Friday, 3 September 2010
Customer Value: Why You Must Understand This Concept
Monday, 22 March 2010 at 08:36, Ian Gilyeat, Chief Marketing Officer - I.R. Gilyeat & Company
Company executives must understand the concept and the realities of customer value.
In saying this I don’t mean the soft, fluffy idea that customers are important or that the customer is always right. Instead I mean the hard numbers attached to the value of a customer. How recently have your customers purchased from you? How often do they buy? How much money do they spend on each purchase? How much money do they spend with you every 30 days, 90 days or each year?
These are fundamentals that must inherently be understood by the CEO and how these basic customer measurements impact your business.
If you sell a product line that is “consumable” and “perishable” like food or something that is “durable” like industrial valves the annual spend of your customers could be the similar but the transaction costs for serving them may be very different. As a result their value is different.
Consider for a moment the twelve month spend of your customers. Let’s assume they spend $26,000 annually. A food based customer could be spending $500 each week and you have to serve them 52 times per year.
In contrast, a buyer of industrial valves purchases your products two times annually and spends $13,000 on average for each transaction. Your transactions costs and servicing costs are very different in these two scenarios – yet, the annual spend for each is the same amount - $26,000.
As basic as this appears, these two scenarios create business needs that are very different. Accepting cash or credit cards from customers, having store fronts and moving goods in and out of the company on a daily basis is very different from taking purchase orders and accepting a check for payment on that purchase order.
In the case of food, inventory rots and perishes quickly. Industrial valves can be manufactured and sit on the shelf for months if not years. Buying and selling food requires a quick turn on capital. Manufacturing valves may require that capital be invested and sit idle on your shelves for months and years at a time.
What happens to a company when the time to acquire a customer grossly exceeds the “shelf life” of their product? Or what happens when the cost to acquire a customer is two times the annual spend of each customer?
You’ll remember that time and cost (recency and monetary value) are two of the customer behaviours that I referred to earlier. Understanding how these two elements, plus frequency of transactions has dramatic effects on the profitability (revenue minus cost) of your company.
Returning to my earlier statement – you must understand the concept and the realities of customer value. If not, you could very easily chase market opportunities that are at odds with the fundamental metrics of your business.
If you don’t understand customer value and how your products align with the behaviors and transactional costs of your customers, you will bankrupt your company.
Email the writer: i.gilyeat@alrroya.com
In saying this I don’t mean the soft, fluffy idea that customers are important or that the customer is always right. Instead I mean the hard numbers attached to the value of a customer. How recently have your customers purchased from you? How often do they buy? How much money do they spend on each purchase? How much money do they spend with you every 30 days, 90 days or each year?
These are fundamentals that must inherently be understood by the CEO and how these basic customer measurements impact your business.
If you sell a product line that is “consumable” and “perishable” like food or something that is “durable” like industrial valves the annual spend of your customers could be the similar but the transaction costs for serving them may be very different. As a result their value is different.
Consider for a moment the twelve month spend of your customers. Let’s assume they spend $26,000 annually. A food based customer could be spending $500 each week and you have to serve them 52 times per year.
In contrast, a buyer of industrial valves purchases your products two times annually and spends $13,000 on average for each transaction. Your transactions costs and servicing costs are very different in these two scenarios – yet, the annual spend for each is the same amount - $26,000.
As basic as this appears, these two scenarios create business needs that are very different. Accepting cash or credit cards from customers, having store fronts and moving goods in and out of the company on a daily basis is very different from taking purchase orders and accepting a check for payment on that purchase order.
In the case of food, inventory rots and perishes quickly. Industrial valves can be manufactured and sit on the shelf for months if not years. Buying and selling food requires a quick turn on capital. Manufacturing valves may require that capital be invested and sit idle on your shelves for months and years at a time.
What happens to a company when the time to acquire a customer grossly exceeds the “shelf life” of their product? Or what happens when the cost to acquire a customer is two times the annual spend of each customer?
You’ll remember that time and cost (recency and monetary value) are two of the customer behaviours that I referred to earlier. Understanding how these two elements, plus frequency of transactions has dramatic effects on the profitability (revenue minus cost) of your company.
Returning to my earlier statement – you must understand the concept and the realities of customer value. If not, you could very easily chase market opportunities that are at odds with the fundamental metrics of your business.
If you don’t understand customer value and how your products align with the behaviors and transactional costs of your customers, you will bankrupt your company.
Email the writer: i.gilyeat@alrroya.com
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