Serving customers profitably
Carrying out customer profitability analysis ensures that you develop long term relationships that will ensure long term profitable relationship. Many businesses spend 75% of their marketing budget in the search for more new customers. This is a mistake and has a negative impact on profits. Let us look at how you can calculate the true value of existing customers.
- It costs substantially more to win new customer than it does to keep a current customer
- The longer a business keeps a customer – the more profitable that customer is for the business
- As a customers lifetime value grows the more dependent they become on the company and less susceptible to competitor offers
- As customers become more loyal they become advocates for the business encouraging friends and acquaintances also to buy there.
Customer value calculation
The following worksheet will help you to calculate the average lifetime value of each customer:
| 1. Working from your annual accounts, take the total amount of revenue and divide it by the number of current customers | |
| 2. Calculate the average length of a relationship | |
| 3. Total the number of referrals that became customers for the year and divide by your total number of customers and add one (representing the original customer) | |
| 4. Multiply the average spent per customer per annum and any yearly dues, by the average length of a relationship | |
| 5. Multiply the number of referrals by the total in box four above. This total in box four above – is the total average value of each relationship. |
While this calculation does over-simplify the issue it is useful in highlighting the value of a customer. Especially if compared with the usual high customer attrition rates of 15 to 50 per cent.
The cost of replacing one customer is the sum of all marketing and sales costs for the year, divided by the number of new customers attracted. Profit per customer is achieved when marketing costs have been paid. Every month or year that the customer stays a customer they become more valuable.
Tips for success
There are some important steps that you should take to ensure that your enterprise provides better customer service:
- Customer product – high quality every time preferably above expectations
- High perceived value – attention to detail and added service touches
- Clear benefits
- Reliability
- Customer service – responsive and knowledgeable
- Guarantee/ warranty
- Accessibility
- Complaint resolution – fast response always
- Positive experiences
It might be useful to think of each customer as having certain life cycle stages:
Contact phase
Goal – to gain a new customer. Contact through marketing, advertising, telemarketing, personal selling, direct mail, promotion and publicity.
Acquisition phase
Goal – to increase customer retention. Collect as much information about the customer as possible. Understand their purchase condition. Offer them post purchase re-assurance. Promote the price value relationship. Establish the foundation for a long term relationship. Know the associated costs.
Retention phase
Goal – to create long term and committed loyal customers. Develop a service philosophy. Increase responsiveness to customers. Identify and close service gaps. Improve the service recovery process.
Loyalty phase
Goal – to extend your customers loyalty. Define loyalty and customer lifetime value and average net worth. Counteract defection rates and patterns. Understand loyalty calculations. Know costs associated with their loyalty. Provide them with accurate customer information.
How to stay close to your customer?
1. Show them that you think of them
2. Tell them what’s new – it is a good way to stay in touch and make more sales
3. Offer valued customer discounts to important clients – this can take the form of coupons, letters and other sales promotions
4. Compensate customers for lost time or money for faulty products or services.
5. Be personal – keep notes in your customer files of every little detail that you know about the customer – from spouse children’s names, hobbies etc.
6. Always be honest – nothing undermines your credibility than dishonesty.
7. Accept returns unconditionally – the few dollars that you lose in the short run are more than compensated for by long term value of the customer.
8. Honour your customer’s privacy.
9. Keep your promises – Never, never make a promise that you cannot deliver.
10. Give feedback on referrals – this is the best way to show your appreciation for the referral.
11. Make your customers famous – if your business has a newsletter ask your customers permission to write about their success.
12. Keep lines of communication to the customer always open.
Customer attrition and retention
Relationship attrition is the number of client who do not renew their relationship per month – this is expressed as a percentage of the total customers at the beginning of the month. This is a key indicator of the relationship management performance of the business and should be reviewed at least monthly.
The measure of relationship retention is an important indicator of how effective your business has been fulfilling the requirements of the customer. In some cases attrition rates can be very high and alarming.
How to keep customers for life:
- Select the right customer through market research
- Know your purpose for being in business
- Move your customers from satisfaction to loyalty by focusing on retention loyalty schemes
- Develop reward programs
- Customize your products and services
- Train and empower your employees in excellent customer service
- Speed up the customer service process
- Know what’s important for the customer
- Always measure what’s important to the customer
- Introduce customer retention measures
- Use market value pricing concepts