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How valuable are your clients?

23 January 2020

Some of your customers are worth far more to your business than others. The best clients spend more, return more often, and don’t even think about going anywhere else. They are loyal, enthusiastic advocates of your business. They are promoters.

Here’s a challenge: Do you know how much more valuable are these clients compared to others? Do you know what it might be worth to turn another 10% or 20% of your clients into promoters? Unless you can answer such questions, you are flying blind. You can’t know how much to invest in the efforts to create and retain more of these valuable clients.

With careful analysis, businesses can not only estimate the relative profitability of promoters they can also estimate the impact of proposed actions and initiatives on their performance, providing guidance to improving clients’ performance.

The lifetime value of different clients’ groups

The first step is to calculate the lifetime value of an average client. The fundamental idea is to add up all the transactions attributable to the life of a typical client and put them in today’s dollars. Next, using the lifetime value of an average client as a baseline, you can add up the differences in lifetime value for promoters, passives, and detractors based on the ways their respective behaviors produce differences in revenue and cost. The following list describes several characteristics that distinguish the different client groups (promoters, passives, and detractors):

  • Retention rate –
    Customer Retention Rate = ((EC-NC)/SC)*100, where:
    EC – number of customers at the end of a period
    NC – number of new customers during that period
    SC – number of customers at the start of that period
    Detractors generally defect at higher rates than promoters, which means that they have shorter and less profitable relationships with a business. Use the retention rate of each group to calculate the average lifetime of promoters, passives, and detractors.
  • Pricing – Promoters are often less price-sensitive than other customers. They rarely need a huge promotion to trigger their purchases. The opposite is generally true for detractors.
    To estimate differences in price realization, you’ll need to examine the whole basket of whatever was purchased by promoters and detractors over a six- to a twelve-month period so you can calculate the margin on the basket, keeping track of discounts and price concessions.
  • Annual spending – Promoters increase their purchases faster than detractors. Your share of their category spending increases as promoters choose your products over competitors, upgrade to higher-priced products or services and respond with enthusiasm to new offerings.
  • Cost efficiencies – Promoters typically cost less to serve. They complain less often, and they are responsible for fewer credit losses. They bring you more new clients, reducing your sales, marketing, advertising, and other client acquisition costs. Because promoters have longer client lifetimes, their acquisition costs can be spread over more years of lifetime revenue. And their higher propensity to upgrade to premium products and services often increases the margins on their business.
  • Word of mouth –The financial impact of positive or negative word of mouth is usually significantly greater than realized. Although it isn’t easy to do, you can estimate the effect of positive and negative word of mouth. Begin by quantifying (by survey if necessary) the proportion of new customers who selected your firm because of reputation or referral. The lifetime value of these new customers, including any savings in sales or marketing expenses, should be allocated to promoters.
    Detractors, meanwhile, are responsible for more than 80% of negative word of mouth, and the cost of this drag on growth should be assigned to them.

The link between loyalty and growth

This micro view of clients’ economics provides a foundation for cost-benefit analyses to build stronger customer relationships to be able to determine how valuable it would be to improve overall clients

There are more factors other than clients’ loyalty that can play an important role in growth. But scores are a powerful predictor of growth in most situations and will help you quantify the value of investing in greater clients’ loyalty – the best engine of sustainable, profitable growth.