Customer Delivered Value

1. Costs Psychic Energy Time Monetary Total Value Image Personnel Services Product Total Customer Delivered Value

2. Why Satisfaction Is Not Enough • Are your customers satisfied? How do you know? • Could your customers be more satisfied? • What are you doing about this? • What about your competitors?

3. Customer Relationships Customer Relationship Management (CRM) – process of managing information about customers and managing all customer touch points Touch point – customer encounters brand, product, personnel How many bugs are one bug too many?

4. Customer Relationships Framework for one-to-one marketing • Identify prospects and customers • Differentiate customers with respect to their needs and their value to your firm • Observe/interact with individual customers to learn • Customize products, services, messages

5. Customer Relationships • Reduce rates of customer defection – deliver personalized service • Increase longevity of relationships – involve customers • Enhance customer growth potential – cross-sell, up-sell • Make low profit customers more profitable – terminate, reduce features, pay more

6. Customer Relationships Reduce Customer Defection • Know the retention rate – define it • Understand causes of defection and ascertain which can be managed • Estimate profit lost when a customer defects • What will it take (cost) to reduce defections? • Listen to customers

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

8. Customer Lifetime Value Customer Equity – total of discounted lifetime values of all the firm’s customers • Value – customers’ assessment of utility • Brand – customers’ assessment of image • Relationship – customers’ willingness to stay with brand

9. Customer A Purchase – $5,000 Makes 1 purchase per year Signed a 5 year contract Uses our product in a non-critical support role Provides exposure for our product to thousands of potential customers each year Customer B Purchase - $1,000 Makes 1 purchase a month Signed a 2 year contract Uses our product as part of their key service to their customers Once purchased our product is only seen by this customer Congratulations, You’re Hired!

10. 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

11. How Salespeople UseCustomer Information • To improve customer strategies • To grow, retain, or win customers • To maximize customer lifetime value (CLV) • Data about the customer is the fuel to the CLV engine

12. 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

13. Customer Retention with CLV • Customer lifetime value is applicable only if salespeople are focused on developing and maintaining relationships • A daily commitment from both the salesperson and the sales organization is required to retain customers

14. 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

15. 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

16. 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

17. 80-20 Rule 20 percent of customers provide 80 percent of the profits

18. How Marketers Use Customer Lifetime Valueto Guide Their Behavior These are the firm’s best customers, yielding the largest revenue. Thy often offer little room for growth, so the firm may simply act to maintain excellence in relations through 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. Marketers should expand efforts with these and try to work with salesforce to allocate resources to 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 percentage of revenues. They may even represent a loss of revenue. Marketers can choose to deactivate them or continue coverage if they offer higher future value Small Customers

19. 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

20. 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

21. Building Blocks of Lifetime Customers Customer Loyalty Customer Delight Over Time Knowledge of Customer Life Cycles A Relationship Focus Click on each component (Schlesinger, Sasser & Heskit 1997)

22. 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

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

24. 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

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

26. 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

27. 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

28. Calculating CLV • Salespeople can use ROI and CLV to guide their sales strategies

29. Calculating CLV • Annual Revenue per Customer $24,000 • Annual Costs per Customer $18,000 • Annual Net Profit per Customer $6,000 • Avg. Customer Lifetime (Years) 6 • Total Net Profits $36,000 • Customer Acquisition Costs $14,400 • Return (CLV) $21,600

30. Lifetime Value Calculation REVENUE Year 1 Year 2 Year 3 Customers 200 150 110 Retention Rate 75% 67% 73.3% Purchases/year 1.6 1.9 2.3 Average Invoice $26K $32K $40K Spending Rate $41.6K $60.8K $92K Total Revenue $8320K $9120K $10120K COSTS Direct Percent 70% 62% 58% Direct Costs $5824K $5654K $5870K Acquisition Cost ($1500) $300K 0 0 Total Cost $6124K $5565K $5870K PROFITS Gross Profit $2196K $3555K $4250K Discount Rate 1.00 1.20 1.44 NPV Profit $2196K $2963K $2951K Cum NPV Profit $2196K $5159K $8110K LIFETIME VALUE 10.98K $34.39K $73.73K

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

32. 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

33. Discounts • Discounts are a reduction in price from the list price • Quantity • Cash – 2/10 net 30 • Trade • Consumer

34. 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

35. 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 Example of Markup on Selling Pricein the Channel of Distribution

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. Customer Lifetime Value Creation Program

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

45. 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

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

47. 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

48. Competing on Value • Concentrate • Customize • Consult

49. Differentiating Within Customer Standards • Product-driven values are homogeneous • Applications = Value-adders • Basis for value-creation is end use

50. Value vs. Selling • Value: The added competitive advantage you bring to your customers. • Selling: Transacting value.