Is the Customer Always Right?
By admin | August 20, 2008
By Mike Myatt, Chief Strategy Officer, N2growth
Is the customer really always right? How far should a company go to satisfy their clientele or customer base? What is the lost opportunity cost assoicated with customer churn? Is there a point when satisfying the customer is actually harmful to the enterprise, or as the saying goes, is the customer always right? In today’s blog post I’ll share my opinion as to the validity of this statement and where to draw the line…
I believe that all businesses should use great care and concern when determining how their customers are treated. The time, energy, and cost associated with acquiring a customer are substantial, the benefits of retaining customers are considerable, and the costs associated with customer churn are significant.
While I believe most CEOs have a grasp on the concept of lifecycle value, I’m not sure they really understand the true cost of losing a customer. Let’s just assume that the lifetime value of a customer for company X is $2,000 dollars. If company X loses just one customer, the total lifecycle loss could be well into the hundreds of thousands of dollars. If you don’t believe me consider the following 6 points:
- First you have the $2,000 dollar lifetime value loss attributed to churning the account itself.
- Don’t forget to add in the cost of acquiring the account to begin with. You spent very real dollars to acquire the account so you need to factor that into the total equation. I’ll let you pick the percentage you want to use and add that into the total number.
- Remember the cost of acquisition number you just calculated above? Well, you need to add it back in again, because now you have to go out and replace the customer you just lost. By the way, you should probably multiply the cost of acqusition number by 5 since it costs about 500% more to acquire a new customer than retain an existing one.
- On average, a single account is good for a 30 -40% cross-sell and up-sell boost over time as new products, services, joint ventures etc. are brought on line. This means you can lose another $600 dollars of upside.
- Depending on your business, and whether or not you have a solid sales process in place, a single account should be good for a minimum of 2-3 referrals on an annual basis. Over a 10 year period of time, assuming only 2 annual referrals, without any cross-sell or upsell value being added-in, you just lost another $200,000 dollars.
- But wait; it just gets worse….Those lost referrals mentioned above would have also given you 2-3 referrals each year, and if you carry this formula out over 20 years the loss of a single account could easily cost your organization more than a million dollars in lost revenue.
- If it isn’t bad enough already, a lost account can easily have a negative impact on future sales due to spreading the news of their bad experience with your company. The average dissatisfied customer will persuade 10-20 other people from doing business with your firm. This will not only impact your revenue, but can also taint your brand equity.
The bottom line is that it is very expensive to lose an account. Now with the above points being noted, I also believe there is a point where customers can begin to abuse the good will of the merchants and service providers who work so hard to earn their business. So, when does a customer cross over to the dark side and become your worst nightmare? The answer is a fairly simple one…when they become unprofitable to keep, or when you can replace them with more profitable accounts.
Regrettably, experience has shown me that a small percentage of customers/clients live for the chance to wield their perceived power over their merchants, vendors, suppliers and professional service providers. These customers are the proverbial “squeaky wheels” that demand to be greased. These are the verbally abusive customers who expect special consideration, and whose demands far exceed the boundaries of reason. There is in fact a point where “bad customers” can erode margins, negatively affect morale, or even tarnish a brand. These customers not only are not right, they deserved to be fired…
The following tips will help you minimize the amount of bad customers served by your enterprise and will show you what to do once a customer crosses over to the dark side:
- Align Expectations: Where possible, and especially if your business has the luxury of choosing your customers make sure that mutual expectations are both defined and aligned at the outset of the relationship. Insure that your client understands what types of customer behaviors will be accepted and what types of behavior will not be tolerated.
- Develop Customer Scorecards: You should actually profile your clientele such that you understand the difference between good accounts and bad accounts. Much like you have performance reviews for your employees you should conduct an analysis of how your customers are performing. Not all accounts are accretive and more accounts than you think may in fact be dilutive.
- Turnover Bad Accounts: When a client is identified as being a bad account either not capable of being saved nor worthy of salvaging, you should strongly consider firing the client. I am constantly looking to upgrade the bottom tier of my clientele either by improving account performance or by releasing the client and replacing that business with a better quality account.
Those of you who have worked with me know that I state very clearly at the outset of any new relationship that I reserve the right to terminate an engagement if said engagement turns out to be less than a fruitful endeavor. While I feel privileged to serve my clients and am thankful for the opportunity to earn their business, I also believe that the relationships should be reciprocal in nature and that they should respect the caliber of advice and quality of representation they receive. Business as they say is after all a two-way street…
Topics: Miscellaneous, Operations & Strategy |
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