What are your customers worth to you?
Start-up expert Brian O’Kane poses an interesting question.
The concept of the life-time value of a customer, highly developed in the USA, is only slowly beginning to catch on in Europe. It rests on two principles:
o It’s easier to retain a satisfied customer than to find a new one.
o Satisfied customers not only buy again (and again and again …) but they encourage others to become customers.
To test the first principle, think of your own shopping habits. When you are buying something you buy regularly, from a shop you use regularly – the daily newspaper from your local corner-shop – how much thought goes into the purchase decision? Almost none. You simply add the newspaper to whatever else you are buying. But, if you are buying some thing expensive from a supplier you do not know, you spend time checking out them and the product, before you finally make the commitment.
Most people are the same: regular purchases from familiar sources are made quickly, while new purchase relationships take longer to establish. Customers build up a trust with their regular suppliers. And once the trust is established, repeat sales follow easily. Thus, it is easier to develop new sales based on that trust than to develop new customers from scratch.
So when you win a new customer, do not think of them in terms of that single first purchase only. Think of all the repeat sales you will make to them. For example, a customer who buys €20 of petrol in your garage every Saturday morning will buy over €1,000 of petrol in a year. If he or she lives in the area for 10 years, and continues to buy petrol from you, they will buy €10,000 of petrol over that 10-year period. If someone offered to buy €10,000 petrol from you, wouldn’t you be extra nice to them? This person is offering to do just that – but just not all at once.
Everyone wants big-spending customers, not small-purchase customers. But, looked at over the longer-term, your small-purchase customers are high-spenders too.
To calculate what your customers are worth to you, multiply their average purchase by the frequency of purchase (in the example above of €20 of petrol a week, €20 x 52 = £1,040), and then again by the length of time that you expect to hold them (again, over a 10-year period, €1,040 a year becomes €10,400). This puts a clear money value on retaining your customers for the long-term.
The second principle again can be tested against your own experience. When you are pleased with a purchase, particularly a significant purchase, you tell other people about your experience and recommend them to use your supplier. Research shows that satisfied customers tell four other people about their experience. So you can take your customer value calculated above and multiply this by four, since you expect that one satisfied customer will generate four new customers. And you could multiply further since, if these new customers are satisfied, they will each tell four more, who will become new customers and so on.
But, if you disappoint a customer, they tell nine others, probably exaggerating the seriousness of the problem and they almost never come back themselves. So you have lost 10 customers – perhaps even more if the story spreads.
So it’s very clear that satisfied customers are valuable creatures and should be looked after.
Customer service
And now that you know what your customers are worth to you, what do you do to show it?
Customer service is probably the primary means of creating repeat customers. In most cases, the customer can buy a similar product or one that does the same job elsewhere, probably for around the same price. That’s the competitive world in which we live. So customer service is the feature that can distinguish your business from your competitors.
Again consider your own shopping experience. How often do you return willingly to a store where the staff are surly, unhelpful or downright rude? Not any more often than you can help. But how often will you visit a store where staff are friendly, eager to help and appear to value your business, however small it may be? A lot more often – sometimes you will even go out of your way to visit that store over others that are closer or perhaps even cheaper.
Look at the buying experience from your customers’ point of view. What can you do as the seller to make that experience as pleasant, as easy and as uncomplicated as possible? Decide and then do it. And keep on doing it.
Good customer service is not a once-off. Nor is it something that is decided once and set in stone forever. Good customer service keeps evolving, changing as customers’ needs change. But it’s the key to keeping those valuable customers.
Brian O’Kane is managing director of OAK TREE PRESS (www.oaktreepress.com), author of Starting a Business in Ireland and Could You Be Your Own Boss?, co-author of Starting Your Own Business: A Workbook, and webmaster for www.startingabusinessinireland.com.