same.

Decrease Costs – Lowering costs also increases the margin.  Perversely, it often plays a part in decreasing retention rates.

In a way, the authors are quantifying lost margin (and lost value) through poor retention.  The pivot point is that serving customers effectively improves retention, loyalty and ultimately lifetime value.  Conversely, bad service delivered poorly can kill retention rate and dampen new sales.

What are Customers Worth?
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