The satisfaction and profit disconnect

“Customer satisfaction is not a surrogate for customer retention. While it may seem intuitive that increasing customer satisfaction will increase retention and therefore profits, the facts are contrary. Between 65% and 85% of customers who defect say they were satisfied or very satisfied with their former
supplier.”

–Frederick Reichheld

Questions asked at listening posts must be designed to find out whether products and services bought by satisfied customers are continuing to meet their needs.

Should existing products be adapted to respond to new needs? Should new services be added to respond to changing lifestyles?

For example, when a leading provider of baked goods saw sales begin to level off, they decided to find out why. By asking questions, they learned that most loyal customers were growing older, and becoming more concerned about fat and cholesterol in their diets. These customers were not dissatisfied with the company's products or delivery. They stopped buying the company's baked goods because the product line did not meet their needs anymore. They discovered that if the firm offered low-fat products, the loyal customers would be happy to buy them. By listening to their most loyal customers, the company determined that they should offer new products, which have become very successful.

Listening posts must be designed and used to measure satisfaction, of course, but they must also be used to measure factors that will gauge the possible defection of satisfied customers.

 

The Ritz

I was standing outside room 1036 of the Ritz-Carlton, just off the Boston Common, equipped with a room service cart with a light meal for two on it, with my trainer, Steve Posner.

I was training for a week to become a room service waiter at the Ritz for the purposes of a Harvard Business Review article I was writing, and was trying to learn how the Ritz achieves what might be called "extreme customer service" on the part of its employees.

I raised my hand to the door, going over the script in my head, pretty frightened as it turned out. I knocked on the door and said, "Good evening, in-room dining." I walked in with my cart, pushing rather than pulling it so that it kind of jiggled and tinkled and almost tipped over as I went into the room, and asked the woman in the room if I could open the bottle of water for her and help her in any way set up her meal.

And then she said, "That would be fine, if you'd like to," and then basically I stood there, hands behind my back, kind of slack-jawed and desperately trying to remember what I was supposed to do next.

Suddenly I remembered, "A-ha! Explain to them what they're receiving tonight." So I lifted off the warming tray and said, "You have a cheeseburger medium rare and a salad and beer and water." And then I stood there again.

Meanwhile my trainer, having basically given up on my ever opening the bottle of water, went over and did just that, and tried to smooth things over for me as we left the room. As we headed down in the elevator, he said, "We've got a little more training to take care of."

This was kind of my maiden voyage as a room service waiter at the Ritz, but the purpose of my going through the training and the process was really to try to find out what makes that hotel chain so successful in providing service to its customers.

They have a lot of rules, they have a very extensive training program, which they offer actually to other companies trying to offer top notch customer service. But my strongest takeaway from the week I spent learning to be a room service waiter was that empathy may be the most important aspect of providing extreme customer service.

The problem with my first trip into that room was I was thinking all about myself and not about my customer, my guest in that hotel. And the challenge over the course of my week was to get outside my own head and to get inside the heads of the people I was serving.

There was one instance where my trainer, Steve, did a wonderful thing. We were taking some champagne and pastries up to a room of a newlywed couple who would be arriving in a couple of hours. He not only was very careful in putting the rose petals around the champagne glasses, crossing the spoon — there was a lot of care given — but he was also at that very moment thinking about his own grandparents' wedding.

And he told me as we were doing this, he said, "On my grandparents' 75th anniversary, they showed pictures of their wedding. And while the pictures were old and kind of funny and from long ago, it meant something to them. And I want this experience to be meaningful to these people as well."

Empathy, getting inside the heads of the people you're trying to serve, was my strongest lesson I had from that experience as a room service waiter.

First-class customer service is all about empathy for the customer.

Observing the customer

There is no substitute for watching your customers while they are using your product or service. Get out into the field with qualified observers, and see how your customers use your product in real life. You'll find out what they like, what they don't like, and ways that they would improve your product or service. You'll be surprised to hear things you never even thought of.

For example, at a major photocopying company, observers in the field found that copy machines were usually placed in storerooms. People frequently stood on the machine to reach the highest shelves. Knowing this, product designers created a copy machine strong enough to support a person's weight.

When you go into the field, bring along observers with different backgrounds and skills. Different perspectives can provide valuable information.

Word of mouth

One of the things we are learning in the media is that the change that we're going through right now is something that is going to extend itself beyond media companies. One of the key elements we're learning in the media is that we have to pay more attention to the consumer.

The consumer has got much, much more control of the relationship than they used to and that's really going to be true in almost every business from now on. And that's one of the things digital platforms do; they match buyers with sellers — it's the reason eBay works so well, or Amazon.

You can find something you're looking for in a much easier way than you used to be able to. Any company has to worry about the fact that consumers can find information wherever they want and has to understand what that consumer wants and go after the consumer, and build a relationship with the consumer to keep them, to make them understand why they should stay with their product.

So a great example of that is a company called "Nespresso." They built a business where, 15 years ago when they started to build this business, you had to buy the coffee directly from them. They treasured that and they stayed after the consumer, wanted the consumer to have a good experience.So the consumer would call in and order the coffee by phone, even though they could get the machine at any number of stores. This phone call was the first connection the company would have one-on-one with the customer and they encouraged customers to call in and to order. And they would do what they could to get them all their canisters. But they used the opportunity to speak to them.An interesting thing happened: the Web came along and they also opened up some stores — they could have personal contact in stores. They actually built a Web site where you could order the coffee from. And a huge percentage of people moved to the Web to order the coffee. The interesting thing was they didn't stop calling though. They liked the calling experience so much that, even though they weren't buying from the phone bank, they were actually calling and asking questions about the coffee and doing stuff.

And the company, instead of cutting back on the call center and firing people and laying them off or trying to shorten the length of calls, went the other way. Invested more in it, added more people, and created what is an old fashioned social network, but the ultimate social network.You're actually talking to your consumers and customers and learn so much on a continuing basis that they encouraged their people, on the phone, to stay on the phone with customers — to talk to them more, to chat them up about new coffees that are coming and to explain how the company does everything it does.

And the business has grown dramatically. They're extremely happy with it. They have more and more customers every month. They've cut way back on traditional advertising. They believe word of mouth is what matters in that business and that social networking and all of the things that are at the heart of a consumer relationship are the heart of their business.Adapt your service strategy to the unique needs of your consumer. In the case of Nespresso, phone conversations provided the personal touch that their customers craved.

A wedge of lime

There's an interesting thing about Corona beer that a lot of people don't know about. A lot of people realize that Corona uses, in their advertising and, in fact, the way the beer is served, they use a wedge of lime in the bottle. Now, here's the story. It turns out that when this was initially being done, it was being done by people, consumers, who were consuming and drinking the beer. The people at Corona, the company — actually a Mexican company called Grupo Modelo — didn't like this.

And the reason they didn't like this is because they recycle their bottles. And this meant that every time there was a wedge in a bottle, it had to be taken out when the bottle had to be cleaned, to be reused. So they tried to initially discourage this.

And then they realized that consumers really like this ritual of putting the lime in the bottle. Since then, it's become part of the way that Corona beer gets marketed, to the point that they put it in all of their advertising.

To me, this is a wonderful example of how you learn from your customers, from your consumers, what's important to them. See, a lot of brands don't understand that a brand is more than just a logo, it's a relationship with a customer. And the customer co-creates this relationship with all kinds of rituals — in this particular case, something as simple as a wedge of lime in the bottle.

That today has made Corona beer iconic. When you see a clear glass bottle of beer with a wedge of lime, you almost don't have to see the brand name on it, you know that it's Corona.

So, great example of how you can use a consumer ritual as part of your brand, a ritual that the consumer has initiated.

When companies embrace consumer rituals as part of their brand, the customer relationship thrives

Get customer feedback

"All the smiles in the world aren't going to help you if your product or service is not what the customer wants."

–Carl Sewell and Paul Brown

The successful company is the one that meets and exceeds the expectations of its target customers. To accomplish this, it listens continually to its target customers to find out what products and services they want to meet their needs, and the way in which they want the products or services delivered. But customers are moving targets—their expectations are constantly changing. For this reason, organizations need as many opportunities to hear and respond to customer feedback as they can find. Every organization has listening posts, places where employees hear customer feedback. Organizations can create both formal and informal ways to find out how they're doing.

Communication is key

The relationship between the loyal customer and the successful organization is a dynamic, ongoing process based on constant two-way communication and responsiveness.

The difference between average and excellent organizations is how effectively management generates feedback, listens to it, communicates the information internally, and acts on it. Instead of "telling" through constant advertising and hard-sell pitches, companies must focus on "listening." Every organization already has built-in mechanisms for getting feedback, but they are not necessarily used well.

Select for attitude, train for skills

Skills can be taught, but it's difficult to train someone to have the right attitude. The most successful service organizations hire first for attitude and only secondly for skills. They train new hires in the skills they need for their jobs.

Everyone in the organization needs to have a customer-focused attitude. No one should be exempt, not even workers who spend little or no time in front of customers.

For example, a talented but egomaniacal software programmer can delay product releases and make life truly miserable for teammates. If the programmer's attitude problems go unchecked, delays will continue, and the most highly skilled co-workers will find jobs with a competitor.

Go beyond frontline service

Many organizations understand the need for training frontline workers to be polite, empathetic, and knowledgeable. But great frontline service is simply not enough. Everyone in the company is responsible for delivering the results the customer wants.

For example, a major airline subcontracted a shuttle service to fly passengers from a hub to the smaller airports in the region. Frontline workers were polite, industrious, and efficient. Unfortunately, the planes were never on time, when they took off at all. Flights were canceled almost continuously. Passengers constantly arrived hours or even a day late, frequently missing important events and meetings. Eventually, the poorly run shuttle service lost its contract and went out of business.

Obviously, great frontline service is critical for success in any organization. But, as this story shows, capability cannot stop at the front line if the company is to be profitable. When capability is lacking anywhere, it compromises the company's ability to deliver what the customers want. In the case of the airline, that was reliable transportation.

As a manager, you have the power and responsibility to strengthen the first link in the service-profit chain: employee capability.

Match expectations

"It takes months, even years to find a
customer ... and only seconds to lose one."

Great companies remember that even target customers are moving targets—their expectations shift and evolve over time. Thus, service quality is not absolute, because it is determined by the customer, not by the service provider. And it varies from customer to customer. Consequently, excellent service quality firms are those that can adapt their products and services to meet and exceed changing customer expectations.

For example, an automobile manufacturer with an extremely high loyalty rate noticed that it was losing customers. They went to their defecting customers and asked why. The customers were happy with the quality of the cars, but they were beginning to have families and wanted bigger cars. Their expectations had changed. When the manufacturer responded by designing bigger cars, its efforts were rewarded by increased loyalty and sales.

Misguided marketing

"Various estimates place the cost to attract new customers at five or more times the cost of retaining existing ones"

–James L. Heskett

The illustration below represents a typical marketing budget. As you can see, only a small fraction of the entire budget is devoted to maintaining loyal customers.

Most companies today don't work very hard at developing a relationship with a long-term customer. They focus nearly all their energy and money on getting new customers. They promise low, introductory rates and sign-up incentives, and, of course, they spend millions on marketing and advertising and lose money on bad debts.

The reward structure within the company is geared almost exclusively to luring new customers. The biggest incentives often go to employees who bring in new customers, not to those employees who work hard at keeping loyal internal and external customers satisfied.

Marketing budgets like these are driven by the misconception that if you want to make a profit, you must increase market share. This traditional marketing approach focuses on the four Ps—product, price, promotional activity, and "place" (distribution channels)—and leads to the misguided concept that any customer is a good customer.

Tools for getting feedback

All tools that measure feedback are best used in an atmosphere of trust. They should be used to gather useful information as a way to improve products and services, not as weapons or methods for assigning blame or punishing people. And all tools should measure both positive and negative feedback.

Listening posts include:

Web sites. Your company's Web site offers an excellent arena for obtaining customer feedback quickly and easily. Make the most of e-mail functionality by soliciting general feedback prominently on your site and posting e-mail addresses for designated contact people. Scan bulletin boards either on your site or look at those of competitors to find out what people are saying about your products or services.

• Audits. Audits take many forms. Perhaps the most popular among them is "mystery shopping." Mystery shopping may consist of actual visits to retail or other business sites, calls to customer service providers, or the actual consumption of either products or services. It is thought to offer a high degree of objectivity, although employees can regard it as unfair or even as "spying," if not evenly conducted to identify ways in which efforts can be improved.
• Market research. Many large corporations hire market research firms to do extensive studies that explore demographics, lifestyles, buying habits, preferences, and buying patterns. Small businesses may not be able to commission such extensive studies, but they can get data from the Small Business Administration.
• Focus groups. There are many kinds of focus groups, from small, informal meetings to elaborate, carefully orchestrated sessions. An informal group of customers from a target market can help a company testing an initial product idea, design, or concept. As the product develops, the company may begin to conduct more geographically expansive, professionally organized focus groups. Focus groups are excellent for testing products and services, but the focus group phenomenon can send an unfocused company into disarray as it becomes unable to think clearly in the face of often contradictory results.
• The ordering process. One of the most overlooked listening posts is the ordering process. Whether an order is taken in person, over the phone, or on the Web, valuable information can be obtained from customers by asking the right questions and listening carefully at this contact point.
• Satisfaction cards. Most service industries give customers a chance to fill out guest satisfaction cards. Today, they're prevalent in industries like food and lodging, health care, and automotive care.
• Surveys. A well-designed survey can help you determine what you are doing to deliver the greatest satisfaction, or lack of it. More elaborate than a satisfaction card, a survey measures many areas of satisfaction. Sometimes a written survey is followed up with a phone interview. Information gathered from surveys can be used to replicate the most successful strategies and solve the problem areas.
• The customer service process. Complaints that arise in the course of serving a customer should be carefully studied and responded to promptly. At one successful hotel chain, when a customer complains, it is noted on a Guest Incident Form and entered that day into a database so that other hotel personnel can be notified. This helps employees know that the guest may need special attention.
• Follow-up satisfaction calls. Recently, many organizations have established a follow-up satisfaction call as another listening post in their customer relationships. More elaborate than a card, but less involved than a comprehensive survey, the follow-up call is a personal, brief phone call that takes place shortly after a transaction. A representative calls the customer to make sure that everything is okay and ask a few, simple questions about their products and services.

The well-trained representative can spot service recovery problems before they begin, and can reveal more general information about what the target customer values or does not value.

For example, a major optical company calls customers about a week after they buy a pair of glasses. They check to make sure that the glasses fit properly, and invite the customer in for a follow-up fitting. At that time, representatives also ask a few other, brief questions that measure satisfaction. This "extra" service distinguishes this optical company from its competitors, and helps ensure repeat business.

Follow-up calls are also excellent marketing tools, establishing a feeling of trust between the company and the customer. A follow-up satisfaction call should be a sincere effort to ask about and provide service. It should not be used to "sell." If the caller uses a satisfaction call as a trick to "push" products, the customer will become annoyed.

The three Rs

Studies show that the longer customers are loyal, the more profitable they become. Why? The answer has to do with what are known as the three Rs of customer loyalty.

The first R of customer loyalty is retention. An ongoing relationship with a customer creates a steady stream of revenue over time as the customer continues to buy products. The costs associated with marketing decline, and, in many cases, so do the costs of actually serving the customer who becomes familiar with the company, its product lines, and its procedures.

Loyal customers also generate related sales, the second R. The profit generated by selling new products and services to existing customers is greater than it is for selling to new customers. The forward-thinking company develops new products by listening to its loyal customers. Loyal customers are therefore more likely to buy because the new product has been designed to meet their needs, and because they have a degree of faith in the company already.

In fact, the original product may generate a minor profit compared to related sales over time. New sales to existing customers are less costly, because they require less marketing, no new credit checks, less paperwork, and less time. Furthermore, loyal customers are often less sensitive to price than new customers.

Positive referrals, the third R, are the best kind of marketing—and they're free! Positive customer referrals are vital to profit and growth. Research suggests that satisfied customers are likely to tell five other people about a good experience, while dissatisfied customers are likely to tell eleven other people about a bad one. From your own experience, you know that personal referrals carry much more weight than traditional marketing.

Take risks

Sometimes, talking and listening to customers, studying market research and one process after another, can stifle imagination and creativity. How can a new product or service be introduced without solid approval from its target customers? How can any product make it without the blessing of a hundred focus groups? However, we need only to look at the histories of some of the most successful businesses to find that they were founded on products that focus groups rejected.

Do your market research. Listen to your customers. Deliver the best service. But use your imagination. Don't be afraid to let a new product or service create a need. Don't let the data drive you. You need to drive the data.

The service-profit chain

Research across a wide variety of industries confirms that profitability and growth are strongly related to variables such as:

• Employee capability
• Employee satisfaction
• Employee productivity
• Employees' ability to deliver good value to customers
• Customer satisfaction
• Customer loyalty

For example: Employee capability—built by hiring the right people, giving them training, support, latitude, and rewards—promotes employee job satisfaction. When employees enjoy their work and believe they are making a difference, they tend to stay longer and become more productive and knowledgeable. Such employee loyalty, in turn, creates greater customer satisfaction. After all, customers are more likely to be happy when they are being served by motivated employees who take the time to get to know their specific needs and circumstances. Not surprisingly, happy customers tend to buy more from the company and also to refer other customers to the company more frequently. Thus, customer satisfaction breeds customer loyalty. And there is a dramatic cause-and-effect relationship between customer loyalty and profitability: in some industries, a small percentage of a company's most valuable and loyal customers can account for more than half of total profitability.

The high cost of turnover

Research suggests that employees place a high value in their jobs on capability—which can be translated roughly as the latitude and ability to deliver results to both internal and external customers. High perceived capability can, in turn, lead to reductions in the rate of employee turnover.

Successful organizations have lower employee turnover than their competitors. Even firms that have relied upon high employee turnover—for example, fast-food chains, which have tended to hire low-skilled employees at minimal wages and provide them with minimal training—are beginning to understand that satisfied, long-term employees help build customer loyalty and satisfaction and cost less to manage. As a consequence, these companies are starting to question their traditional assumptions.

The visible costs of bad hires and high employee turnover show up in related costs, such as:

• Additional recruiting and training expenses
• Lower productivity on the part of co-workers and managers

A broad range of hidden costs can be equally damaging. High employee turnover can have a negative impact on:

The morale of other employees

• The quality of service provided
• Customer retention
• Productivity and profitability

Use the information you generate from calculating the cost of employee turnover in your own organization to help convince colleagues that it makes economic sense to hire, train, support, and reward loyal employees.

Set the right goal

Setting customer satisfaction goals requires you to identify target areas where your team or company needs to improve.

How to increase Motivation

If you want to make things happen the ability to motivate yourself and others is a crucial skill. At work, home, and everywhere in between, people use motivation to get results. Motivation requires a delicate balance of communication, structure, and incentives. These 21 tactics will help you maximize motivation in yourself and others.

1. Consequences – Never use threats. They’ll turn people against you. But making people aware of the negative consequences of not getting results (for everyone involved) can have a big impact. This one is also big for self motivation. If you don’t get your act together, will you ever get what you want?

2. Pleasure – This is the old carrot on a stick technique. Providing pleasurable rewards creates eager and productive people.

3. Performance incentives – Appeal to people’s selfish nature. Give them the opportunity to earn more for themselves by earning more for you.

4. Detailed instructions – If you want a specific result, give specific instructions. People work better when they know exactly what’s expected.

5. Short and long term goals – Use both short and long term goals to guide the action process and create an overall philosophy.

6. Kindness – Get people on your side and they’ll want to help you. Piss them off and they’ll do everything they can to screw you over.

7. Deadlines – Many people are most productive right before a big deadline. They also have a hard time focusing until that deadline is looming overhead. Use this to your advantage by setting up a series of mini-deadlines building up to an end result.8. Team Spirit – Create an environment of camaraderie. People work more effectively when they feel like part of team — they don’t want to let others down.

10. Recognize achievement – Make a point to recognize achievements one-on-one and also in group settings. People like to see that their work isn’t being ignored.

11. Personal stake – Think about the personal stake of others. What do they need? By understanding this you’ll be able to keep people happy and productive.

12. Concentrate on outcomes – No one likes to work with someone standing over their shoulder. Focus on outcomes — make it clear what you want and cut people loose to get it done on their own.

13. Trust and Respect – Give people the trust and respect they deserve and they’ll respond to requests much more favorably.

14. Create challenges – People are happy when they’re progressing towards a goal. Give them the opportunity to face new and difficult problems and they’ll be more enthusiastic.

15. Let people be creative – Don’t expect everyone to do things your way. Allowing people to be creative creates a more optimistic environment and can lead to awesome new ideas.16. Constructive criticism – Often people don’t realize what they’re doing wrong. Let them know. Most people want to improve and will make an effort once they know how to do it.

17. Demand improvement – Don’t let people stagnate. Each time someone advances raise the bar a little higher (especially for yourself).

18. Make it fun – Work is most enjoyable when it doesn’t feel like work at all. Let people have fun and the positive environment will lead to better results.

19. Create opportunities – Give people the opportunity to advance. Let them know that hard work will pay off.20. Communication – Keep the communication channels open. By being aware of potential problems you can fix them before a serious dispute arises.

21. Make it stimulating – Mix it up. Don’t ask people to do the same boring tasks all the time. A stimulating environment creates enthusiasm and the opportunity for “big picture” thinking.

Master these key points and you’ll increase motivation with a bit of hard work.

How to Build Trust With Your Employees?

To be successful in managing employees you have to build a repertoire of skills to motivate employees. Creating a strong working relationship with each of your team members occurs when you increase trust with each member of your team.

A team is a group of people, each one influencing the effectiveness of the whole. A team is successful when they have a trusting relationship with their manager.

==>What is trust?

Their are several definitions though this is probably the one that is most familiar:

Trust: assured reliance on the character, ability, strength, or truth of someone or something b: one in which confidence is placed.

==>Here are some basic steps to building trust with your employees:

Be Honest

Tell the truth, as best as you know it. If you don't know the answer, let them know you will research the question. This is basic respect that we offer others and ourselves in our interactions.

Keeping Your Commitments

A manager that consistently follows up when they say or gives an update builds trust naturally with their employees.

Handle Mistakes Respectfully

Everyone makes mistakes! Choose your words wisely when you are handling a mistake with an employee. First of all, always discuss the issue in private and be upbeat about the problem.

This is such an important skill to develop as a manager and one that is the most challenging to master. Why? First of all, I believe we don't listen to ourselves, so it can be a bit daunting to listen to others. Yet, we must learn to listen to others to build our reservoir of trust with our team members.

Treat All With Respect

Yes, you will have employees that are much easier to interact with...that are normal. It happens in all relationships. The skill you need to acquire here is to master your emotions, treat all team members fairly and equal. Equal doesn't have to be exact. Equality is based on respect for what each individual brings to your team.

There is skill to building trust with employees. Once you learn and practice the aspects of building trust, you will experience a change in your employees. If your relationship has been shaky with your employees, it will take time.

Try This!

Take some time to evaluate how you build trust with your employees. What is the one thing you do now that increases the trust levels with your team members? Then what is one action that decreases their trust levels with you.

Communicate the things you know for sure and then make you see those plans through. This will develop the proper pattern of communications and trust of management in future actions.

How to Dress up for a Job Interview

When you are invited to an interview you need to consider that your first impression is going to weight heavily on the person who is interviewing you. If you make a great first impression then you can bet the interviewer is going to use the meeting to try and justify why you should be working for their company. Likewise, of you make a poor first impression you should know that in the back of their mind they are looking for reasons why they shouldn’t hire you.

First impressions count and the way you dress for success is one of the simplest and most powerful ways to portray an image of confidence, authority, success, style and self-esteem.

Here is a universal truth that you must keep in mind whenever you meet someone for the first time. “People almost always judge a book by its cover.” Our appearance is the single most important way we impact someone else when we first meet. Studies have shown the following

• 55% of the other persons impression is determined by our appearance
• 38% determined by how we speak, our tone, volume, diction, etc.
• 7% of their impression is determined by what we say

So what does this mean if you have a job interview?

1) If you are in doubt find out the dress code in advance. You can call the company and ask the receptionist or a sales person: “what’s the dress code for your sales people, is it business casual or suit and tie?”

2) If its business casual then dress one level better than you need to. If they work in jeans and T-shirts then wear a set of clean dress pents and a new T shirt or open collar dress shirt. If the company’s sales team wears dress pants and jackets with no ties then wear a suit and tie.

3) It’s always smarter to dress better than is needed. You don’t want them wondering; “what were you thinking when you got dressed for this job interview”.

Don’t be afraid to invest a few Rupees in a new shirt and tie when you are job hunting, they will go a long way towards sprucing up a suit you may have had for a few years. Looking good will improve your confidence and help you move one step closer to landing that job.
By: Ibrahim Khalil

Compare lifetime values

The lifetime value of a customer works very differently from industry to industry. Show your understanding of the different shapes that lifetime value can take.

You will need this information to answer the questions about the three charts.

Chart 1 shows profit traceable to individual customer increasing along with the time of the customer relationship.

Chart 2 shows profit traceable to individual customer varying from year to year, with no discernible trend.

Chart 3 shows the highest profit traceable to individual customer at the beginning of the customer relationship. As time of customer relationship progresses, the profit traceable to the individual customer goes up and down, but never reaches the profit gained at the beginning of the relationship.

Calculating customer lifetime value

Why don't companies pay more attention to their loyal customers? Because they don't appreciate how valuable they are. Calculating the lifetime value of your customers can be an eye-opening experience. It can also help you build top management's support for customer retention initiatives.

Lifetime value can be calculated for any customer in any industry. Let's assume a business-to-business example: a small graphic design studio that buys software from a vendor.

In year 1, the owner of the design studio sees a television ad for new desktop layout software and makes a purchase. In this first year, the vendor doesn't make any money on this customer because the costs of acquiring and serving the customer are greater than the purchase price of the software program.

In year 2, the customer, happy with the layout software, buys the upgrade (which has a higher profit margin) as well as a software program for drawing and illustrating. In addition, the studio owner refers the layout software to several independent graphic designers, one of whom buys the layout software.

In year 3, the design studio buys a program for manipulating images and a clip art library from the vendor. The first referral buys the drawing software and the layout software upgrade. Another referral purchases the layout software.

In year 4, the design studio purchases a new upgrade to the layout software and an upgrade to the drawing software. The first referral purchases image manipulation software and a clip art library. The second referral purchases the drawing software and the layout software upgrade. In addition, two new referrals purchase the basic layout software.

In year 5, the design studio buys new all-in-one software combining layout, illustration, and image manipulation capabilities and also a different clip art library. The first referral buys another upgrade to the layout software and an upgrade to the drawing software. The second referral buys image manipulation software and a clip art library. The two referrals from the past year each purchase the drawing software and the upgrade to the layout software.

The purchases made in years 1 through 5 by the design studio and its referrals are tabulated below. As you can see, the initial $800 purchase in year 1 leads to an additional $12,850 of business from all sources in years 2 through 5.

Calculating Lifetime Value, Sample
	Year1	Year2	Year3	Year4	Year5
Revenue from basic goods and services	800	0	0	0	0
Revenue from new goods and services	0	500 250	500 200	250 250	3,000 200
Cost to (acquire and) serve	850	100	100	100	100
Referrals: Revenue from new loyal accounts	0	800	750 800	700 750 800 800	500 700 750 750
Profit ($)	(-)50	1,450	2,150	3,450	5,800