CHAPTER 4 Servicing the Customer to Build Lifetime Value

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

How Salespeople Use Customer Information To improve customer strategies To grow, retain, or win customers To maximize customer lifetime value (CLV)

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

Customer Retention 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

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

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

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

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

Table 4.1 Transaction-Focused vs. Relationship-Focused Selling

Figure 4.3 Building Blocks of Lifetime Customers A Relationship Focus Knowledge of Customer Life Cycles Customer Delight Over Time Customer Loyalty

Customer Life Cycle Every customer has a “Life Cycle” –Initial purchase decision –Product or service use –Increased loyalty to the product or service –Defection

Three Main Goals of The Customer Life Cycle Approach Because customers have a life cycle, sales people must: Attain new customers and continually increase the number of relationships Increase the profitability of those relationships 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 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

Defection Competition undercuts your price An error occurs A change in customer personal Competitor’s product improves

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

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

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

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

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* * ONE OF THESE ARE REQUIRED IN YOUR TERM PROJECT

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

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

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 One of the text examples is poor

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

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

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

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

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

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

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

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