Adventure #2: Willie Looks at Customer Profitability

Willie and his wife Wilma are discussing customer loss driving back from seeing son Wilbur perform in a school play. (Wilbur played a pre-historic plant in a program about dinosaurs.) Willie explains to Wilma, "So what if I’m losing some customers. I’m still bringing in new ones. Just this month I’ve signed up four new accounts. So even if I had lost three accounts over the past several months, I’m still making up for it. Aren’t I?"

Since Wilma keeps the company books, she’s well aware of what Willie is spending in marketing and sales expenses to acquire these new customers. These activities aren’t cheap. And she knows that the company’s bottom line has sure been missing the monthly checks that those three lost accounts use to provide. She suspects there’s more to the picture that what Willie realizes. With this in mind, Wilma suggests that she and Willie stop by the bookstore on their way home to see if they might find a book that helps them better understand the costs associated with lost customers. They find one. Willie and Wilma purchase the book, The Loyalty Effect by Frederick Reichheld. Upon arriving home she makes Willie a pot of coffee. She knows he’s likely to be up for a while as he digs into the chapters to find some answers. She says goodnight to Willie and he’s off to the races.

Two hours and four cups of coffee later, Willie has made some interesting discoveries. From his reading he discovers six important economic factors that make his mature customers considerably more profitable than his new customers. In a nutshell, they are:

- Acquisition Cost: Once the customer is acquired, Willie’s company no longer has to invest in acquisition costs.

- Base Profit: Base profit is the difference between the price a customer pays and the company’s costs. The longer Willie retains a customer the longer he can earn base profit, and, in turn, the better his acquisition investment looks over time.

- Revenue Growth: As customers mature and become more and more familiar with WWI (Willie Widgets Inc.) products and services, customer spending tends to accelerate as customers increasingly buy a greater cross-section of Willie’s company’s offerings.

- Cost Savings: As customers get to know WWI, they tend to be less costly to service. Mature customers don’t waste time requesting services Willie’s company doesn’t provide and these customers are less dependent on employees for information and advice.

- Referrals: Loyal customers recommend the business to others. While referrals are relatively unimportant in some industries, in Willie’s company and in many industries like insurance, home building, car sales, software, etc. referrals are a major driver of new business.

- Price Premium: Customers who have been around long enough to learn WWI’s procedures and acquaint themselves with its full product line will invariably get greater value from the business relationship with Willie’s company. This generally makes them less price sensitive on individual items than new customers.

Willie now gets it. Customer loss is costing him big bucks. That’s the bad news. The good news is that the return from win-back programs could be substantial for WWI. Using win-back measures to extend the profit contribution of Willie’s mature, high value customers who leave is well worth the effort.

Willie can’t wait to tell Wilma. But as he crawls into bed and hears Wilma snoring lightly, he decides his news can wait until morning.

The Lesson: New customers are rarely as profitable as long-term customers.

New customers typically cost a firm money in the beginning whereas long term customers create revenue. When a long-term customer leaves, his departure adversely affects the firm’s bottom line profitability. And this profit deficit is not offset simply by recruiting a new customer.

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