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PORTER: Great customers worth more than you think

You know the old saw: “Happy customers will tell three to four others about your business” and, as we all know these days, word of mouth is about the most valuable advertising you can get. It follows that you’ll probably see some revenue from this somewhere down the line.

But how do you really put a value on happy customers? What’s a customer really worth? More importantly, what are the benefits of a really good customer today?

We’re fortunate that several researchers have already done a lot of the number crunching on this. And, without getting too dense with financial models, I list below some facts and rules-of-thumb regarding the worth of a great customer that you may not have considered.

First, loyal customers pay premium prices and refer new business.

Bain consulting exec Fred Reichheld in his book “The Loyalty Effect” says there are several additional financial benefits to be had from loyal customers. Based on his study of customers across a dozen industries, he found there is a “cumulative financial effect” from great customers that incudes premium prices, new customer referrals and expanding revenue growth.

Thus a customer who seemingly might be $10,000 from annual business over five years may really be worth $100,000 when figuring in all of Reichheld’s components.

Consulting firm McKinsey found similar results from their study of what they call the customer decision journey where they concluded that happy customers used the digital media in online touch points to refer to other potential customers by word-of-mouth, ultimately adding new business to a company’s bottom line.

Increasing customer satisfaction produces a big jump in profits.

Harvard Business School professors Joseph Heskett and Robert Sasser studied hundreds of companies regarding the connection between customer service and company profits. Their findings resulted in a financial model that they have often substantiated.

It makes sense that happier customers mean better financial results. However, Heskett and Sasser put numbers to it. And we can intuit that if we invest in creating a better customer experience, we’ll see increased revenue and profits from the effort. They found that if you can increase customer satisfaction by only 1 percent, you can drive a 5 percent increase in Profitability.

McKinsey consultants weigh in on this by revealing that, by using data analysis and related research, revenue growth gains in the double digits are possible when we can isolate the detailed customer decision points and how they bond with a company’s brand.

Great customers buy a lot and see the benefits.

From research in my own book “Quest for Loyalty,” I developed a “great customer profile” where I found that great customers gave companies increasing business over time plus were first in line to buy new products and services. They saw the benefits and value of a company’s products early in the customer relationship and actually became a missionary to potential new customers.

So remember, great customers are valuable not only for their initial purchase of your products but also for the premium prices they pay, their profitability and their ability to spread the good word to prospects who are considering doing business with you.

I hope you’ll join me next time when we look at managing difficult customers. We all have them.

 

William Porter has published books on customer experience and employee engagement and speaks regularly at business schools. Contact him at bpwilliamaporter@gmail.com.

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