Servicing the Customer to Build Lifetime Value(A New Dimension)
“Not everything that can be counted  counts, and not everything that      counts can be counted”          Albert Einstein
Relationship selling isa process that occurs over time
14     Knowing the Status of Customers    An important aspect of knowing the status of    customers lies in the salesperso...
1            How Salespeople Use4            Customer Information    To improve customer strategies    To grow, retain, or...
Figure 4.1             How Salespeople Can Use Data to Maximize                  the Lifetime Value of Customers          ...
Lifetime Value ApproachWhen salespeople use the information they have derivedand accessed from every contact the customer ...
14       Customer Retention with CLV    Customer lifetime value is applicable only if    salespeople are focused on develo...
1     Customer Relationship Management4                  (CRM)    Key aspects of a CRM program     Knowing how much custo...
14         Embracing CLV Principles    When customers are viewed as assets, CLV    concepts enable salespeople to estimate...
14                 A Shift in Focus    From acquisition to retention     It costs less to serve loyal customers than to  ...
80-20 Rule20 percent of customers provide    80 percent of the profits
Figure 4.2           How Salespeople Use Customer Lifetime Value                     to Guide Their Behavior              ...
14     Customer Lifetime Value (CLV)    Customer lifetime value is the net profit    earned from sales to a given customer...
1       How much are you, as a customer,4       worth over your college lifetime?    $960 at a pizza parlor over your year...
14    Knowing The Customer Lifetime Value    Knowing the CLV helps salespeople:     Determine how much to spend to acquir...
Figure 4.3    Building Blocks of Lifetime Customers                                                              Customer ...
Table 4.1               Transaction-Focused vs.             Relationship-Focused Selling         Selling Element          ...
14              Customer Life Cycle    The series of steps a customer goes through when    she considers purchasing, using...
1           Three Main Goals of4     The Customer Life Cycle Approach1. Attain new customers and increase the   number of ...
14        Creating Customer Life Cycles    Collecting and analyzing data       Purchase frequency       Recency       A...
14               Customer Delight    Customer delight occurs when a salesperson    goes above and beyond customers’    exp...
14         Four Ways to View Loyalty    Based on the accomplishment/performance of the    product/service over a period of...
1                 Conceptualizing4             Customer Lifetime Value    CLV includes the total financial contribution of...
Figure 4.4            CLV (The Approach)              Life Span             of CustomerRecurring                  Cumulati...
1               Understanding the4             “Lifetime” Part of CLV    Comparing ROI to CLV     Return on Investment (R...
Over the long-term, customerretention occurs when salespeople   make offers and the customer  accepts those offers over time
1                 Understanding the4                “Value” Part of CLV    As salespeople gain an understanding of    thei...
14              Using CLV Concepts    To determine customer profitability,    salespeople can use CLV concepts to    segme...
14                           Calculating CLV       Salespeople can use ROI and CLV to guide       their sales strategies  ...
14       Building Value for Customers    For customers     Value is the source of long-term prosperity    For salespeople...
14               Monetizing Benefits    Salespeople can strengthen their    presentations by showing prospects that the   ...
14                        Discounts    Discounts are a reduction in price from the    list price       Quantity       Ca...
14              Markup and Profit    Markup is the actual dollar amount added to    the product’s cost to determine its se...
Figure 4.5                         Example of Markup on Selling Price                            in the Channel of Distrib...
14        Return on Investment (ROI)    ROI is an additional sum of money expected    from an investment over and above th...
14            Cost Benefit Analysis    A cost-benefit analysis is a list of the costs to    the buyer and the savings the ...
Table 4.4      An Example of a Cost Benefit AnalysisMonthly Cost to PurchaseMonthly payment schedule (five-year purchase o...
14                      Payback Period      Payback period is the length of time it takes      for the investment cash out...
1            Customer Defections4           and Retention Programs    Lost customers are called customer    defections    ...
14           Customer Defections    Five reasons why customers defect    1. Some customers are attracted to competitors   ...
1                 Using CLV to4             Recover Lost Customers    A key to recovering lost customers is for    salespe...
Table 4.5          Estimating the Second Lifetime Value                   of Lost Customers                               ...
1              Using CLV To Select4                New Customers    By evaluating a customer’s potential revenue    and li...
Table 4.6     Customer Lifetime Value Creation Program          Planning                       Strategy                   ...
14      Other Value Creation Programs    Satisfaction surveys    Reactive contacts    Special invitations    Value-added s...
1         Four Principles of Successful4          Value Creation Programs1.   The better salespeople know their customers,...
Customer relationships   are based on trustCustomers evaluate products based  on experience not awareness
1          The Relevance of Customer4         Lifetime Value To Salespeople    Lifetime value demonstrates that it costs l...
1                   Building a4              Customer Value Index    Salespeople should assemble all existing    informati...
Table A4.1                                 Calculating a Lifetime Value                                     Index for Cust...
Table A4.2Using the Customer Value Index
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Life Time Customers

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Life Time Customers

  1. 1. Servicing the Customer to Build Lifetime Value(A New Dimension)
  2. 2. “Not everything that can be counted counts, and not everything that counts can be counted” Albert Einstein
  3. 3. Relationship selling isa process that occurs over time
  4. 4. 14 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
  5. 5. 1 How Salespeople Use4 Customer Information To improve customer strategies To grow, retain, or win customers To maximize customer lifetime value (CLV)
  6. 6. Figure 4.1 How Salespeople Can Use Data to Maximize the Lifetime Value of Customers Salespeople can further use this information in • Information is updated in real time, sometimes after a decisions to grow, retain, or win customers sales call, other times after other customer contacts Salespeople can use this information to predict customer behavior • When lifetime value is important, customer profiles Data are used to profile customers and segments are based on future revenues from and create customer segments customersFeedback • Data are collected from many sources – sales contacts, trade shows, customer e-mails, customer Web site visits Data collected • Data are assembled, analyzed and stored by others in from customer the sales organization interactions • Salespeople use information to better manage their customer relationships and improve customer lifetime value
  7. 7. Lifetime Value ApproachWhen salespeople use the information they have derivedand 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
  8. 8. 14 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
  9. 9. 1 Customer Relationship Management4 (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
  10. 10. 14 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
  11. 11. 14 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
  12. 12. 80-20 Rule20 percent of customers provide 80 percent of the profits
  13. 13. Figure 4.2 How Salespeople Use Customer Lifetime Value to Guide Their Behavior These are the salesperson’s best customers, yielding most of the rep’s sales revenue. However, they often Key Customers offer little room for growth, so the salesperson may simply act to maintain excellence in relations through Salespeople must make the provision of service. choices about which customers are worthy of large investments to move them to key customer status. These customers often represent the best growth Customers That Are opportunities. Salespeople should expend effort Candidates For Growth with these and try to work with the sales firm to allocate resources toward these customers.Salespeople must makechoices about which of thesecustomers represent growthopportunities and shouldreceive attention. These customers account for a very small percent of the salespersons revenue. They may even represent loss of Small Customers revenue. Salespeople can choose to deactivate them or continue coverage if they offer higher future value.
  14. 14. 14 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
  15. 15. 1 How much are you, as a customer,4 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
  16. 16. 14 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
  17. 17. Figure 4.3 Building Blocks of Lifetime Customers Customer Loyalty Customer Delight Over Time Knowledge of Customer Life CyclesA Relationship Focus Click on each component (Schlesinger, Sasser & Heskit 1997 )
  18. 18. Table 4.1 Transaction-Focused vs. Relationship-Focused Selling Selling Element Transaction-Focused Selling Relationship-Focused Selling Focus Solicitation of one-time sales Customer retention Performance measures Return on Investment (ROI), value Lifetime value of sales, batting average Orientation Transactions Customer relationships Time horizon Short-term Long-term Customer service Little emphasis as transactions are Strong emphasis as long-term key relationships are keySource: Adapted from Sargent, Adrian (2001), “Customer Lifetime Value and Marketing Strategy: How to Forge the Link,” The Marketing Review, 1, 427-440.
  19. 19. 14 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
  20. 20. 1 Three Main Goals of4 The Customer Life Cycle Approach1. Attain new customers and increase the number of relationships2. Increase the profitability of those relationships3. Increase the duration of profitable relationships Building Creating a Blocks Life Cycle
  21. 21. 14 Creating Customer Life Cycles Collecting and analyzing data  Purchase frequency  Recency  Average purchase size  Number of customer visits and contacts over time
  22. 22. 14 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
  23. 23. 14 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
  24. 24. 1 Conceptualizing4 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
  25. 25. Figure 4.4 CLV (The Approach) Life Span of CustomerRecurring Cumulative Costs Margin Lifetime Net Margin ValueRecurring AcquisitionRevenues Cost
  26. 26. 1 Understanding the4 “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
  27. 27. Over the long-term, customerretention occurs when salespeople make offers and the customer accepts those offers over time
  28. 28. 1 Understanding the4 “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
  29. 29. 14 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
  30. 30. 14 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
  31. 31. 14 Building Value for Customers For customers  Value is the source of long-term prosperity For salespeople  Value is sales
  32. 32. 14 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
  33. 33. 14 Discounts Discounts are a reduction in price from the list price  Quantity  Cash  Trade  Consumer (Refer to Table 4.3--Types of Discounts)
  34. 34. 14 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
  35. 35. Figure 4.5 Example of Markup on Selling Price in the Channel of Distribution MANUFACTURER WHOLESALER RETAILER CONSUMER$5.00 = Cost to manufacturer $7.00 = Cost from manufacturer $7.00 = Cost from manufacturer $9.00 = Cost from wholesaler $9.00 = Cost from wholesaler+2.00 = Markup (28.6 percent)+2.00 = Markup (28.6 percent) +2.00 = Markup (22.2 percent) +2.00 = Markup (22.2 percent) +6.00 = Markup (40 percent) +6.00 Markup (40 percent) $15 Cost from retailer $15 Cost from retailer$7.00 = Selling price to wholesaler $9.00 = Selling price to retailer $9.00 = Selling price to retailer $15.00 = Selling price to consumer $15.00 = Selling price to consumer or direct from the manufacturer
  36. 36. 14 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
  37. 37. 14 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
  38. 38. Table 4.4 An Example of a Cost Benefit AnalysisMonthly Cost to PurchaseMonthly payment schedule (five-year purchase of six trucks*) 600 x 6 trucks $ 3,600.00Monthly service agreement $ 300.00 Total monthly cost for entire fleet $ 3,900.00Total cost over five years (excluding service agreement) 3600 x 60 months $ 216,000.00Monthly Cost to LeaseCost of leasing (per truck) $ 500.00 Total monthly cost 500 x 6 trucks $ 3,000.00Monthly service agreement $ 300.00Cost over ten years 3000 x 120 months $ 360,000.00 Total savings (buying vs. leasing) = (360,000 – 216,000) $ 144,000.00*After five years, the company owns the trucks, whereas with leasing, the company continues to pay.
  39. 39. 14 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
  40. 40. 1 Customer Defections4 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
  41. 41. 14 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
  42. 42. 1 Using CLV to4 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
  43. 43. Table 4.5 Estimating the Second Lifetime Value of Lost Customers Win Back Win Back Customers Win Back CustomersRow Customers in Year 1 in Year 3 in Year 2 1 Orders per year 8 10 12 2 Average order size $1,600 $1,800 $2,100 3 Revenue (row 1 x row 2) $12,800 $18,000 $25,200 4 Cross-sell revenue $12,000 $16,000 $22,000 5 Information value $500 $700 $900 6 Total revenue (rows 3, 4, and 5) $25,300 $34,700 $48,100 7 Direct cost (60% x row 6) $15,180 $20,820 $28,860 8 Win-back cost (25% x row 6) $6,325 0 0 9 Retention cost (10% x row 6) 0 $3,470 $4,81010 Total costs (rows 7, 8, and 9) $21,505 $24,290 $33,67011 Gross profit (row 6 – row 10) $3,795 $10,410 $14,43012 Cumulative second lifetime value $3,795 $14,205 $28,635
  44. 44. 1 Using CLV To Select4 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
  45. 45. Table 4.6 Customer Lifetime Value Creation Program Planning Strategy Implementation• Create cross-functional • Analyze churn behavior – • Create a steering teams to achieve value the degree to which committee to ensure creation results customers turn over implementation• Communicate internally • Gather financial data • Create a team for each about customer lifetime about customers action plan developed value creation ideas • Calculate the lifetime • Launch test programs and• Agree on realistic value of a customer pilot programs objectives for value creation • Segment customers based • Measure results on calculations of lifetime• Create a detailed value • Adjust plans according to implementation plan that results obtained includes a calendar, • Simulate the use of value resources required, and creation levers with each tools to be used segment
  46. 46. 14 Other Value Creation Programs Satisfaction surveys Reactive contacts Special invitations Value-added services:  Product differentiation  Service differentiation  Relationship differentiation
  47. 47. 1 Four Principles of Successful4 Value Creation Programs1. The better salespeople know their customers, competitors, and the market, the higher the likelihood they will succeed2. Today’s customers are less susceptible to the influence of marketing3. Customizing sales programs is only effective if such customization is based on relevant information4. Value is much more powerful than image
  48. 48. Customer relationships are based on trustCustomers evaluate products based on experience not awareness
  49. 49. 1 The Relevance of Customer4 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
  50. 50. 1 Building a4 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 Refer to Appendix Table A4.1 Table A4.2
  51. 51. Table A4.1 Calculating a Lifetime Value Index for Customers A B C D E F G H I Number of Units Profit Trade Trade or Purchase Expected Average Profit Service or Margin on Replacement Replacement Customer Likelihood of To be Bought Purchase Margin on Repair Level Repair Cycle in Cycle Value IndexCustomer New Units Or Replaced Price New Units Per Unit Service Years Variable (CVI) 1 0.5 20 $1,400 45% $400 35% 5 .20 $38,500 2 0.9 80 $900 30% $300 30% 2 .50 $51,840 3 0.3 250 $1025 25% $300 25% 1 1.00 $24,844 4 0.2 1800 $900 20% $250 25% 5 .20 $436,500 5 0.8 25 $1,300 40% $300 35% 5 .20 $62,500The customer value index is calculated using the following equation:Customer Value Index (CVI) = (Purchase Likelihood (A) * Trade Cycle in Years (G)) * (Number of Units Expected (B)) * ((Purchase Price (C) * Profit on New Units (D)) + (Service Level (E) * Profit on Service(F))CVI for Customer 1: = (.5*5) * 20 ((1400 * .45) + (400 * .35)) = 2.5 * 20 (630 + 140) = $38,500Source: adopted from Weber, Alan (2002), “Building a Customer Value Index,” Database Marketing Institute, (January 10).
  52. 52. Table A4.2Using the Customer Value Index

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