How customer loyalty depends on employee satisfaction

We’ve all experienced it – you go to a store to buy something and the service is lousy, you walk out annoyed and make a mental note to never shop there again. Or you go to another store selling the same stuff and the service is excellent, you walk out feeling good and make a mental reminder to come back to this store when you next need whatever they sell. The difference behind these experiences is primarily employee training and attitude. Employees who are poorly trained and/or dissatisfied with how they perceive being treated by their employer and manager will reflect that in how they deal with customers.

How does this apply to B2B marketing and sales? Many B2B companies are focusing on customer retention and loyalty as a means to market and sell additional products/services/solutions to existing customers. A key element of this strategy is to increase customer retention and loyalty. Firstly, we need to recognize these are different attributes:

  • Customer retention means that a customer continues to actively use your product/service/solution and there is some continuing relationship such as subscribing to support or maintenance services.
  • Customer loyalty means that a customer desires to continue doing business with you based on their positive experience and satisfaction. They want to buy more from you.
While you obviously want to retain customers, developing customer loyalty is the key to generating significant revenues from existing customers.

However, before you set off on any marketing and sales program based on customer retention or loyalty, be aware that there is a direct correlation between employee satisfaction and customer loyalty. There is a lot of research to support this – just search for ‘customer loyalty and employee satisfaction’ in your favorite Internet search engine. If your employees, in every area of your business and particularly those who interact with customers, are dissatisfied with their situation and/or the conditions at your company overall, your customer loyalty rating will probably be impacted negatively.

To adapt an old adage – “customer loyalty starts at home” – there is no point in launching a customer loyalty program for generating more sales unless employee satisfaction and attitude at your company is generally positive. Unfortunately, during this challenging economic period, companies are doing many things to undermine employee satisfaction and are mistakenly expecting to improve sales via customer loyalty at the same time.

“Bring a good attitude to work and customers will feel it all day long.” – Anonymous

Customers can sense when something is wrong at a company based on the demeanor of the employees. An employee satisfaction program should be an integral precursor to using customer loyalty for marketing and sales programs for best results.

If you have a customer loyalty focus in your organization, check out this blog post by my good friend and former colleague Melissa Paulik about the role: The Trials of the Customer Loyalty Specialist.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

Impact of Customer Retention on Lifetime Customer Value

Continuing the series of posts about Lifetime Customer Value (LCV), this post looks at how Customer Retention impacts LCV.

Everyone probably agrees that customer retention is important and we know intuitively that better retention is a good thing. But just having better customer retention isn’t worth much unless you have relevant programs to monetize existing customers. Do you know specifically how a change in customer retention will manifest in financial terms at your company?

That’s where having factual data that measures LCV comes into play. Measuring LCV provides the means to do modeling on possible scenarios and then track performance. Using the same LCV example from the previous posts, this would be the scenario if we increased retention to 95% with a 10% increase in retention costs (changes in red):
Assuming the same sales penetration rate for existing customers, revenues and gross profit would increase by 41% and 34% respectively during years 2-5 (the retention period). The LCV revenue and profit per customer would increase by 9.1% and 9.3% respectively over the full 5 year lifetime period. In this example the 10% increase in retention cost represents 1.05% of total costs. Therefore an investment of 1.05% returns 9.3% additional LCV profit – a good deal by any measure. Would you like to do this for your company?

Unless you have factual LCV baseline data to model possible improvement scenarios, you’re just guessing that the outcome would be favorable. In this example, spending 28% more on customer retention produces a negative return – do you know what your rate of return would be for various spending levels?

“Old age marketers like photo shoots and they believe in their intuition. But new age marketers believe their job is allocating assets in order to achieve desired business results, such as increasing revenue or customer retention.” – Jeff Levitan

As mentioned earlier, we probably all agree that improving customer retention is a good thing, especially in the current recessionary business environment where finding new customers is tough. Retaining more customers should reflect positively on Lifetime Customer Value, but it’s not a straightforward certainty:
  • What’s the value proposition for customers to stay with you longer than they have been?
  • How much can you spend to retain more customers?
  • If you can retain more customers, how are you going to monetize it? There’s no point in just retaining more customers if you don’t have a plan to market and sell something to them.
  • What other benefits can you reap from retaining more customers? For example, a larger pool of candidates for references and case studies.
Hopefully this series of blog posts has provided some ideas and food for thought to make better decisions and improve business results using Lifetime Customer Value data.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

Strategic Insights from Calculating Lifetime Customer Value

Last week’s post looked at the calculations and mechanics of developing a Lifetime Customer Value (LCV) model. This post reviews some of the insights that can be determined from LCV calculations for better marketing, sales and business decisions.

Consider the following sample analysis using the same LCV model example from last week's post for reference.

Acquisition costs for a new customer are high and profitability in the first year is usually low or possibly negative. In the example, the ROI in the first year of acquiring a new customer is ~26% whereas the ROI for the next 4 years for those same existing customers is ~92%. More remarkable is the Sales & Marketing ROI in the acquisition year is ~42% and ~297% over the next 4 years. While this insight may be intuitively obvious in general, it is knowing exactly what your numbers are that will enable you make informed strategic decisions for improving performance.

“If you cannot measure it, you cannot improve it.” – Lord Kelvin (William Thomson)

Consider LCV per customer – in the example, total revenue over 5 years is $88,279 of which $12,000 (13.6%) is realized in the first year. LCV per customer in profit terms is $26,093 over 5 years of which $2,500 (9.6%) is realized in the first year. The point here is that many B2B companies invest a huge amount of resources, time and effort to acquire new customers, but rarely seem to show that same determination and enthusiasm for generating returns from existing customers in subsequent years. But the vast majority of the revenue potential and profitability is only realized in those subsequent years.

This raises some interesting questions:
  1. Are your marketing and sales resources aligned with generating the maximum lifetime value from your customers relative to your specific LCV data?
  2. Are these resources appropriate relative to the lifetime values? The type of marketing campaign and sales activity to acquire a new customer is quite different from marketing and selling to existing customers.
  3. Knowing your LCV revenue and profit profiles, are you using the right marketing and sales channels?
  4. In last week’s post I recommended calculating LCV by customer or market segment. You may also consider a separate dimension by product line if applicable. Having the market segment and/or product line slices of the LCV data provides more granular and specific insight for making even better and more relevant strategic decisions.
Customer retention is a significant factor in determining Lifetime Customer Value revenues and profitability – I’ll explore that in the next post.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.

How to determine Lifetime Customer Value

I’ve mentioned Lifetime Customer Value (LCV) in several previous posts. Subsequent discussions around the topic of LCV indicated that while many people talk about it, few actually know the information for their business. Seems that there are perceptions about lack of data, complexity, calculation formula, etc. that get in the way of determining LCV. There’s tremendous value in going through the process and determining LCV for your business. Keep it simple to start, then refine and improve data and calculations over time.

You can find many LCV calculation models on the Internet. For the purposes of this discussion, we’ll use this simplified model I developed:Lifetime Customer Value modelThis post will focus on the model and mechanics for calculating LCV using this simplified example. I’ll review analysis and usage in next couple of posts. The following bullet numbers refer to the subscript numbers in the first column of the spreadsheet image above:

  1. Unless you only sell one type of product/service/solution to one market segment, you should do LCV calculations by customer or market segment – this will provide much better information and insights to make good strategic decisions. LCV information averaged over all customers in a multi-segment business tends to obscure the nuggets that can make a huge difference.
  2. The number of new customers in that customer or market segment acquired in a recent year.
  3. What percentage remain active customers in each subsequent year (year over year %).
  4. Calculated from the initial number of new customers and subsequent retention rates.
  5. Total product/service/solution revenues from these customers each year. Year 1 is when they initially buy, subsequent years are additional purchases.
  6. If applicable, the annual license/maintenance/service/support/hosting/etc. fees the retained customers pay.
  7. Divide total annual revenue by number of retained customers for each year.
  8. Cumulative total revenue divided by initial number of customers. This reflects the LCV in Revenue terms for each customer. In this example each of the initial 1,000 customers that produce $12,000 in revenue in year 1 from the initial sale, produce $18,253 in revenue over 3 years and $22,603 over 5 years.
  9. Your total sales costs for acquiring the customers in year 1 and additional purchases in subsequent years.
  10. Your total marketing costs for acquiring the customers in year 1 and additional purchases in subsequent years.
  11. Your cost of goods sold (COGS) – this example uses a 25% of revenue flat rate.
  12. The costs for retaining customers and generating continuity sales(6) – such as support, product updates, services, etc.
  13. Total revenue minus total costs.
  14. Cumulative gross profit divided by initial number of customers. This reflects the LCV in Profitability terms for each customer. In this example each of the initial 1,000 customers that produce $2,500 in gross profit in year 1 from the initial sale, produce $5,505 in gross profit over 3 years and $7,587 over 5 years.
For added financial accuracy, the Revenue and Profit LCV over the extended period should be calculated in Net Present Value (NPV) using the discount rate (based on prevailing interest rates and risk) to calculate future revenue and profits in today’s value of money. For simplicity, NPV is not included in this example. The time span for calculating LCV should be based on your typical customer life cycle longevity.

What analyses and insights can you glean from this Lifetime Customer Value example that would be beneficial to know in you business?

The next post in this series reviews some of the insights that can be determined from LCV calculations.

Your comments are always welcome.
Copyright © 2009 The Marketing Mélange and Ingistics LLC.