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What Are Your Customers Worth?
The report examines the concept of the Life Time Value (LTV) of a customer relationship and the strategies, practices, and benchmarks used to maximize and measure customer retention.
Posted May 13, 2003
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Customer retention will always be a top issue among companies of all types, but a new report from the Service and Support Professionals Association (SSPA) says that some companies are going about customer retention the wrong way. "All the metrics in the world will not matter if you are not looking at what revenue each customer relationship is generating," says Thomas Sweeney, director of research at the SSPA. Sweeny says the report examines the concept of the Life Time Value (LTV) of a customer relationship and the strategies, practices, and benchmarks used to maximize and measure customer retention. This study examines the support center's role in customer retention by examining customer interaction practices, support portfolios, and customer retention and support contract renewal best practices, he says. Some common mistakes companies make when trying to create solid customer retention procedures are not retaining the right kind of customer and failing to take into account intangibles that may detract from the LTV of a customer, Sweeny says. "An assumption that a company that buys $1 million in product is a good thing may be misleading if that company is going to cost the company $5 million to support," he says. "Value is predominantly measured in terms of financials, but the impact of the intangibles must be factored in. Investments to acquire marquis accounts, or to win market share, may run counter to LTV analysis, but may yield long-term marketing advantages that need to be factored into LTV analysis. This gets tricky since the expected marking value is based on assumptions that may be difficult to quantify." Sweeny says companies looking to begin gauging the LTV of their customer base can start by diving customers into like segments and analyzing the financial value of each segment. "The next important step is to begin to look at the costs, the revenues, and the duration of customer relationships," he says. "Once you begin to get a handle on the LTV for particular customers and customer segments, you can begin to formulate strategies to maximize the value of a customer relationship.
"For example, one segment may indicate high profitability, but very short relationships--what types of action plan can you put in place to extend the lifetime of these profitable relationships. You may also see that some segments are losing money: Perhaps it is time to raise the price for the product or maintenance," Sweeny says. Finally, Sweeny says it is important to note that customer value is not simply about revenue. He explains that some accounts may bring in small revenue, but may be highly profitable due to not needing extensive service and support. Sweeny also notes that having high profile customers, even if they are not hugely profitable, can be extremely valuable from a marketing perspective. More information on the report is available at www.thesspa.com.
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