Know the Life Time Value of Your Customer

Commandment #2: Know the Life Time Value of Your Customer

We know the customer is the most important element of a business. The most expensive act any business can take is to lose a customer. That cost is stunning when considering the LVC.

So here is why losing a customer is so expensive: The Life Time Value of a Customer [LVC]

How do you calculate this? Simple. LVC = The sum total of money a customer will spend with you.  Example: Suppose you owned a clothing shop with a demographic of young women between the ages of 18-24.  Now suppose the average customer spend each month was $200. 

Over six years that customer will be about $14,400.00 with you!

Armed with that knowledge the following comes into sharp relief:

1. Customer service: poor customer service drives away customers.  If, after six months of spending at your shop the customer is outraged and decides never to come back, you just lost $13,200 in revenue.  A very expensive mistake.

2. When customers walk they talk. When customers like a product or a store they talk about it. When they don't like a product or store, they are likely to slam your product or store at a rate of about 6x.  That means you are continuing to lose business.  More of those $14,400 nuggets that fail to even show up.

3. Strategy in focus. Plenty of strategy consultants talk about qualitative research, but few if any talk about LVC.  Knowing LVC will refocus, refine, and realign your strategic objectives.

4. Cost per sale. With a clear knowledge of LVC you will be able more accurately determine what your annual ad buy should be. In addition, you will have an absolute standard against which to measure your cost per lead and ad cost per sale.

The Brits skidaddled and a million+died

Before I go to another post regarding business I return to Iraq.

What happened when Ghandi forced Churchill to succumb to the hurry-up wishes of the Indians and the British population?

More than 1,000,000 died in the ensuing bloodbath.  Muslim hacked Hindus and Sikhs. Hindus sacked, burned, pillaged, and bombed the Muslims.

And thus Pakistan was born.

Ghandi didn't care if more than a million people had to take a bullet to make India independent. The man of nonviolence received his wish.

Today sectarian violence still is a fact of life. Rickety trains burst into fire and passengers die in a fiery rail-bourn inferno.

Why are we in Iraq and Afghanistan?

The real reason?

Well there is only one reason and it has several locations: Auschwitz, Dachau, and more.  

It is just not in our guts to let people go unwillingly into that dark night. True, we did nothing about the Ruwandan genocide and Darfur is proving extraordinarily difficult.

Check the next post for more Business Commandments.

What We Told The Soviets

Before the wall came down, before Yeltsin was elected, and while Gorbechov was still in power, I was invited to visit Russia with my brother. We were there to give a series of seminars on the free market and to help the victims of the Chernobyl reactor disaster.

Passing through security in the Pan Am JFKTerminal, Dan Rather and CBS news declared Desert Storm had started. I gulped and boarded the flight to Moscow...Heart of the Evil Empire.

For the next 6 weeks Mark and I barnstormed the USSR giving thousands of Soviets the essential message of free market capitalism. It was Mark's gig but we worked like a couple of tag-team wrestlers.

We spoke to audiences of 500-1,500. Most were educators or engineers. None were in business. Business was illegal and anti-social...they called it "speculating".  "Speculators" were considered something less than bottom-feeding sucker fish.  My how times have changed.

To be concise and clear we presented to them The Ten Commandments of Business.

But instead of the traditional Soviet approach of sitting behind a desk on stage and ominously reading the lecture into the microphone to the hundreds assembled who were all taking copious notes in their bound diaries, we disposed notes, of coat and tie, and microphone. We walked the stage, both peppering the audience with our questions, and fielding their questions. Interacting with an audience was unheard of. We did it. They loved it. Nobody left before the day was done.

Time has now past those heady days into memories and journals. 

But the Ten Commandments of Business still apply.  Strange that even US business leaders frequently and perilously neglect them.

So in the next few posts I'll reiterate them one-by-one.

Commandment Number One:The most important element of a business is the Customer.

No customer=no business.  "Dot-com"-ers and their professors forgot about that. Zambians trying to sell cooper also forget it. Bechtel engineers find it hard to believe...or to stomach.

Example: I spent 10 years at Bechtel in management and organization development beginning in the construction department of the Refinery and Chemical division. Proctor and Gamble[P&G] had been a prime client but we had no projects in more than 4 years despite having done excellent work in the past and despite P&G continuing to build but using other firms. 

We were now proposing on building new project to build a plant in Canada. But we were nervous about winning the job because of some "undefined unhappiness" on the part of P&G. I sought to understand why. The last job had been completed on-time and within budget: a clear victory for both Bechtel and P&G. Why then no follow on work. I dug deeper. Speaking to P&G I learned that they had developed a hatred for the Bechtel Site Manager and decided that he was a permanent but unspoken impediment.  We removed the impediment and won more P&G awards.

We had been victorious on the project but alienated the client. We had no customer and we won no more work until we solved the customer problem.

The most important element of a business is the customer; ignore it at your peril. Just like K-Mart is doing.

Next posting will discuss:

1. The Biggest Mistake businesses make and

2. The Most Expensive event in a companies history.

Dreams,Ghosts, Opera, Iraq, and Panama!!

Somebody said young men have dreams and old men see ghosts.That is the state of the political race today. Obama has ambition laced dreams and McCain sees the ghosts of McNamara, Rumsfeld and his fallen, flaming nomex suited comrades in Vietnam's rice patties. And Hillary neither dreams nor worries about ghosts; she is pure ambition and guile. A true Lady McBeth...beware to any Banquo!  Is a America ready for a woman president? Was England ready for a woman? No doubt, when she turned out to be Lady Margaret Thatcher.  I know Margaret, Hillary, and you are NO Margaret! [Apologies to Sen Lloyd Bentsen]

Don't fix the mortgage crisis. They tried that in Africa a decade ago. The result: no mortgages available. You want a house... save up and buy it. No loans. Want to build an apartment complex? Build the first few floors, leave the verticle beams exposed on the top floor with rebar exposed....when you have enough cash build a few more floors.  Makes for a strange view....all those verticle concrete pillars with rebar sprouting up like hairs in an old mans ear.

Opera is making a comeback. Hope so anyway. Have a daughter, Olivia, trying her hand at it. Tough to break in.  Many auditions to get roles.  But plenty of Baby Boomers are getting tired of 2.5 minute songs that are nothing but ear candy. We want something that is longer, has more texture and is more than even a two-dimensional HDTV can give. Nothing beats live music. Right Martina? Keep the pit full of musicians, no sound machines please! We don't want a karaoke version of "Tosca"!

I used to have a travel company doing river cruises in Russia. People loved them. Great two week adventure. Great art, music, visuals. Imagine hearing Tchaikovsky's Seasons as you glide on a smooth river surface through the early fall color changed aspen forests. Intoxicatingly peaceful. I was there last September and it was as beautiful as ever. I want to go again with friends that like great music, art, ballet, and going from Moscow to St.Petersburg. Let me know if you want the details.

How is Iraq? As my dipolmat son says: "Not as bad as CNN would tell you, but not as good as Fox would claim." Ummm......sounds like the truth. He's trudging away saving ag in Afghanistan. Been getting a lot of ink lately. I guess the heavies trust him to stay on message. 

The Panama Canal Authority is enlarging the Pacific side of the canal. The world's richest man, Carlos Slim, has a company that won the bid. Heard the Bechtel didn't have the executive leadership to handle it. Dirt moving contract has been reported as $3.5 to 5.5 Billion. Lots of dirt and rock. They are using Terex shovels and Cat 777 ATD to haul it away.