What’s a Customer Really Worth?

Few topics engender as much passionate discussion and debate as the subject of customers. While most everyone seems to agree on their importance (hard to have any kind of business without customers) there is less consensus at to what they are worth and what they cost to maintain and grow.

Some years ago, Frederick Reichheld pioneered research on the topic of the lifetime value of a customer (LTV). In his book The Loyalty Effect, Reichheld cited research into several industries (most notably life insurance) to illustrate his point that it’s not simply getting the customer that matters but that real value is created after years of customer loyalty. And in many cases, your most loyal customers fit a common profile. That profile has less to do with what industry or profession they are in but more to do with what it is they are trying to accomplish and how what you provide facilitates that.

Conducting robust analysis of your most loyal customers can yield some interesting results. For example, we were working through this process with a client recently and the subject of account profitability came up. The company is tracking three key metrics: sales volume, profitability, and value-added contribution.  Yet, the discussion among the management team suggested there might be more to the story. So, we took a closer look by examining the following questions.

Are there any unusual factors with this account such as, slow payments or frequency of estimates? Is there a fair amount of complexity of order entry, billing, delivery/distribution, customer service (remember, complexity comes at a cost!)? How much senior executive time is required for this account?  How much time is required of the salesperson and is some of that time spent doing things that could (should?) be handled by customer service?  It turns out that while these costs were considerable for some of their key accounts, most were hidden from view as part of general overhead and were not being tracked against the account directly.

The outcome of this analysis was two-fold. First, the company had a more complete picture of the costs to service these accounts. Second and perhaps of even greater importance, they were able to gain a better understanding of how they create unique value for these clients leading to development of a more focused, more effective prospecting plan.  And once we were able to determine the lifetime value of these accounts, we were able to calculate the maximum acquisition cost of new clients who fit the profile of these key clients. That brought a sharper focus and a greater sense of purpose to the business development plan.

For more information and tools you can use to lead your team through this important process, contact me at joe@ajstrategy.com