Category Archives: Life Time Value

Customer Metrics: Measure what matters most to customers

Key Customer Metrics

As business leaders we tend to pay a lot of attention to the metrics important to the business, that is, revenue, cash flow, profitability, growth and so on… but the real drivers of these business outcomes are customers.

So the obvious question becomes what customer metrics should I be tracking to make sure my business metrics continue to head in the right direction?

Well there are a number of key customer metrics that must be considered for every business:

1. Customer Satisfaction

As a first step it is important to track customer satisfaction, this will provide some inputs as to how well the business is performing on delivering what it promises. But remember customers have already paid for satisfaction, they expect to get what they paid for. So high levels of dissatisfaction are an obvious and immediate cause for concern.

Satisfaction is not enough, even highly satisfied customers can and do switch to alternatives so it is important to also look at Loyalty and Advocacy. That brings me to the next question (Fred Reinhold calls the “Ultimate Question“) How likely are you to recommend us? Loyal customers not only bring you repeat business, they also expand your customer base through positive word-of-mouth.

2.Net Promoter Score

The net promoter score is a simple tool designed to identify 3 types of customers, promoters (advocates with strong positive word of mouth),  detractors (negative word of mouth) and those in the middle. The goal is to drive up the number of promoters as a way of driving business growth.

Many of the most customer-focused businesses in the world use NPS, see below a list of the current top 10 Netpromoter scores in the US:

USAA – Banking = 87%
Trader Joe’s = 82%
Wegman’s = 78%
USAA – Homeowners Insurance = 78%
Costco = 77%
USAA – Auto Insurance = 73%
Apple = 72%
Publix = 72% = 70%
Kohl’s = 70%

Source: Satmatrix

3. Customer Value Analysis

This is a more advanced metric specifically looking at the value a customer places on what you offer. Value consists of an equation that includes CUSTOMER PERCEPTIONS  of price,  service and product quality. Customer value analysis looks directly at how customers view your business vs. your competition and provides you with valuable information on what you might need to adjust in terms of both product and service quality, as well as price, to increase market share and revenue.

4. Life Time Value of Customers

I talk about this in some more detail in these two posts:

Part 1: Understanding Lifetime Value of Customers

Part 2: Calculating Lifetime Value of Customers – a simple example

Something not covered however was some of the inputs to Customer Lifetime Value which in themselves are useful metrics:

Customer Acquisition metrics include customer awareness levels, the information sources customer use to make purchase decisions, and cost of acquiring a customer.

Churn (%)  measures how many customers are leaving, that is, customer attrition.  Churn is a commonly used metric related to customer retention. Specifically, this is about knowing how many customers are defecting and why.

Customer Complaints are usually an early warning signal that something is wrong. Most customers will not complain they will just take their business elsewhere. Complaints although often difficult to hear are a gift that can help course correct.

5. Your own Customer Culture

How customer obsessed is your organization? How would you know?

This is the question we received from a CEO of a Global 1000 company a number of years ago. It led us to the development of the Market Responsiveness Index (MRI) to answer that very question.

This is an organization-wide metric design to measure the behavior of employees and the level of attention they pay to customers in their daily work.

It is a one of a kind tool that allows you to benchmark your company versus the best in the world, you can check it out here.

What Criteria should I use when deciding on Customer Metrics?

  1. The metric drives business results
  2. The metric correlates strongly with business results
  3. The metric is something you can influence
  4. The metric can be measured accurately
  5. The metric can be measured consistently
  6. The metric can be measured cost effectively
  7. All the stakeholders agree the metrics meet these criteria

Ultimately you want to choose the right metrics for your specific business, they should be tailored to the unique business drivers and business strategy.

Why implement customer metrics?

Tracking customer metrics is important for many reasons, but the most important reason is cultural. It gets everyone on the same page, aligns people across the different parts of the business, and leads to a customer-focused culture of success. You should celebrate wins when a key customer metric reaches a new and important milestone. Choosing the right metrics and celebrating progress against them are incredibly important to building a strong customer culture that can work together and grow rapidly.

What customer metrics are you using?

The company-customer disconnect

It’s a strange irony that the very actions many companies take in an attempt to grow often stops them from growing.

The most obvious recent example is Netflix. Once a darling of customer focus and innovation it has been faced with some difficult growth decisions recently, the result of which has seen 810,000 customer leave.

Here is how Reed Hasting’s their CEO explained things:

“Although we dramatically improved our $7.99 unlimited streaming service by embracing new platforms, simplifying our user interface, and more than doubling domestic spending on streaming content over 2010, we greatly upset many domestic Netflix customers with our significant DVD-related pricing changes, and to a lesser degree, with the proposed-and-now-canceled rebranding of our DVD service.”

This is what happens when a company effectively raises prices 60% without a significant boost in perceived value. To read more on exactly what happen and the wall street reaction you can click here

The point I am making is that there is a significant disconnect between companies and their customers and where there are gaps there are opportunities. While most companies believe they are delivering a great experience, while the majority of customers disagree. The disconnect can be seen below in a chart taken from an Bain and Co whitepaper on this topic:

So what do the 8% of companies that have alignment with their customers do?

Firstly they really understand what their customer’s find most valuable about their products and services.

Secondly they understand who their most valuable customers are and they create strong compelling and different value propositions for them.

Not only do they identify the value propositions but they actually deliver them.

This is where culture comes in, it’s not good enough to know what the value proposition is, you need an organization that is willing and able to align around it and make it happen. This requires a organization-wide mindset that is customer centered, not just company centered. Are you leading that type of organization?

The only metric that matters to customer focused businesses – Lifetime Value

I was recently asked by a client, “if you could only have one measure to manage your business, what would it be?”. I quickly thought about the range of metrics available to executives today: profit per customer, market share, revenue growth, customer satisfaction, new product success, share price… the list goes on.

However the one metric that always comes to mind is one that not many businesses use, lifetime value of customers, and yet it is the most powerful.

This metric provides a long term customer centered view of your business. What is the value, in profit terms, of an average customer over the potential life of your business relationship?

This is not a static number but an active one that can be used to value your business and identify opportunities to grow that number.

It’s real power however is in galvanizing everyone in a company around the importance and value of customer relationships. It proves the tangible logic for why every interaction matters and connects everyone with the ultimate customer.

Below is a video interview with one of the great practitioners of Lifetime Value, Chris Zane of Zane’s Cycles

If you are interested in seeing more from this interview series you can go to MarketCulture’s Video Library

Part 2: Calculating Lifetime Value of Customers – a simple example

At the most basic level calculating the lifetime value of customers can be done using some assumptions and a simple spreadsheet like the one below:

In the above example I have used a yoga studio as an example with 100 customers in its first year. To keep things simple I have not leveraged all the data for the calculations but you can draw a couple of key points from the data:

Firstly – The lifetime value of a customer to a yoga studio can be very significant, the average customer in this example is spending almost $2.5k over a four year period! Understanding this bigger picture allows us to make better decisions about the value and importance of even a single customer to our business.

Secondly -Acquisition costs a usually higher than retention costs, in this example it costs a full 100% more to acquire a customer than to retain one. The economics demonstrate the value of customer retention. Of course this will vary from business to business but regardless this is an important data point to understand.

Calculating your own lifetime value of customers

The key inputs relate to estimating the probabilities of the impact of our sales and marketing activities on customer acquisition and retention.We then marry this with some hard data, i.e, the costs associated with these activities.

So what information do we need to begin the analysis?

1. What is the average revenue (spend) and gross margin per customer?

2. What does it cost to acquire a new customer for the first time?

3. What does it cost to retain a customer each year?

4. How often do customers purchase in a given year?

5. How many customers do you have right now and how many do you gain and lose each year?

Note: For this example I did not use a discount rate but as a side note we should be accounting for the time value of money. In other words a dollar today is worth more than a dollar in a year or 5 years time.

If you would like access to the spreadsheet you can sign up for free at our easyLearn website here.

Part 1: Understanding Lifetime Value of Customers

This is a simple business concept that is not necessarily that widely known. Intuitively we understand that customers that are loyal and keep coming back are the heart of business. However when was the last time you quantified this value? When you take a look at the numbers if becomes clear that managing customers as real assets is a powerful way to grow profitably.

Take the following chart for example:

You can see that if you provide a product or service with real tangible value to customers they will not only buy more from you but tell everyone they know to buy more from you. They also tend to be more interested in other products and services you offer. Plus as they become familiar with you it costs you less to service their business as they know how you operate.

The very best modern example of this on a mass scale is Apple, customers are attracted by the iPod, transition to an iPhone and or an iPad then get interested in a Mac computer… a virtuous cycle that has seen Apple’s revenue and profit grow exponentially over the past 5 years with no signs of slowing.

In the next post we will take a look at how you can calculate this for yourself.