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Valuing Customers

Disciplines > Marketing > Understanding Customers > Valuing Customers

Marketing and sales costs | Sales value | Repurchase value | Service costs | Feedback | Referrals | Advocacy | See also

How do you decide how valuable your customers are?

Your most valuable customers may not be your biggest customers. If you can value your customers then you can prioritize your actions to support high-value customers and to encourage others to increase their value to you. Here are a number of dimensions to consider when performing this exercise.

Marketing and sales costs

Customers do not come free and there is a distinct set of customer costs, from research to identify them and understand their needs, to sales and marketing efforts to persuade them to buy your products and services.

Sales value

All sales are not equal and higher revenue sales are not necessarily higher profit ones. Customers who buy high-priced items but who negotiate deep discounts may leave you with little or no profit. This is typical of big customers who feel they deserve lower prices.

The best way of calculating sales value of a customer is the total profit that is gained from selling to them.

Repurchase value

While you may sell one item to a customer and gain some profit, the fuller sales value of the customer is more about how much they will ever spend with you.

While this is of course impossible to calculate accurately, analysis of general customer sales data may show typical, low and high lifetime spend. Some products in particular lend themselves to purchasing of parts that are used once or which wear out. The value of this follow-on business can significantly outstrip the initial expense. Likewise, customers will regularly repurchase consumables, such as toothpaste, until they decide to switch products.

This is sometimes called the lifetime value of the customer and may be based on individual customers or on typical spends over the life of a product.

Service costs

In some business contexts, customers will typically purchase service contracts that extend or add further value to product warranties. For example computer vendors may offer anything from automated offsite backups to short-turnaround problem-fixing.

Service contracts can be highly profitable if customers seldom call on them. But if they call you out on a regular basis, they can be very unprofitable. This can make the actual profit made on service contracts, based on the cost of servicing all calls, an important measure of customer value.

Feedback

One of the best ways customers can help you is to tell you things about themselves and your products and services. In doing so, they are spending their own time in giving you valuable information.

Information about themselves is helpful for both product design and marketing. This can include needs, strategies, budgets, buying patterns, etc. Feedback on products enables improvements in design. Feedback on services can help even more immediate improvements.

Feedback can received when customers contact the company, for example with a complaint. It can also be sought more actively, for example with focus groups.

Valuing feedback is difficult, but can be very useful for showing which customers add particular value, including those that complain but in doing so offer helpful insights.

Referrals

One of the most useful ways customers can add value is by recommending the company and its products to others.

Referrals are a powerful method that significantly increases the chance of sales. One of the easiest ways to use more referrals is simply to ask existing customers for them (provided they are satisfied, of course).

An amount for the value of referrals may be discovered by adding up the value of the sales that were initiated through a lead from existing customers. What cannot be measured are informal recommendations where you gain a sale but do not know the role of existing customers.

Advocacy

A further way customers can add value is by acting as an advocate for you, spending even more time and risking their credibility by speaking at conferences, appearing in adverts or even acting within your sales teams.

Advocacy is perhaps the ultimate test of high customer loyalty. It can be surprising how many customers will do this, but considering the emotional investment that some customers put into their suppliers, it can be understood.

Again, it can be difficult to estimate advocacy value, although it clearly can be very helpful.

See also

The Cost of Customers, Value Exchange