Maximizing customer lifetime value

Marketers play several roles in helping their companies define and deliver high-quality goods and services to target customers. First, they bear the major responsibility for correctly identifying the customers’ needs and requirements. Second, they must communicate customer expectations properly to product designers. Third, they must make sure that customers’ orders are filled correctly and on time. Fourth, they must check that customers have received proper instructions, training, and technical assistance in the use of the product. Fifth, they must stay in touch with customers after the sale to ensure that they are satisfied and remain satisfied. Sixth, they must gather customer ideas for product and service improvements and convey them to the appropriate departments. When marketers do all this, they are making substantial contributions to total quality management and customer satisfaction, as well as to customer and company profitability.

Ultimately marketing is the art of attracting and keeping profitable customers. According to James of American Express, the best customers outspend others by ratios of 16 to 1 in retailing, 13 to 1 in the restaurant business, 12 to 1 in the airline business, and 5 to 1 in the hotel and motel industry. Yet every company loses money on some of its customers. The well-known 20-80 rule says that the top 20% off the customers may generate as much as 80% of the company’s profits. Sherden suggested amending the rule to read 20-80-30, to reflect the idea that the top 20% of customers generate 80% of the company’s profits, half of which are lost serving the bottom 30% of unprofitable customers. The implication is that a company could improve its profits by “firing� its worst customers.

Furthermore, it is not necessarily the company’s largest who yield the most profit. The largest customers demand considerable service and receive the deepest discounts. The smallest customers pay full price and receive minimal service, but the costs of transacting with small customers reduce their profitability. The midsize customers receive good service and pay nearly full p=rice and are often the most profitable. This fact helps explain why many large firms are now invading the middle market. Major air express carriers, for instance, are finding that it does not pay to ignore small and midsize international shippers. Programs geared towards smaller customer provide a network of drop boxes, which allow for substantial discounts over letters and packages picked up at the shipper’s place of business. United parcel Service (UPS) conducts seminars to instruct exporters in the finer points of shipping overseas.

Customer Profitability

What makes a customer profitable? A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. Note that the emphasis is on the lifetime stream of revenue and cost, not on the profit from particular transaction Customer profitability can be assessed individually, by market segment, or by channel.

Although many companies measure customer satisfaction, most companies fail to measure individual customer profitability. Banks claim that this is a difficult task because a customer uses different banking services and the transaction are logged in different departments. However, banks that have succeeded in linking customer transaction have been appalled by the number of unprofitable customers in their customer base. Some banks report losing money on over 45% of their retail customers. There are only solutions to handling unprofitable customers. Raise fees or reduce service support.