How To Measure Customer Value
A CCW Digital Analysis
Acquiring a new customer is anywhere from five to twenty-five times more expensive than retaining an existing one.
Why? To put it simply, you don’t always have to spend costly resources targeting new clients and first-time customers — you just have to keep the ones you have happy.
Research done by Frederick Reichheld shows a 5% increase in customer retention rates increases profits by 25% to 95%.
Marketing managers and CSAT analysts will usually look at churn rate as one metric, directed at a specific segment level of their target market (i.e. how many of our 20-25-year-old customers from these demographic regions left this quarter).
But strategically competitive organizations that enjoy a plethora of actionable analytics and consumer data are starting to shift their focus to the predictive value of an individual customer, emphasizing the importance of customer lifetime value (CLV) and detailed consumer personas.
The rise of big (actionable) data is making it possible for businesses to act more expediently and precisely on costly churn rates, to pinpoint specific problems in their business model.
Not all leads are created equally
As seen in a recent HBR study, one major mistake is not seeing that high churn rate or low CLV as being the result of (controllable, yet) poor customer acquisition efforts.
“This was the problem many pointed out with Groupon’s business model. Those deals may have helped companies bring on new customers, but they were typically high-churning customers who didn’t stick around to make another purchase when a heavy discount wasn’t offered.”
In other words, not all leads are created equally.
“Many firms are attracting the wrong kinds of customers. We see this in industries that promote price heavily upfront. They attract deal seekers who then leave quickly when they find a better deal with another company,” says Jill Avery, a senior lecturer at Harvard Business School and author of HBR’s Go To Market Tools.
Do you have an acquisition or retention problem?
Before you assume you have a retention problem, consider whether you have an acquisition problem. Think about the customers you want to serve upfront and focus on acquiring the customer/client for as long as possible. “The goal is to bring in and keep consumers who you can provide value to and who are valuable to you,” says Avery.
“The #1 reason customers switch brands is that they feel unappreciated,” Scotty Werner, customer experience consultant, and CCW Digital Influencer, recently told me at CCW Nashville, (in reference to his book, Spectacular Service).
Today’s organizations demand meaningful relationships with their customers. And customers gravitate towards brands that consistently and continuously provide great experiences. The organic approach involves constantly working to elevate the customer experience journey, from first-time interactions through post-purchase consumer behavior (and everything in-between).
Another way to increase chances of longer CLV with individual customers is to exceed the customer’s expectations where you can (even if that means going against a small, yet harmless company policy).
When it’s okay to break company policy
Here’s an everyday example from an excerpt by CCW Digital Principal Analyst, Brian Cantor:
“In recent months, two nearby coffee restaurants suffered outages with their credit card systems. Always the lucky ones, I happened to visit each restaurant on its respective day of strife.
Store One: As I got to the register, the cashier advised me of the credit card situation, before confirming, ‘You don’t have cash, right?’ I began to reach for my wallet, only for him to repeat, ‘It’s cool…you don’t have cash.’ He winked, I understood what was going on, and I received my drink for free.
Store Two: Having reaped the rewards of the previous store’s outage, my eyes lit up when I found out store number two was now facing a similar credit card conflict. When the cashier asked if I had cash, I knew the drill: ‘Sorry, I don’t think I do.’ This time, however, there was no wink, and I instead heard, ‘Oh, really? Well, our credit card system is down so you have to pay with cash…we also don’t have change.’ A firm believer that the concept of ‘change’ should no longer exist, I never carry change (the change I do begrudgingly receive goes into tip jars, the cups of homeless persons and street performers or my desk to use for the occasional pack of gum), and that meant I had to pay $4 cash for a $3.19 drink.
Care to guess which store I now prefer to frequent?”
If two coffee stores are right next to one another and one gives Brian a free drink and develops a relationship with him, as a customer, there is a greater chance of Brian becoming a loyal customer of Store One.
If Brian works at the same company for a chunk of his life, and he decided to get his morning coffee from Store One next to his office every morning, that has the potential of $3.19 times 261 workdays in a year (give or take) times 25 years (assuming Brian doesn’t die or move across the country in his 50’s), equating to $20,814.75 in Store One revenue, from Brian.
.. All over a $3.19 discount (that was never supposed to happen).
When I first heard this story, I instantly reminisced on the time I recalled an auto-body shop-owner explaining to my Grandma (a loyal customer to the particular business) “you helped put my kids through college,” referring to a life-time of motive repairs and tire changes.
As mentioned earlier, a 5% increase in customer retention rates increases a businesses’ profits by 25% to 95%.
In other words, you don’t always have to empty your budget on costly resources, in an attempt to target every potential customer or client. Sometimes, you just have to keep the ones that come your way happy.