The Customer as Appreciating Asset
When the Federal Express courier comes to my office reception area, she is greeted by Annah Salas. When she looks at Annah, she should see $180,000 stamped on her forehead.
My little 20-person firm runs about a $1,500-a-month Fed Ex bill. Over ten years, that will total $180,000. I find this simple device, calculating the ten-year (or, alternatively, lifetime) value of a customer, to be very powerful. It has profoundly altered my own thinking.
Stew Leonard, the erstwhile Norwalk, Connecticut, grocer, got me started on this. He says, "When I see a frown on a customer's face, I see $50,000 about to walk out the door." His good customers buy about $100 worth of groceries a week. Over ten years, that adds up to roughly $50,000. We all agree that repeat trade is the key to business success; this simple quantifying procedure provides a way to add potency to the idea.
Here are two other examples. Average lifetime auto purchases will total about $150,000, not including repair work. Given car buyers' remarkably low dealer loyalty these days, it would surely alter that business's tactics if dealers and their employees focused on this big number. Or suppose you frequent a good restaurant twice a month for a six-person business dinner. You're worth about $75,000 every ten years to that establishment.
Though these numbers are imposing, two further twists up the ante. The repeat customer is obviously any firm's principal vehicle for word-of-mouth advertising. Conservatively, suppose a lifelong, happy customer sells just one colleague on becoming a lifelong customer of your superb restaurant, grocery store, or Federal Express, as the case may be. Suddenly, the regular customer's value to the restaurant doubles from $75,000 to $150,000, including that likely word-of-mouth referral. And that sign on Annah's forehead is now read by the Fed Ex person as $360,000 rather than $180,000.
There's a third step in the progression. If the restaurant's waiter handles five tables a night, he or she is catering to 5 x $150,000, or $750,000, worth of potential business. The numbers are stunning for Fed Ex. If our courier has 40 regular stops at businesses my size, she is managing a 40 x $360,000, or $14 million, "portfolio" of customers each day!
So the three-step formula is: First, estimate the 10-year lifelong value of a customer, based upon the size and frequency of a good customer's average transaction. Then multiply that number by two, to take into account the word-of-mouth factor. Finally, multiply the new total by the average number of customers served per day by the sales, service, dispatch, or other front-line person or group. The result is the lifelong value of the "customer portfolio" that the individual or group deals with each day.
The implication is clear. If you look at customers in this or a related way, you are likely to take a new view of hiring, training, compensating, and spending on support tools to aid the customer-serving process.
Take that waiter, managing $750,000 of your future each night. Are you still sure you want to brag about your low average wages? Are you certain that skimping on uniform quality makes sense? Does the investment in a small computer system to support order taking still look as expensive as it did?
Suddenly, Stew Leonard's insistence that everyone in the store go through lengthy Dale Carnegie public speaking and attitude courses takes on a different light. So does Federal Express's high pay and seemingly lavish spending on support systems, such as the Cosmos computer system that soon will include an onboard terminal in each delivery truck.
Consider another element of the pay scheme. Most firms don't discriminate in sales commissions that come from new business or repeat and add-on business. A few go so far as to weigh commissions in favor of new business and cut back on repeat order commissions, which presumably require less work. In fact, sales pay ought to be skewed substantially toward increased incentives for repeat and add-on business. We want our salespeople not to take today's customers for granted. Repeat and add-on business usually results from a host of small but, in total, time-consuming touches—such as acting as a go-between with the engineering or service departments. We want to ensure that the incentive says unmistakably, "Spend that time!"
There is no limit to this line of thought. PPG Industries (the former Pittsburgh Plate Glass) recently built satellite plants—near six auto assembly plants (plus four under construction) for which it is currently a sole-source supplier. It did this without a request by the customer and with no guarantee of keeping the business. Sounds risky. Not if you consider, by my rough calculation, that about $1 billion in business is at stake over the course of a decade. Now the risk is in not building the satellites to enhance responsiveness.
The ideas of "good will" and the importance of repeat business are not new. But this calculation adds precision to the awesome importance of the concepts, for restaurateurs and grocers, as well as a PPG, a Boeing, or an IBM.
It boils down to this: When you build a plant, it starts depreciating the day it opens. The well-served customer, on the other hand, is an appreciating asset. Every small act on her or his behalf ups the odds of repeat business, add-on business, and priceless word-of-mouth referral.
(c) 1987 TPG Communications.
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