Archive for the 'Customer Performance' Category

Customer Satisfaction and Retention

Published on February 19, 2010 by Roger Best in Customer Performance. 0 Comments

Customer Satisfaction

Southwest Airlines (SWA) has built a culture around customer service and customer satisfaction. While the corporate verbiage comes easy, meaningful results are more difficult to achieve. However, there is good evidence to support Southwest Airlines’ efforts. As shown above, SWA has the highest customer satisfaction rating among airlines in an industry that is well below average in customer satisfaction. Another customer performance metric is the customer complaint rate. This is shown above in comparison for other airlines. Some might say “So what?” Does this extra effort and high customer satisfaction scores contribute to higher profits?

Customer Satisfaction and Customer Retention

Customer retention is an important customer performance metric that is a function of customer satisfaction and dissatisfaction. When customer retention decreases, a business has to spend more to attract new customers to replace them—often with customers that buy less than the customers they replaced. There are two ways to estimate customer retention. The first is simply to track customers that are retained from one year to the next. This requires waiting to the end of each year to measure this metric. The second way is to survey a sample of customers and ask them how likely they are to repurchase. This provides a timely metric to track increases or decreases in likely customer retention before year-end. Either metric provides an estimate of overall customer retention.

Customer Retention and Customer Life

Customer retention has a direct relationship to customer life. In the example below an estimated customer retention rate of 67 percent corresponds with a 3-year customer life. The longer a business can retain a profitable customer, the more profitable that customer becomes. A business that can improve customer retention from 67 percent to 75 percent will extend the customer life from 3 years to 4 years. As shown below, there is an exponential effect on both customer life and customer lifetime value as customer retention improves. For Southwest Airlines, higher customer satisfaction scores translate into higher levels of customer retention and profitability.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.

Customer Lifetime Value

Published on February 19, 2010 by Roger Best in Customer Performance. 0 Comments

Is Your Customer Profitable?

An important customer performance metric is customer profitability.  A business often spends a considerable amount of money acquiring and retaining a new customer. The customer purchases have to more than offset these expenses over the course of their customer life for that customer to be profitable. Because this happens over time, we need to discount future purchases and expenses in order to determine the Lifetime Value of the Customer. Our example focuses on an average fast-food customer.

Four-year Customer Life – Is The Average Customer Profitable?

In this example the cost of acquisition is $100. The average customer spends $100 per year as a first year customer of this fast food restaurant. The customer buys less expensive items (32 percent margin) in year one, which produces an average gross profit of $32 per year.  The customer life is 4 years. As shown below, each year the average customer buys more and higher margin products. The company spends 5 percent of sales each year on the average customer to retain them. Using a 25 percent discount rate the Lifetime Value of the average customer is $15. This means the rate of return for this customer is greater than 25 percent. The rate of return for this customer cash flow is 32 percent (this is determined by varying the discount rate until the lifetime value is approximately zero).

Five-year Customer Life – Is It Worth Spending More on Customer Retention?

Using this customer performance, we can assess the profit impact of spending more on customer retention in an effort to extend the customer life one more year. As shown above, we made year 5 customer buying the same as year 4, but for each year of the customer life we increased the percent of sales spent on customer retention from 5 percent to 6 percent.  This result in a Lifetime Value of $37, more than double the current Lifetime Value of $15. The rate of return for this customer cash flow is 39 percent.

To learn more, go to www.marketingmetricshandbook.com, view the  Intro Video, and download a 30-day demo.