CLV and Policy Making

Quick quiz: What is worth more to your organization? 

A) one new customer

B) one repeat customer

 It is highly probable that your answer is influenced by a few factors. The type of organization, the service or product you offer, the cost of attracting a new customer, or the life-cycle of a customer’s purchase and repurchase decisions will all impact how you chose to answer the above question. The repurchase (or rebuying) cycle is the most effective measure of where one’s focus must lie.  The repurchase cycle is simply the length of time between an initial purchase and the subsequent purchase. Starbucks, for example, has a ridiculously short repurchase cycle whereas a homebuilder has a ridiculously long repurchase cycle, if any at all.

Companies with long rebuying cycles or a limited service or product offering (car dealerships, large appliances, scholarship coaches, e.g.) must focus on acquiring new customers as this is the only way to meet short-term cash-flow goals, while those with shorter re-buying cycles or a multitude of offerings (e-retailers, consumable retailers, accountants, e.g.) should focus on repeat customers. 

Certainly, not every organization will fall at such broad ends of the spectrum as those examples above. There are plenty of groups in the middle which are well-served to focus on both tasks. 

This being said, it is important to point out that in essence we have two groups of customers (long and short) based on their respective repurchase cycles. Additionally, we must acknowledge that an organization which excels at valuing their customers and treating them well will not only generate repeat customers, but will also generate the most valuable marketing of all, positive word of mouth.

Before moving on, it is useful to look at one more concept, Customer Lifetime Value (CLV). In short, this is the dollar amount of net income one customer generates over their “lifetime” with a given company or organization. In the non-profit world, a lifetime may be rather short, as donors tend to burn out whereas car manufacturers tend to make customers for life given brand loyalty. Any organization is well-served to define the “lifetime” of a customer and subsequently the CLV. It is important to note that CLV is a dynamic concept, and must not convince an organization to ignore potential buyers in favor of current buyers.  CLV is most useful when used as a general measuring stick for customer relation policy decisions or for operational considerations such as loyalty or reward offerings.

Let’s apply CLV to a real-world scenario. Let’s say you are an executive for a large e-retailer of electronics and computers. You are the go-to for DIY computer builders as well as the end-user guys looking for a monitor or keyboard at a discount. You do nearly nothing to generate new business, as your word of mouth and reputation take care of that for you. What would you do with the following scenario?

You have a customer who orders a motherboard, RAM, processor, and cooling paste. The customer contacts you a week later indicating that the motherboard is faulty and after a discussion with the manufacturer’s support team your customer was instructed to return the board to you. He goes on to state that since he needed the board to run his work computer, he ordered another identical board from Amazon (same-day delivery) which also failed.  He is frustrated and annoyed, as he is now facing two RMA’s and still does not have a working computer. Your poor customer, when boxing the returns, places the wrong board in the wrong box. Keep this in mind. It is the exact same product, in the exact same retail box. The only difference is the serial number on the box and that on the board. Unfortunately, these boards are headed to two different retailers.

The first retailer at Amazon accepts the return and credits your customer, no problem. Your team, however, finds out that the board manufacturer will not credit you for the return as the serial numbers don’t match. This is an obvious policy to prevent someone from cheating a warranty period. 

This brings us to the decision: Do you credit your customer and take the loss yourself, or do you inform them that you cannot help them in this situation?

Here are some details that may guide you; the board cost the customer $225. Your cost to purchase the board is $75. The customer’s first order was $600, and in the two weeks intervening between their purchase and this point in the scenario, they have ordered another $150 in non-computer related items, for a total of $750 in 30 days.

If you understand your CLV, you would most likely take it on the chin for your customer, just as the Amazon seller did. 

Unfortunately, if you are Newegg.com, you will make the wrong decision based on in-place policies and lose a customer for life. I personally experienced this very thing. Yes, I can admit that I made a mistake with the boxes, and I am not writing this to vent my own frustrations (well, maybe a little). Rather, it is such a great example of CLV in action that I simply could not pass it up.

Newegg offered me a 10% store credit on the cost of the board to make up for the trouble. There was a caveat, however. They would offer the credit based on the discounted cost of the board which was part of a “package” for the initial purchase. That’s right, repeat customers are so important, that they are willing to spend $19 to retain one.

In this case, this company has lost a repeat customer, and while the experience is certainly an outlier, it may be indicative of a larger policy issue, one which we as executives may be able to learn from.

Any policy which does not allow for flexibility in unusual circumstances is, by definition, a failed policy. Certainly, we cannot account for every permutation of a given situation, but we can form policies which allow our front-end staff to either run an issue up the chain of command or empower them to make a decision themselves. What is the point of having middle management if they are not involved in the operations of the front-line staff?

I encourage you to look at your own organization.  Think about the CLV and policy issues here as they relate to your operations; you may just find some weaknesses you can leverage into strengths.