CHAPTER 4

1. CHAPTER 4 Servicing the Customer to Build Lifetime Value

2. “Not everything that can be counted counts, and not everything that counts can be counted” Albert Einstein

3. Relationship selling isa process that occurs over time

4. 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. How Salespeople UseCustomer Information • To improve customer strategies • To grow, retain, or win customers • To maximize customer lifetime value (CLV)

6. Salespeople can further use this information in decisions to grow, retain, or win customers • Information is updated in real time, sometimes after a sales call, other times after other customer contacts Salespeople can use this information to predict customer behavior • When lifetime value is important, customer profiles and segments are based on future revenues from customers Data are used to profile customers and create customer segments Feedback • Data are collected from many sources – sales contacts, trade shows, customer e-mails, customer Web site visits • Data are assembled, analyzed and stored by others in the sales organization • Salespeople use information to better manage their customer relationships and improve customer lifetime value Data collected from customer interactions Figure 4.1How Salespeople Can Use Data to Maximizethe Lifetime Value of Customers

7. Lifetime Value Approach When salespeople use the information they have derived and 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. 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. Customer Relationship Management (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. 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. 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. 80-20 Rule 20 percent of customers provide 80 percent of the profits

13. These are the salesperson’s best customers, yielding most of the rep’s sales revenue. However, they often offer little room for growth, so the salesperson may simply act to maintain excellence in relations through the provision of service. Key Customers Salespeople must make choices about which customers are worthy of large investments to move them to key customer status. These customers often represent the best growth opportunities. Salespeople should expend effort with these and try to work with the sales firm to allocate resources toward these customers. Customers That Are Candidates For Growth Salespeople must make choices about which of these customers represent growth opportunities and should receive attention. These customers account for a very small percent of the salesperson's revenue. They may even represent loss of revenue. Salespeople can choose to deactivate them or continue coverage if they offer higher future value. Small Customers Figure 4.2How Salespeople Use Customer Lifetime Valueto Guide Their Behavior

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. How much are you, as a customer,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. 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. Customer Loyalty Figure 4.3Building Blocks of Lifetime Customers Customer Delight Over Time Knowledge of Customer Life Cycles A Relationship Focus Click on each component (Schlesinger, Sasser & Heskit 1997)

18. ConceptualizingCustomer 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

19. Figure 4.4CLV (The Approach) Life Span of Customer Recurring Costs Cumulative Margin Lifetime Value Net Margin Acquisition Cost Recurring Revenues

20. Understanding the“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-termvalue of the customer

21. Over the long-term, customer retention occurs when salespeople make offers and the customer accepts those offers over time

22. Understanding the“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

23. 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

24. 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

25. Building Value for Customers • For customers • Value is the source of long-term prosperity • For salespeople • Value is sales

26. 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

27. Discounts • Discounts are a reduction in price from the list price • Quantity • Cash • Trade • Consumer (Refer to Table 4.3--Types of Discounts)

28. 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

29. MANUFACTURER WHOLESALER RETAILER CONSUMER $5.00 = Cost to manufacturer +2.00 = Markup (28.6 percent) $7.00 = Selling price to wholesaler $7.00 = Cost from manufacturer +2.00 = Markup (22.2 percent) $9.00 = Selling price to retailer $9.00 = Cost from wholesaler +6.00 = Markup (40 percent) $15.00 = Selling price to consumer $15 Cost from retailer or direct from the manufacturer Figure 4.5Example of Markup on Selling Pricein the Channel of Distribution

30. 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

31. 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

32. Table 4.4An Example of a Cost Benefit Analysis

33. 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

34. Customer Defectionsand 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

35. Customer Defections • Five reasons why customers defect • Some customers are attracted to competitors • Some customers are bought • Some customers move • Some customers are unintentionally pushed away • Some customers are intentionally pushed away

36. Using CLV toRecover 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

37. Table 4.5Estimating the Second Lifetime Valueof Lost Customers

38. Using CLV To SelectNew 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

39. Table 4.6Customer Lifetime Value Creation Program

40. Other Value Creation Programs • Satisfaction surveys • Reactive contacts • Special invitations • Value-added services: • Product differentiation • Service differentiation • Relationship differentiation

41. Four Principles of SuccessfulValue Creation Programs • The better salespeople know their customers, competitors, and the market, the higher the likelihood they will succeed • Today’s customers are less susceptible to the influence of marketing • Customizing sales programs is only effective if such customization is based on relevant information • Value is much more powerful than image

42. Customer relationshipsare based on trust Customers evaluate products based on experience not awareness

43. The Relevance of CustomerLifetime 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

44. Building aCustomer 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