How to Hook a Life-time Customer
Many businesses define the value of a customer by long-term or lifetime value—a formula calculated by estimating the profits generated by that customer into perpetuity (discounted back to the present). Most customers, however, have a different perspective. They define value as the difference between the highest price they would be willing to pay and the actual price. In economics, this is sometimes referred to as consumer surplus.
The trick is to find a long-term value proposition that works for both you and the customer. Unfortunately, many companies lose sight of the fact that if they don’t provide customer value in the short term, they will never have the opportunity to provide customer value in the long term, because the customer won’t come back.
We were reminded of the importance of customer value in two recent interactions with vendors:
1. We chose a new vendor to build and manage our website. As soon as we informed the account reps of our decision, they began to suggest additional services and advice the company could provide—at no additional cost—which made us feel good about the substantial investment we were making in them.
2. We chose another vendor for some personal photography. The photographer quickly offered us an additional "bonus" product. But when we reconsidered the initial purchase and opted for a slightly lower-cost option, the rep told us we were now $200 under the amount needed to qualify for the "bonus." Feeling slightly misled, we opted for another vendor and ended up spending twice the amount we originally agreed to.
Businesses that do create customer value in the short-term, like our website vendor, for example, will always have the option to choose how to create value in the long term, by rising prices, reducing the cost-to-serve, increasing volume (i.e., selling more), or even choosing not to serve that customer. All of these options can increase profitability.
What’s more, we’ve found that if you "wow" a customer once or twice early on, with a great product or great service, they will purchase from you with more confidence in the future. This, of course, results in less price sensitivity, which can drive higher profits.
It’s a simple concept, but one that management teams frequently overlook. By thinking about customer value from your customers’ perspective—even if it means losing some short-term battles—your customers will reward you in the long term. And if they don’t, you can always walk away.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.