Customer Lifetime Value Chapter 4

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. This extends our discussion on the theories related to sales and marketing relationships.

A 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

Customer Lifetime Value (CLV) CLV, as a sales focus, is about how the customer is treated over time Lifetime value is a measure of customer loyalty, customers will remain loyal only if they derive value from a relationship (remember the SPT) Therefore customer lifetime value is the net profit earned from sales to a given customer during the time that customer purchases from the sales organization

Small Customers These customers account for a very small percent of the salesperson'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 Are Candidates For Growth Customers That Are Candidates For Growth Key Customers These customers often represent the best growth opportunities. Salespeople should expend effort with these and try to work with the sales firm to allocate resources toward these customers. These are the salesperson’s best customers, yielding most of the rep’s sales revenue. However, they often offer little room for growth, so the salesperson may simply act to maintain excellence in relations through the 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 4.2 How Salespeople Use Customer Lifetime Value to Guide Their Behavior

Exercise 10.1, p.21 on Cases and Exercises Purpose is to identify customers that will offer a favourable lifetime value. This is also closely related to the portfolio method of account classification.

Figure 4.3 Building Blocks of Lifetime Customers A Relationship Focus Knowledge of Customer Life Cycles Customer Delight Over Time Customer Loyalty (Schlesinger, Sasser & Heskit 1997 )

Customer Life Cycle The series of steps a customer goes through when she considers purchasing, using, and maintaining loyalty to a product or service describes the customer life cycle. Customer behaviour can change over time, and salespeople must consider these changes as insights into future behaviour and interactions with customers.

Creating Customer Life Cycles Collecting and analyzing data –Purchase frequency –Recency –Average purchase size –Number of customer visits and contacts over time

Three Main Goals of The Customer Life Cycle Approach 1.Attain new customers and increase the number of relationships 2.Increase the profitability of those relationships 3.Increase the duration of profitable relationships

Customer Delight Customer delight occurs when a salesperson goes above and beyond customers’ expectations –Tangible and intangible benefits (e.g., extraordinary service) beyond the functional features of a product

Four Ways to View Loyalty Based on the accomplishment/performance of the product/service over a period of time (i.e. Auto) Based on awareness of a deeply held commitment to repurchase regularly Influenced by feelings or partiality toward the product/service and/or the salesperson Influenced by a propensity toward the product or service

Conceptualizing Customer 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 4.4 CLV (The Approach) Recurring Costs Recurring Revenues Net Margin Life Span of Customer Cumulative Margin Acquisition Cost Lifetime Value

How much are you, as a customer, worth over your university lifetime? $960 at a pizza parlor over your years in university, not $10 per visit $1150 at the hair stylist during your years in university, not $45 per visit $2570 at a gas station during your years in university, not $40 per fill-up $4800 at the bookstore over your years in university, not $600 per semester