Brand Breakthrough - Establishing a Consumer Satisfaction Strategy

Author: Yang Lin / Country: Mainland China
Publisher:
Publish Date: 2006-06-01
Features:
Section 2: Metrics for Measuring Consumer Resources—Customer Lifetime Value
There was once a supermarket in the U.S. that offered turkeys to customers on Thanksgiving to attract them in. The result was a frenzy of opportunistic shoppers rushing to buy. Afterward, the company evaluated the cost-effectiveness of this promotion and found that the profits generated by these "opportunistic buyers" were not enough to cover the costs of the promotion. This story may seem simple, but the lesson it conveys may not be fully understood by every manager. Extending this further, the following questions arise: Would managers place special emphasis on consumers who make large single purchases? Do they believe that big customers are more valuable to the company than ordinary customers? If your answer is yes, then please read this chapter carefully, as the correct answer should be no.
### I. The Myth of Consumer Value
One common mistake companies make when defining consumer value is assuming a direct correlation between spending volume and consumer value. As a result, they may label consumers who make large single purchases as "valuable," or view those with smaller current spending as unimportant. These misperceptions are widespread in businesses, leading to inefficient allocation of resources: companies invest most of their resources in satisfying large single-purchase consumers while neglecting those with smaller spending.
However, consumers who make large single purchases are not necessarily loyal regulars. Their long-term profits often do not exceed those of frequent visitors. This type of consumer buys in bulk for discounts and is typically budget-conscious, which may not generate the profits the company expects. On the other hand, consumers with lower spending levels may not be less valuable to the company. They might have significant spending potential but have reduced their willingness to purchase due to dissatisfaction with the company's service.
In non-monopolistic markets, consumers often have access to more than five companies to choose from. For example, a consumer might have credit cards from multiple banks but only use one frequently. To a particular credit card company, this consumer may seem unimportant, but to another, they are a "valuable" customer. Even with moderate spending, their cumulative volume can be substantial. Therefore, companies should aim to be the "frequent card" for this type of consumer. Unfortunately, many businesses view lower-spending consumers as unimportant, offering them lower levels of service, causing them to return no more.
### II. "Lifetime" Does Not Mean "Lifetime"
We know that not all customers contribute equally to a company's profitability. As the 80/20 rule (also known as the Pareto Principle) states, 20% of consumers contribute more than 80% of the company's profits. Companies rely on a group of high-profit-contribution customers, known as "profitable customers." These are the consumers who consistently increase the company's revenue and profits. It is important to note that this emphasizes sustained revenue and cost expenditures, not just the profit from a single transaction.
The reason these customers bring significant profits to the company is twofold: first, they believe they receive valuable service and are willing to build and maintain long-term, stable relationships with the company. Second, they are "profitable" customers who not only pay higher prices but also refer others to the company, acting as unpaid promoters of its products and services. They are often not the company's "biggest" or "smallest" customers but rather those of medium scale. The profits they generate far exceed those from a single transaction. They bring to the company long-term "lifetime" value.
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