4. 1
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. 1
How Salespeople Use
4
Customer Information
To improve customer strategies
To grow, retain, or win customers
To maximize customer lifetime value (CLV)
6. Figure 4.1
How Salespeople Can Use Data to Maximize
the Lifetime Value of Customers
Salespeople can further use this information in • Information is updated in real time, sometimes after a
decisions to grow, retain, or win customers sales call, other times after other customer contacts
Salespeople can use this information
to predict customer behavior
• When lifetime value is important, customer profiles
Data are used to profile customers
and segments are based on future revenues from
and create customer segments
customers
Feedback
• Data are collected from many sources – sales
contacts, trade shows, customer e-mails, customer
Web site visits
Data collected • Data are assembled, analyzed and stored by others in
from customer the sales organization
interactions
• Salespeople use information to better manage their
customer relationships and improve customer lifetime
value
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. 1
4
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. 1
Customer Relationship Management
4
(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. 1
4
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. 1
4
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
13. Figure 4.2
How Salespeople Use Customer Lifetime Value
to Guide Their Behavior
These are the salesperson’s best customers, yielding
most of the rep’s sales revenue. However, they often
Key Customers
offer little room for growth, so the salesperson may
simply act to maintain excellence in relations through
Salespeople must make the provision of service.
choices about which
customers are worthy of large
investments to move them to
key customer status.
These customers often represent the best growth
Customers That Are opportunities. Salespeople should expend effort
Candidates For Growth with these and try to work with the sales firm to allocate
resources toward these customers.
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
Small Customers revenue. Salespeople can choose to deactivate them or
continue coverage if they offer higher future value.
14. 1
4
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. 1
How much are you, as a customer,
4
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. 1
4
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. Figure 4.3
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 )
18. Table 4.1
Transaction-Focused vs.
Relationship-Focused Selling
Selling Element Transaction-Focused Selling Relationship-Focused Selling
Focus Solicitation of one-time sales Customer retention
Performance measures Return on Investment (ROI), value Lifetime value
of sales, batting average
Orientation Transactions Customer relationships
Time horizon Short-term Long-term
Customer service Little emphasis as transactions are Strong emphasis as long-term
key relationships are key
Source: Adapted from Sargent, Adrian (2001), “Customer Lifetime Value and Marketing
Strategy: How to Forge the Link,” The Marketing Review, 1, 427-440.
19. 1
4
Customer Life Cycle
The series of steps a customer goes through when
she considers purchasing, using, and maintaining
loyalty to a product or service describes the
customer life cycle
3 Main
Goals
20. 1
Three Main Goals of
4
The Customer Life Cycle Approach
1. Attain new customers and increase the
number of relationships
2. Increase the profitability of those
relationships
3. Increase the duration of profitable
relationships
Building Creating a
Blocks Life Cycle
21. 1
4
Creating Customer Life Cycles
Collecting and analyzing data
Purchase frequency
Recency
Average purchase size
Number of customer visits and contacts over
time
22. 1
4
Customer Delight
Customer delight occurs when a salesperson
goes above and beyond customers’
expectations
Tangible and intangible benefits (e.g.,
extraordinary service) beyond the functional
features of a product
23. 1
4
Four Ways to View Loyalty
Based on the accomplishment/performance of the
product/service over a period of time
Based on awareness of a deeply held commitment
to repurchase regularly
Influenced by feelings or partiality toward the
product/service and/or the salesperson
Influenced by a propensity toward the product or
service
24. 1
Conceptualizing
4
Customer 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
25. Figure 4.4
CLV (The Approach)
Life Span
of Customer
Recurring Cumulative
Costs Margin
Lifetime
Net Margin
Value
Recurring Acquisition
Revenues Cost
26. 1
Understanding the
4
“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-term value of the customer
27. Over the long-term, customer
retention occurs when salespeople
make offers and the customer
accepts those offers over time
28. 1
Understanding the
4
“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
29. 1
4
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
30. 1
4
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
31. 1
4
Building Value for Customers
For customers
Value is the source of long-term prosperity
For salespeople
Value is sales
32. 1
4
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. 1
4
Discounts
Discounts are a reduction in price from the
list price
Quantity
Cash
Trade
Consumer
(Refer to Table 4.3--Types of Discounts)
34. 1
4
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. Figure 4.5
Example of Markup on Selling Price
in the Channel of Distribution
MANUFACTURER WHOLESALER RETAILER CONSUMER
$5.00 = Cost to manufacturer $7.00 = Cost from manufacturer
$7.00 = Cost from manufacturer $9.00 = Cost from wholesaler
$9.00 = Cost from wholesaler
+2.00 = Markup (28.6 percent)
+2.00 = Markup (28.6 percent) +2.00 = Markup (22.2 percent)
+2.00 = Markup (22.2 percent) +6.00 = Markup (40 percent)
+6.00 Markup (40 percent) $15 Cost from retailer
$15 Cost from retailer
$7.00 = Selling price to wholesaler $9.00 = Selling price to retailer
$9.00 = Selling price to retailer $15.00 = Selling price to consumer
$15.00 = Selling price to consumer
or direct from the manufacturer
36. 1
4
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. 1
4
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. Table 4.4
An Example of a Cost Benefit Analysis
Monthly Cost to Purchase
Monthly payment schedule (five-year purchase of six trucks*) 600 x 6 trucks $ 3,600.00
Monthly service agreement $ 300.00
Total monthly cost for entire fleet $ 3,900.00
Total cost over five years (excluding service agreement) 3600 x 60 months $ 216,000.00
Monthly Cost to Lease
Cost of leasing (per truck) $ 500.00
Total monthly cost 500 x 6 trucks $ 3,000.00
Monthly service agreement $ 300.00
Cost over ten years 3000 x 120 months $ 360,000.00
Total savings (buying vs. leasing) =
(360,000 – 216,000) $ 144,000.00
*After five years, the company owns the trucks, whereas with leasing, the company continues to pay.
39. 1
4
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
40. 1
Customer Defections
4
and 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
41. 1
4
Customer Defections
Five reasons why customers defect
1. Some customers are attracted to competitors
2. Some customers are bought
3. Some customers move
4. Some customers are unintentionally pushed
away
5. Some customers are intentionally pushed
away
42. 1
Using CLV to
4
Recover 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
43. Table 4.5
Estimating the Second Lifetime Value
of Lost Customers
Win Back
Win Back Customers Win Back Customers
Row Customers
in Year 1 in Year 3
in Year 2
1 Orders per year 8 10 12
2 Average order size $1,600 $1,800 $2,100
3 Revenue (row 1 x row 2) $12,800 $18,000 $25,200
4 Cross-sell revenue $12,000 $16,000 $22,000
5 Information value $500 $700 $900
6 Total revenue (rows 3, 4, and 5) $25,300 $34,700 $48,100
7 Direct cost (60% x row 6) $15,180 $20,820 $28,860
8 Win-back cost (25% x row 6) $6,325 0 0
9 Retention cost (10% x row 6) 0 $3,470 $4,810
10 Total costs (rows 7, 8, and 9) $21,505 $24,290 $33,670
11 Gross profit (row 6 – row 10) $3,795 $10,410 $14,430
12 Cumulative second lifetime value $3,795 $14,205 $28,635
44. 1
Using CLV To Select
4
New 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
45. Table 4.6
Customer Lifetime Value Creation Program
Planning Strategy Implementation
• Create cross-functional • Analyze churn behavior – • Create a steering
teams to achieve value the degree to which committee to ensure
creation results customers turn over implementation
• Communicate internally • Gather financial data • Create a team for each
about customer lifetime about customers action plan developed
value creation ideas
• Calculate the lifetime • Launch test programs and
• Agree on realistic value of a customer pilot programs
objectives for value
creation • Segment customers based • Measure results
on calculations of lifetime
• Create a detailed value • Adjust plans according to
implementation plan that results obtained
includes a calendar, • Simulate the use of value
resources required, and creation levers with each
tools to be used segment
46. 1
4
Other Value Creation Programs
Satisfaction surveys
Reactive contacts
Special invitations
Value-added services:
Product differentiation
Service differentiation
Relationship differentiation
47. 1
Four Principles of Successful
4
Value Creation Programs
1. The better salespeople know their customers,
competitors, and the market, the higher the
likelihood they will succeed
2. Today’s customers are less susceptible to the
influence of marketing
3. Customizing sales programs is only effective if
such customization is based on relevant
information
4. Value is much more powerful than image
48. Customer relationships
are based on trust
Customers evaluate products based
on experience not awareness
49. 1
The Relevance of Customer
4
Lifetime 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
50. 1
Building a
4
Customer 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
51. Table A4.1
Calculating a Lifetime Value
Index for Customers
A B C D E F G H I
Number
of Units Profit Trade Trade or
Purchase Expected Average Profit Service or Margin on Replacement Replacement Customer
Likelihood of To be Bought Purchase Margin on Repair Level Repair Cycle in Cycle Value Index
Customer New Units Or Replaced Price New Units Per Unit Service Years Variable (CVI)
1 0.5 20 $1,400 45% $400 35% 5 .20 $38,500
2 0.9 80 $900 30% $300 30% 2 .50 $51,840
3 0.3 250 $1025 25% $300 25% 1 1.00 $24,844
4 0.2 1800 $900 20% $250 25% 5 .20 $436,500
5 0.8 25 $1,300 40% $300 35% 5 .20 $62,500
The customer value index is calculated using the following equation:
Customer Value Index (CVI) = (Purchase Likelihood (A) * Trade Cycle in Years (G)) * (Number of Units Expected (B)) *
((Purchase Price (C) * Profit on New Units (D)) + (Service Level (E) * Profit on Service(F))
CVI for Customer 1: = (.5*5) * 20 ((1400 * .45) + (400 * .35))
= 2.5 * 20 (630 + 140)
= $38,500
Source: adopted from Weber, Alan (2002), “Building a Customer Value Index,” Database Marketing Institute, (January 10).
