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Sunday, January 31, 2010

The Real Value of a Customer

One of the reasons customer service is what it is (as in not nearly as good as it should be) is that most organizations grossly underestimate customer value (CV) seeing it as simply the difference between the cost of providing goods or services and what the customer pays for them at point of sale.

Say for example Neil, my youngest pictured above, buys a pair of skis on sale for $800 (a ridiculous amount if you ask me, but considerably less than the ones he really wants). If the total cost of those skis (what the manufacturer/distributor charges the retailer, plus a proportionate share of operating expenses such as salaries, commissions, rent, advertising, etc.) to the shop is $700, they are likely see his CV as $100.

On the surface this might seem reasonable, but it far from tells the whole story.

First, the skis mentioned above by no means represent my son's first pair, in fact, he currently has three pair in active service (don't ask) and there are at least as many cast offs in the basement. I prefer not to think how many pair of skis he has owned and how much they cost.

It should be noted that not all of those skis were bought from the same shop and even if they had, I can understand why the retailer is not all that likely to account for purchases of years gone by when calculating Neil's value as a customer, although a little acknowledgment would be nice.

But consider this - Neil typically buys a new pair of skis every two years, either because he wears them out (what he tells me) or because something 'way better' has come along (the real reason). Given his passion for the sport, he is very likely to continue this pattern for many years to come and it would not be out of line to suggest that in the course of his lifetime he will probably go through at least 25-30 pair.

So what we are really talking about here are sales over time of somewhere between $20,000 - $25,000 and based on a 10% margin, that translates into $2,000 - $2,500 in potential value for the retailer.

But that is only part of the story. In order to ski, Neil not only needs skis, but also boots - good ones go for about $500 to $600 (replace every 3-4 years); poles - $50 to $100 (lasting 2-3 years, unless stolen); gloves - $100 (at best 2 years, but only if he doesn't lose them); goggles - at least $100 for anything decent, considerably more if you go with the built in antifogging fans (who know how long they'll last); a helmet - his mother won't let him leave home without one - $100 to $150 (good for 3-4 seasons or until he head buts a tree)...and then there's the outer wear (jackets and ski pants)... inner wear (thermal underwear, fleece, etc.)...and après ski wear...let's not even go there.

But we're not done yet. When it comes to skiing, Neil is the expert in our family, so when his brother or I need new equipment, we follow his lead. And because he can recite equipment specs in his sleep, not to mention 'drop a line' (ski cliffs/shoots/tight trees) most of us wouldn't think skiable, there's also a broader circle of friends, acquaintances and people who just happen to be riding the same chairlift who turn to him for advice as per what to buy and where to buy it.

When you add everything up over the course of his life, Neil will directly or indirectly influence the purchase of well over $100,000 in ski equipment, which would suggest that to those who sell the stuff he has a potential customer lifetime value (CLV), even at very conservative margins, well in excess of 10 grand!

It would be silly to imply that all of Neil's 'customer lifetime value' will be realized by a single shop, but one thing is for sure, little if any will go to the one that calculates his CV as $100!

So if you happen to own a ski shop, you might want to think about that the next time some lanky kid in jeans and a hoodie strolls in and tips back his baseball cap to give you and your inventory a critical glance.

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7 comments:

  1. Hi Jim, what a fascinating concept. Customer value. It'll never catch on, of course, but I admire your optimism in putting it forward.

    Although flippant, of course, there may actually be some truth in it, at least as far as the small, retail customer is concerned. Tracking his/her spend could cost the retailer more than the worth of the spend itself.

    Different matter when we're looking at the CV of our large corporate customers, almost to the point that your invite failure if you fail to track the annual spend of your large corporate customers.

    Thought provoking blog, as usual! Thanks my friend.

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  2. Nice blog Jim! I wholehearedly agree.

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  3. This is a great article Jim!

    Excellent story full of simple examples and with humour.

    cheers!

    Jeff

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  4. Great article on customer service.

    Keep up the good work.

    All the best!

    Al

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  5. Makes you wonder what the customer lifetime value of a car fanatic might be.

    Rick

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  6. Rick

    Worse than that would be the lifetime value to a grocery store for the average family of four.

    Jim

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  7. Customers are crucial for a business and a customer friendly culture drives a company's profitability. Treat them well and they will boost your company's bottom line with their referrals and recommendations.
    Small Business Answering service

    ReplyDelete