Tag Archives: Benefits

What are Customers Worth?

Posted on 22 August 2009 by | 3 Comments

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.

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Posted in How to Deliver Customer Service, Why Bother with Customer Service

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Why Americans are Too Short

Posted on 4 June 2009 by | 3 Comments

One of our cultural short-comings regarding customer care is that it is treated as a cost and not a benefit.  (I say cultural because in simpler and smaller markets it’s quite clear to business owners that they need long-term relationships with their customers.)  Short-term gains come from increasing revenues and decreasing costs.  So this approach means that to realize gains, a company should reduce customer care.  And this thinking, while short-sighted, is actually true… to a degree.  At the extreme, one could eliminate all customer care and this would boost profitability.  But unless you sell a perfect product that meets each of your consumers needs perfectly, your gains will be short-lived.  Why?  Because we want customers to remain customers for a long time.

Two Cases

1)  In one case, products are transactional in nature.  (i.e. Customers are likely to buy only one.)

2)  In another case, customers start by buying one product, but then increase their consumption (either of more of the same product or they cross product lines and buy something different).

In both cases, companies must provide service (even if it means a hit on short-term profitability) so that the customer experience is good enough to create the possibility of future sales.  In the first case this comes through word-of-mouth marketing (which incidentally, isn’t free) and in the second case comes through a level of satisfaction or trust in the first product.

The pivot point is that customer service is not optional.  Whether you sell once to many customers, or many times to one customer, service is required.  Companies that invest in service to differentiate themselves and create a strategic advantage reap the rewards long after their short-sighted competitors fade from view.

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Posted in The Right Kind of Customer Service, Why Bother with Customer Service

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