Know Your Customers –Selection & Value Impacts Profitability & Sustainability: Focus on ‘Customer LifeTime Value’–It Really Matters

Know your customers. “I don’t know the key to success, but the key to failure is trying to please everybody” ~Bill Cosby

Know the Customer ‘Look Into the Mirror’: Customer selection is as much about you (your company) as it is the customer. You must first figure out who you are as a company, today; and what you want the company to be, in the future. Only then can you be proactive about selecting the customers that will help you achieve your goals. Some of your customers are more valuable than others and some, well, they just aren’t worth keeping. Among the many customer types; ‘strategic and partnership accounts’ are essential for the success of a business and they are critical factors in valuing the worth of a business. Whatever their size and whatever their markets, companies everywhere need to effectively manage and protect their strategic/key and partnership accounts as valuable ‘assets’. They need to deliver real customer value and invest appropriately in the strategic relationships, or risk account erosion or worse being ‘positioned’ as a commodity supplier. This all sounds great; but, how do you determine who are the most valued-customers and, more important, how do you measure the ‘value’ of the customer/account over the lifetime of the relationship? There are no easy answers and, to complicate the matter further, there is no standard method for determining ‘customer lifetime value’, as a result, the topic is highly debatable with opinions that vary from; ‘it depends’ to ‘it doesn’t matter’.  However, there are several factors that are involved in the process and they include; customer churn rate, customer turnover, customer return-on-investment… Also, most attempts look closely at the customer cost of replacement versus the customer cost of retention… Here are some expert commentaries on the topic:

Go through a lifetime customer-value exercise… Consider the value delivered to the customer/account, the replacement cost, and the investment you need to make in the relationship… customer retention cost. Would you be able to replace this account with another of equal value… what is the acquisition cost? Is there 5% or 10% or 20% rule for acquisition: If a customer is worth $10 million in annual-revenues is the firm willing to invest $500K or $1 Million annually to retain it or acquire it? What is the return-on-investment (ROI)?”

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“There is a spurious ‘fact’ that circulates widely alleging that it costs ‘five times’ as much to acquire a new customer as it does to retain an existing one; although some people say it’s ‘seven times’ as much, or ‘ten times’ as much. This fact originated with a Harvard Business Review article a couple of decades ago, which was the result of a general study of retention policies compared to acquisition policies across a range of businesses in different (consumer) categories…”

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“The idea that it costs ‘X times’ more to acquire a customer than retain one is an urban myth: First off, acquisition costs vary by industry.  Second, costs to both acquire and retain customers ebb and flow with economic cycles. Third — and most importantly — retention costs are ‘incalculable’. A firm has to first determine what it includes and excludes in the definition of retention costs. For example, do you include all the costs associated with providing customer service in retention calculations?  Do you allocate all IT application maintenance and enhancements to retention calculations?  The ‘ reality’– is that no one has the slightest clue what it costs to retain a customer, because no one has defined a standard for what costs to include and which ones to exclude…”

In the article “Customer Lifetime Value: How to target Your Customer Intimacy” by Jack Springman writes:  For B2B firms, growing existing customer relationships is often seen as an easy way to generate additional revenue and profits. Managers perceive that once the ‘hard part’ (winning the first sale in the account) has been done, then the established relationship provides a platform on which the sales team can build.  Both these points are true, of course, but growing existing relationships must be approached in a ‘strategic’ rather than ‘tactical’ manner.  Solving a customer’s broader problem requires customer intimacy.  Becoming ‘customer intimate’ increases the costs of serving customers. Relatively few businesses can afford to be highly intimate with all their customers, as such, intimacy should only be targeted with customers where the greatest opportunity exists. One means of quantifying this is through calculating ‘customer life-time value’, which recognizes that the relationship with the customer is long-term. Measuring profitability on the ‘current customer revenue contribution’ is, by definition, backward-looking. By contrast, ‘customer life-time value’ is future-focused (forward-looking) and captures the potential value in the relationship, long-term. This encompasses different sources of customer value, and provides a more strategic perspective on relationships; as well as, providing the necessary insight to define ‘how to’ nurture the relationships and which customers to select.  Calculating customer life-time value is not a pre-requisite for growing customer relationships. However, even if a business chooses not to use the process the exercise can still be highly supportive; providing an understanding on how to measure and monitor the key drivers that are the foundation for customer value-based analysis. Thereby, an understanding for growing strategic customer relationships into substantial business opportunities is in effect, turning aspiration into reality…      

In the article “Why Strategic Account Planning is Necessary for Sales Success” by Mark Kilens writes: An essential element for engaging ‘strategic and partnership accounts’ is the ‘account/customer plan’ (or blueprint or guide…). The ‘account plan’ must answer the 5-Ws: who, what, where, when and why, and have a well-designed roadmap identifying different routes and options that connects your positioning to the final destination (i.e., long-term, win-win, business relationship). For sure, the first step is ‘closing the sale’, but more important it means developing an intimate customer relationship. With this objective, the ‘account/customer plan’ must be dynamic, ever-changing, and continuously updated with the most recent information to verify that the connected dots will, in fact, win the sale; as well as, having the right roadmap that will maintain and sustain a productive win-win business relationship.  Some say that 80% of revenue comes from only 20% of their customers, and other benchmarks show that 50% of a company’s revenue comes from 5% of its customers… Whichever the measure, it’s clear that a small and disproportionate number of customers are responsible for a large percentage of a company’s revenue. In fact, strategic & partnership accounts are critically important for a company’s growth and profitability and must be carefully managed as a valued company ‘asset’.  Revenue growth is the new universal imperative; growth is the lifeblood of an organization and executives are increasingly following the mantra ‘back to growth’. There are two approaches for business intent on growing revenue. Expand into new markets and new customer bases, or optimize the business in your existing strategic & partnership accounts. These approaches are meant to be complementary, but with global competition severely limiting market expansion; leading firms are focusing on the second option, seeking to develop untapped potential in their existing strategic and partnership accounts…  

In the article “To Drive Your Sales, Adopt a Major-Accounts Strategy” by Barbara Bix and Beth Somers Stutzman write: Focus on companies that have the potential to become a long-term partnership. Chances are good that you can develop these ‘customers/accounts’ into higher volume purchasers and long-term relationships through a ‘major account strategy’.  A major account strategy concentrates on building relationships with a few high revenue accounts based on your unique differentiated and valued-added products, services, and expertise over a long period of time and across different product lines. The major account salesperson’s role is to cultivate or ‘farm’ a few select high revenue potential accounts for new and repeat business.  The emphasis is on investing in the relationship and creating future opportunities, rather than merely consummating the sale. Each interaction gives both parties the opportunities to learn more about each other, strengthen the relationship, and ideally create additional opportunities to work together.  The desired result is to sell more valued products and services to each major account, create win-win relationships that block competitor entry, build long-term customer loyalty, and ultimately develop a sustainable growing business from each major account. In essence, you are asking the customer to collaborate in the selling/buying process, which will result in a win-win, long-term relationship and contribute to the success of both businesses…

‘Know Thyself’: Know‘where’ your company is today (current position). Know ‘what’ your company wants to achieve (desired goal). Know ‘how’ your company expects to achieve the goal (action plan). Then, you can be proactive about selecting the customers that will help you achieve your goal. The key to a value-driven process is ‘customer discovery’, and an understanding that the customer is the first step in achieving sustainable growth and profit. Discover what your customers need, their value expectations, and what the business relationship looks like through their eyes. This activity of discovery demands a much greater proactive commitment than merely surveying customers or listening to them. It requires attentiveness, creativity, imagination and even speculation. You must constantly be alert to new discoveries which may challenge or change your original plan… Key/strategic customers are the heart of every business. How they are identified and cultivated can be the difference between a thriving enterprise and one that is struggling to survive. Since competitive pressure has never been greater, companies can no longer afford to expend energy on customer development without a well-conceived plan and focus. Sluggish economy, globalization, mergers and acquisition, eroding margins, out-sourcing, the technological revolution, shrinking customer bases; these and other developments are creating unprecedented challenges for business executives, especially for those who manage ‘strategic and partnership accounts’.  More than ever, maintaining and building win-win relationships with key/strategic customers is essential for profitability, and an imperative for company growth and sustainability…

There’s only one safe way to have a strategic account, and that’s to become a strategic vendor to that account. In other words, you’ve got to set things up so that you’re as important to the account as the account is to you.  That way, if the relationship goes sour, you’re not the only one who gets hurt.” ~Sam Reese