Servicing the Customer

to Build Lifetime Value

Servicing the Customer

to Build Lifetime Value

(A New Dimension)

(A New Dimension)

“Not everything that can be counted counts, and not everything that

counts can be counted”

“Not everything that can be counted counts, and not everything that

counts can be counted”

Albert EinsteinAlbert Einstein

Relationship selling isa process that occurs over time

Relationship selling isa process that occurs over time

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4Knowing the Status of CustomersKnowing the Status of Customers

An important aspect of knowing the status of customers lies in the salesperson’s use of information provided by others in the sales organization

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How Salespeople UseCustomer InformationHow Salespeople UseCustomer Information

To improve customer strategies

To grow, retain, or win customers

To maximize customer lifetime value (CLV)

• Data are collected from many sources – sales contacts, trade shows, customer e-mails, customer Web site visits

• Data are assembled, analyzed and stored by others in the sales organization

• Salespeople use information to better manage their customer relationships and improve customer lifetime value

• Information is updated in real time, sometimes after a sales call, other times after other customer contacts

• When lifetime value is important, customer profiles and segments are based on future revenues from customers

Data are used to profile customersand create customer segments

Data are used to profile customersand create customer segments

Salespeople can use this informationto predict customer behavior

Salespeople can use this informationto predict customer behavior

Salespeople can further use this information in decisions to grow, retain, or win customers

Salespeople can further use this information in decisions to grow, retain, or win customers

Feedback

Data collectedfrom customer

interactions

Data collectedfrom customer

interactions

Figure 4.1How Salespeople Can Use Data to Maximize

the Lifetime Value of Customers

Figure 4.1How Salespeople Can Use Data to Maximize

the Lifetime Value of Customers

Lifetime Value ApproachLifetime Value ApproachWhen salespeople use the information they have derived and accessed from every contact the customer has with

the sales organization, they have the opportunity to improve their relationships with customers and

successfully take a lifetime value approach

When salespeople use the information they have derived and accessed from every contact the customer has with

the sales organization, they have the opportunity to improve their relationships with customers and

successfully take a lifetime value approach

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4Customer Retention with CLVCustomer Retention with CLV

Customer lifetime value is applicable only if salespeople are focused on developing and maintaining relationships

A daily commitment is required to retain customers

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Customer Relationship Management (CRM)

Customer Relationship Management (CRM)

Key aspects of a CRM program Knowing how much customers are worth

Knowing where customers are in their life cycles

Knowing customers' total profit potential

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4Embracing CLV PrinciplesEmbracing CLV Principles

When customers are viewed as assets, CLV concepts enable salespeople to estimate the monetary value of customers

The foundation for profitability and sales sustainability lies in the retention of customers

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4A Shift in FocusA Shift in Focus

From acquisition to retention

It costs less to serve loyal customers than to acquire and serve new ones

The profitability of customers is related to the length of the relationship with those customers

A daily commitment from both the salesperson and the sales organization is required to retain customers

80-20 Rule80-20 Rule

20 percent of customers provide

80 percent of the profits

20 percent of customers provide

80 percent of the profits

Small CustomersSmall Customers

These customers account for a very small percent of thesalesperson's revenue. They may even represent loss of revenue. Salespeople can choose to deactivate them or continue coverage if they offer higher future value.

Customers That AreCandidates For Growth

Customers That AreCandidates For Growth

Key CustomersKey Customers

These customers often represent the best growthopportunities. Salespeople should expend effort with these and try to work with the sales firm to allocateresources toward these customers.

These are the salesperson’s best customers, yieldingmost of the rep’s sales revenue. However, they often offer little room for growth, so the salesperson maysimply act to maintain excellence in relations throughthe provision of service.

Salespeople must make choices about which of these customers represent growth opportunities and should receive attention.

Salespeople must make choices about which customers are worthy of large investments to move them to key customer status.

Figure 4.2How Salespeople Use Customer Lifetime Value

to Guide Their Behavior

Figure 4.2How Salespeople Use Customer Lifetime Value

to Guide Their Behavior

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4Customer Lifetime Value (CLV)Customer Lifetime Value (CLV)

Customer lifetime value is the net profit earned from sales to a given customer during the time that customer purchases from the sales organization

CLV, as a sales focus, is about how the customer is treated over time

Lifetime value is a measure of customer loyalty

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How much are you, as a customer,worth over your college lifetime?

How much are you, as a customer,worth over your college lifetime?

$960 at a pizza parlor over your years in college, not $10 per visit

$1050 at the hair stylist during your years in college, not $35 per visit

$1872 at a gas station during your years in college, not $18 per fill-up

$3000 at the bookstore over your years in college, not $75 per book or $375 per semester

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4Knowing The Customer Lifetime ValueKnowing The Customer Lifetime Value

Knowing the CLV helps salespeople: Determine how much to spend to acquire a new customer Determine the level of customer service needed Determine how much focus should be placed on customer

retention Shift focus from one-time sales to the creation of closer

relationships with customers Retain more customers than their counterparts Keep their customers for longer periods of time Develop more profitable customers Gain referrals from customers with whom solid relationships

exist

Figure 4.3Building Blocks of Lifetime Customers

Figure 4.3Building Blocks of Lifetime Customers

A RelationshipFocus

Knowledgeof CustomerLife Cycles

CustomerDelight

Over Time

CustomerLoyalty

(Schlesinger, Sasser & Heskit 1997)

Click on each component

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ConceptualizingCustomer Lifetime Value

ConceptualizingCustomer Lifetime Value

CLV includes the total financial contribution of a customer over the lifetime of that customer’s relationship with a sales company

Calculating a customer’s lifetime value requires:

Knowledge of the cost of acquiring the customer

Computations of the stream of revenues forthcoming from the customer

Computations of the recurring costs of delivering service to that customer

Figure 4.4CLV (The Approach)

Figure 4.4CLV (The Approach)

Recurring Costs

RecurringRevenues

Net Margin

Life Spanof Customer

CumulativeMargin

AcquisitionCost

LifetimeValue

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Understanding the“Lifetime” Part of CLV

Understanding the“Lifetime” Part of CLV

Comparing ROI to CLV Return on Investment (ROI) represents a

way to measure the immediate result of any sales effort

CLV uses relationship capital to assess the long-term value of the customer

Over the long-term, customer retention occurs when salespeople

make offers and the customer accepts those offers over time

Over the long-term, customer retention occurs when salespeople

make offers and the customer accepts those offers over time

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Understanding the“Value” Part of CLV

Understanding the“Value” Part of CLV

As salespeople gain an understanding of their customer groups, they can attempt to create value by: Acquiring new customers Increasing revenues Retaining customers Reducing recurring costs Reducing acquisition costs

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4Using CLV ConceptsUsing CLV Concepts

To determine customer profitability, salespeople can use CLV concepts to segment customers into groups based on:

Revenues generated

• Including frequency of purchase and behaviors

Costs incurred

• Products purchased, channels used, service levels

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4Calculating CLVCalculating CLV

Salespeople can use ROI and CLV to guide their sales strategies First determine how long a typical customer will

do business

Refer to Table 4.2 (A-D)Using Customer Lifetime Value and Return on Investment to Make Sales Decisions

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4Building Value for CustomersBuilding Value for Customers

For customers Value is the source of long-term prosperity

For salespeople Value is sales

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4Monetizing BenefitsMonetizing Benefits

Salespeople can strengthen their presentations by showing prospects that the cost of a proposal is offset by added value Discounts Markup ROI Cost-benefit Payback

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4DiscountsDiscounts

Discounts are a reduction in price from the list price Quantity Cash Trade Consumer

(Refer to Table 4.3--Types of Discounts)

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4Markup and ProfitMarkup and Profit

Markup is the actual dollar amount added to the product’s cost to determine its selling price

Gross profit is the money available to cover the costs of marketing the product, operating the business, and profit

Net profit is the money remaining after the costs of marketing and operating the business are paid

Figure 4.5Example of Markup on Selling Price

in the Channel of Distribution

Figure 4.5Example of Markup on Selling Price

in the Channel of Distribution

$15 Cost from retailer$15 Cost from retailer$5.00 = Cost to manufacturer+2.00 = Markup (28.6 percent)$7.00 = Selling price to wholesaler

$5.00 = Cost to manufacturer+2.00 = Markup (28.6 percent)$7.00 = Selling price to wholesaler

$7.00 = Cost from manufacturer+2.00 = Markup (22.2 percent)$9.00 = Selling price to retailer

$7.00 = Cost from manufacturer+2.00 = Markup (22.2 percent)$9.00 = Selling price to retailer

$9.00 = Cost from wholesaler+6.00 = Markup (40 percent)$15.00 = Selling price to consumer

$9.00 = Cost from wholesaler+6.00 = Markup (40 percent)$15.00 = Selling price to consumer

MANUFACTURER WHOLESALER RETAILER CONSUMER

or direct from the manufacturer

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4Return on Investment (ROI)Return on Investment (ROI)

ROI is an additional sum of money expected from an investment over and above the original investment

• A percentage of the investment

• A dollar return on investment or

• Savings realized

ROI = Net profits (or savings) ÷ Investment

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4Cost Benefit Analysis Cost Benefit Analysis

A cost-benefit analysis is a list of the costs to the buyer and the savings the buyer can expect from the investment

Table 4.4An Example of a Cost Benefit Analysis

Table 4.4An Example of a Cost Benefit Analysis

Monthly Cost to Purchase

Monthly payment schedule (five-year purchase of six trucks*) 600 x 6 trucks $ 3,600.00

Monthly service agreement $ 300.00

Total monthly cost for entire fleet $ 3,900.00

Total cost over five years (excluding service agreement) 3600 x 60 months $ 216,000.00

Monthly Cost to Lease

Cost of leasing (per truck)

$ 500.00

Total monthly cost 500 x 6 trucks $ 3,000.00

Monthly service agreement $ 300.00

Cost over ten years 3000 x 120 months $ 360,000.00

Total savings (buying vs. leasing) =

(360,000 – 216,000) $ 144,000.00

*After five years, the company owns the trucks, whereas with leasing, the company continues to pay.

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4Payback PeriodPayback Period

Payback period is the length of time it takes for the investment cash outflow to be returned in the form of cash inflows or savings

Payback period = Investment ÷ Savings (or profits) per year

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Customer Defectionsand Retention Programs

Customer Defectionsand Retention Programs

Lost customers are called customer defections

Salespeople should have a program of segmenting lost customers by their reasons for defection

A customer retention program should be a core activity of sales organizations

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4Customer DefectionsCustomer Defections

Five reasons why customers defect

1. Some customers are attracted to competitors

2. Some customers are bought

3. Some customers move

4. Some customers are unintentionally pushed away

5. Some customers are intentionally pushed away

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Using CLV toRecover Lost Customers

Using CLV toRecover Lost Customers

A key to recovering lost customers is for salespeople to make sure the customers are worth having back, and then to have a plan for recovering them Not all customers are candidates for a win-back program

Table 4.5Estimating the Second Lifetime Value

of Lost Customers

Table 4.5Estimating the Second Lifetime Value

of Lost Customers

RowWin Back Customers

in Year 1

Win BackCustomersin Year 2

Win Back Customers in Year 3

1 Orders per year 8 10 12

2 Average order size $1,600 $1,800 $2,100

3 Revenue (row 1 x row 2) $12,800 $18,000 $25,200

4 Cross-sell revenue $12,000 $16,000 $22,000

5 Information value $500 $700 $900

6 Total revenue (rows 3, 4, and 5) $25,300 $34,700 $48,100

7 Direct cost (60% x row 6) $15,180 $20,820 $28,860

8 Win-back cost (25% x row 6) $6,325 0 0

9 Retention cost (10% x row 6) 0 $3,470 $4,810

10 Total costs (rows 7, 8, and 9) $21,505 $24,290 $33,670

11 Gross profit (row 6 – row 10) $3,795 $10,410 $14,430

12 Cumulative second lifetime value $3,795 $14,205 $28,635

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Using CLV To SelectNew Customers

Using CLV To SelectNew Customers

By evaluating a customer’s potential revenue and likelihood of defection, salespeople can:

Determine the overall expected value of a customer

Identify which customers are worth pursuing in a designated period of time

Table 4.6Customer Lifetime Value Creation Program

Table 4.6Customer Lifetime Value Creation Program

Planning Strategy Implementation

Create cross-functional teams to achieve value creation results

Communicate internally about customer lifetime value creation ideas

Agree on realistic objectives for value creation

Create a detailed implementation plan that includes a calendar, resources required, and tools to be used

Analyze churn behavior – the degree to which customers turn over

Gather financial data about customers

Calculate the lifetime value of a customer

Segment customers based on calculations of lifetime value

Simulate the use of value creation levers with each segment

Create a steering committee to ensure implementation

Create a team for each action plan developed

Launch test programs and pilot programs

Measure results

Adjust plans according to results obtained

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4Other Value Creation ProgramsOther Value Creation Programs

Satisfaction surveys

Reactive contacts

Special invitations

Value-added services: Product differentiation

Service differentiation

Relationship differentiation

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Four Principles of SuccessfulValue Creation Programs

Four Principles of SuccessfulValue Creation Programs

1. The better salespeople know their customers, competitors, and the market, the higher the likelihood they will succeed

2. Today’s customers are less susceptible to the influence of marketing

3. Customizing sales programs is only effective if such customization is based on relevant information

4. Value is much more powerful than image

Customer relationshipsare based on trust

Customer relationshipsare based on trust

Customers evaluate products based on experience not awareness

Customers evaluate products based on experience not awareness

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The Relevance of CustomerLifetime Value To Salespeople

The Relevance of CustomerLifetime Value To Salespeople

Lifetime value demonstrates that it costs less to serve loyal customers than to acquire new ones

Lifetime value favors up-front preparation and long-term profitable relationships

Information that helps salespeople attract and retain customers is valuable

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Building aCustomer Value Index

Building aCustomer Value Index

Salespeople should assemble all existing information about customers and prospects New unit sales data Service and support data Results of past selling campaigns Results of past prospecting campaigns

Table A4.1Table A4.1

Refer to Appendix

Table A4.2Table A4.2