The Value of Customer Relationships
What is the true value measure of a customer? Is it a single deal or the potential over the life of the customer? How should the profit on an individual sale be calculated? Why should the sales force be asked to not only understand but also be accountable for the real profit of each sale? When the sales force has little or no control over the price company policies, or cost structures of the organization, should profitability be one of their metrics? Does the organization need to know the profitability of each customer and of each deal? Should businesses only do profit-positive deals? When would it make sense to do break-even sales or even lose money to make a sale?
There are many questions that businesses must ask—and answer—to determine which customers to seek and which customers to keep. Not every customer is a good customer. Some customers contribute to the profitability of the business and its ability to grow. Other customers contribute to the profitability of the business at a point in time, but in the long term will hinder the business’ ability to grow because of the nature of the relationship and its impact on operations. Other customers may not initially contribute to profitability but may have the long-term potential to be profitable. How does a business determine which customer is which? Is it a strictly financial numbers game or is there something more to the analysis?
The Ultimate Question for the Customer
According to Fred Reichheld, author of The Ultimate Question, one aspect of the customer relationship that cannot be captured in the pure financial numbers is the impact of how the customer views your business. It is instead captured by the customer’s response to the question “Would you recommend a colleague or friend do business with our company?” and the customer’s response rated on a scale from “definitely would” to “definitely would not.” This ultimate answer tells how well your business is doing with its most important asset: its profit-potential base.
Historic sales from a customer aren’t what we are interested in as business professionals; instead, we are looking for future sales from existing and new customers. If our current customers don’t think we are worth recommending to others, what does it say about how we are doing business with them and our future profit potential?
Future profit potential is about relationships with our customers—current and potential—and about how our customer base can grow. What potential exists in the marketplace for our customers and prospects? How are we able to reach new customers through our existing customers’ ability and willingness to refer to us?
When our business is a commodity product then it is even more important that we have good relationships with our customers. Our product cannot differentiate us, so we must stand out through our relationships and our business processes.
Total Cost of Involvement – Higher Returns
Wait! I can hear you now; you’re saying, “That costs too much. We’ve been talking about financial performance and numbers: revenues, costs, and profits. Relationships are expensive; to be profitable we have to cut costs.” That is the traditional way of doing business. The logical way of looking at our customer relationships is in terms of the total cost to the business and the total profit potential for each relationship. Each customer has the ability to buy from us and generate profits for us from those purchases, AND they have the ability to lead other buyers to us, who can also generate profits directly and through introductions to additional customers.
The process continues to replicate itself, generating continuous inflows of revenues and good profits. The costs of doing business on a relationship basis and understanding the costs of each activity and the investment in each activity—through the potential impact on the flow of good profits—shifts our perspective on what is a “cost” of doing business and what is an “investment” in doing business. It also asks each of us in the business to understand that all activities ultimately impact the sales and marketing teams’ ability to successfully convince customers to buy, so these teams must have access to the numbers and the results that the business is generating to hold each part of the organization accountable for its role in the process.
Sales Does Not Stand Alone
It works both ways. The business is expecting the sales team to perform and generate profits, but the sales team isn’t alone in the process. Because every other part of the organization is engaged in the process of generating the relationship that leads to sustainable growth and true, meaningful, good profits, profits that are not made at the expense of the customer, but as a result of the customer wanting to continue to do business with us. So the sales team holds the rest of the business accountable for customer service after the sale: for accurate invoices, for delivery dates, for quality, for all the things which customers expect when they make the purchase.
Today’s customers are smarter and more demanding in terms of response time, product performance, service, and all the “tangibles and intangibles.” If your business creates a commodity product, then you cannot be simply a commodity seller; you must focus on the customer relationship.
You may have heard the famous quote from Henry Ford (founder of the Ford Motor Company) that the customer could have any color automobile he wanted—as long as it was black. However, soon after, other automobile companies who gave the customer a choice in colors entered the marketplace, and Ford began to follow instead of lead.
Innovation takes place not only in products, but also in the responsiveness to the customer. Changes must take place in not only how you do business but also how you think about business. It does not have to be expensive to be responsive to customers; in most instances, businesses that have a customer focus have found that the costs of marketing and selling are often lower, because the customers are doing more business with them and for them (all those referrals).