On Monday, we shared a typical retail service encounter and how a seemingly harmless $5 service charge can actually detract from value perceptions. We suggested instead a customer-centric policy, one which (as outlined below) would cost the company only 33 cents per redemption, build loyalty, and reinforce perceptions of service quality excellence. Today, we follow up with the rest of the story. What did Performance Bicycle lose in terms of Customer Lifetime Value and what would the ROM be if they invested the 33 cents in only a few customer relationships?
The Customer Lifetime Value Perspective
Overall, it is better to be profit-driven than revenue-driven, and those that neglect to focus on Customer Lifetime Value, are passing up serious profit opportunities.
The primary means of competitive positioning for small businesses and chains of small retail stores is service quality. That’s why we paid the extra $10 and went to Performance Bicycle to start with – to support a smaller store in competition with big box stores, the smaller retailer presumably offering better service.
How can Performance Bicycle brand itself on service dimensions if they are charging $225/hour for very simple service tasks? That was my question that night and when I pointed out the marketing inconsistency, the customer, without expectation or any leading, followed with a vow not to ever return or recommend. In addition to the lost opportunity to build positive brand associations and customer relationships, what did this policy cost Performance Bike in terms of revenue?
Applying CLV Logic
My customer has about 25 to 30 years left as an active cycler and is likely to replace shoes at least once a year, but to my surprise has already shopped for a second pair of athletic shoes within 2 weeks of the purchase under discussion. To be fair, let’s use the smaller 25 year estimate as the cycling lifetime of this customer and the longer 1 year purchase cycle for cycling shoes.
- 25 years x 1 shoe purchase per year = 25 remaining cycling shoe purchases (not incl. other shoe types)
- 25 cycling shoe purchases x $69.99 = $1,749.75 or $1,750
- Replacement of cleats twice per year = $25.00 x 50 remaining cleat purchases = $1,250
- A bike purchase every 5 years: 25 years lifetime / 5 year purchase cycle = 5 remaining purchases
- 5 purchases x $400 to $800+ each = $2,000+
Lower Cost of Revenue
Now let’s examine what it would have cost Performance Bicycle to lock in the revenue estimates above. We will assume generously that the retail employee is paid $15 per hour. What would it have cost (in pro-rated payroll dollars) to allocate 1 minute and 20 seconds building a reputation as a service-oriented, customer-centric company?
- $15 / 45 1 minute, 20 second time periods = ($15 / 45) = $0.33
The employee would have been in the store until closing no matter what and the hourly rate would have been paid for that time independent of providing this service, so while sometimes it may cost the company $0.33, at other times, including the situation under discussion, there would actually have been no additional payroll costs.
How CLV Impacts ROM
If the service fee is waived for all 100 shoe purchases estimated above (25 x 4 customers) and the labor cost is considered a marketing expense (which it truly is), the company would only net $33.00 in related service costs over 25 years.
ROM = $20,000 / $33.00 = 606%
Remember the $20,000 is a low estimate of revenue and we have ignored a lot of other factors (referrals of the 3 referrees, non-shoe/non-bike purchases, etc.) and used low price points and long purchase cycles. Bottom line is that, most of us would happily take 606% ROM ratio any day of the week.
Free CLV Survey Code Part 2 of 2: CLV4ROM
Look back to July 2nd for Part 1, comment on either post and get a free Customer Lifetime Value survey design (reporting fees depend on design and client needs, no obligation to purchase admin or reporting).