CHAPTER 4 CHAPTER 4 Servicing the Customer to Build Lifetime Value Servicing the Customer to Build Lifetime Value

“Not everything that can be counted counts, and not everything that counts can be counted” Albert Einstein

Relationship selling is a process that occurs over time

1 4 Knowing 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

1 4 How Salespeople Use Customer 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 s, 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 customers and create customer segments Salespeople can use this information to predict customer behavior Salespeople can further use this information in decisions to grow, retain, or win customers Feedback Data collected from customer interactions Data collected from customer interactions Figure 4.1 How Salespeople Can Use Data to Maximize the Lifetime Value of Customers

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

1 4 Customer 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

1 4 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

1 4 Embracing 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

1 4 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

80-20 Rule 20 percent of customers provide 80 percent of the profits 20 percent of customers provide 80 percent of the profits

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

1 4 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

1 4 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

1 4 Knowing 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 4.3 Building Blocks of Lifetime Customers A Relationship Focus Knowledge of Customer Life Cycles Customer Delight Over Time Customer Loyalty (Schlesinger, Sasser & Heskit 1997 ) Click on each component

Table 4.1 Transaction-Focused vs. Relationship-Focused Selling

1 4 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 3 Main Goals

1 4 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 Creating a Life Cycle Building Blocks

1 4 Creating Customer Life Cycles Collecting and analyzing data  Purchase frequency  Recency  Average purchase size  Number of customer visits and contacts over time

1 4 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

1 4 Four Ways to View Loyalty Based on the accomplishment/performance of the product/service over a period of time 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

1 4 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

1 4 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

1 4 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

1 4 Using 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

1 4 Calculating 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

1 4 Building Value for Customers For customers  Value is the source of long-term prosperity For salespeople  Value is sales

1 4 Monetizing 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

1 4 Discounts Discounts are a reduction in price from the list price  Quantity  Cash  Trade  Consumer (Refer to Table 4.3--Types of Discounts)

1 4 Markup 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 4.5 Example of Markup on Selling Price in the Channel of Distribution $15 Cost from retailer $5.00 = Cost to manufacturer = Markup (28.6 percent) $7.00 = Selling price to wholesaler $5.00 = Cost to manufacturer = Markup (28.6 percent) $7.00 = Selling price to wholesaler $7.00 = Cost from manufacturer = Markup (22.2 percent) $9.00 = Selling price to retailer $7.00 = Cost from manufacturer = Markup (22.2 percent) $9.00 = Selling price to retailer $9.00 = Cost from wholesaler = Markup (40 percent) $15.00 = Selling price to consumer $9.00 = Cost from wholesaler = Markup (40 percent) $15.00 = Selling price to consumer MANUFACTURER WHOLESALER RETAILERCONSUMER or direct from the manufacturer

1 4 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

1 4 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 4.4 An Example of a Cost Benefit Analysis

1 4 Payback 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

1 4 Customer Defections and 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

1 4 Customer 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

1 4 Using CLV to Recover 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 4.5 Estimating the Second Lifetime Value of Lost Customers Row Win Back Customers in Year 1 Win Back Customers in Year 2 Win Back Customers in Year 3 1Orders per year Average order size$1,600$1,800$2,100 3Revenue (row 1 x row 2)$12,800$18,000$25,200 4Cross-sell revenue$12,000$16,000$22,000 5Information value$500$700$900 6Total revenue (rows 3, 4, and 5)$25,300$34,700$48,100 7Direct cost (60% x row 6)$15,180$20,820$28,860 8Win-back cost (25% x row 6)$6, Retention cost (10% x row 6)0$3,470$4,810 10Total costs (rows 7, 8, and 9)$21,505$24,290$33,670 11Gross profit (row 6 – row 10)$3,795$10,410$14,430 12Cumulative second lifetime value$3,795$14,205$28,635

1 4 Using CLV To Select New 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 4.6 Customer Lifetime Value Creation Program PlanningStrategyImplementation  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

1 4 Other Value Creation Programs Satisfaction surveys Reactive contacts Special invitations Value-added services:  Product differentiation  Service differentiation  Relationship differentiation

1 4 Four Principles of Successful Value 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 relationships are based on trust Customers evaluate products based on experience not awareness

1 4 The Relevance of Customer Lifetime 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

1 4 Building a Customer 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 A4.1 Refer to Appendix Table A4.2

Table A4.1 Calculating a Lifetime Value Index for Customers

Table A4.2 Using the Customer Value Index