The purpose of business is to find and keep a customer, profitably over the long term, thereby securing the business and the livelihood of all stakeholders.
Is your business customer-centric and passionate about meeting customer requirements? Or does it seek to maximise profitability at every turn, never caring whether the customer returns, as there will always be others to take their place?
If it’s the latter, many companies do business in that fashion, and they may succeed for a while. However, many more go bankrupt as a result.
There is a better way, but it requires a fundamental shift and a genuine commitment to re-orient the business around customers and their needs.
Customer satisfaction is the means towards long-term growth and profitability.
Returning to our definition above:
- To find a customer, you first need a product or service with the desired value for a particular customer segment and market it effectively.
- To keep a customer, you have to deliver the product or service in a way that meets or exceeds their needs and expectations. On time. On budget. At the required quality.
- To do it for a profit, you need good people focused on their customers and sound business processes that are reliable and deliver high quality.
The lifetime value of a customer
Nothing makes the logic of a customer-first strategy more apparent than the calculation of the lifetime value of a customer.
Assume a single customer pays you $50,000 a year for your services, and your costs are $40,000 in delivering the services, leaving you a net profit before tax of $10,000.
Assume that the customer has a recurring need and is so happy with you that they engage you the following year, and the year after that, say for the next 15 years.
This creates a formula for customer satisfaction and retention, and it can become the focus for business growth.
The value of the customer is not the $10,000 profit you make in year one.
Instead, it is calculated as follows:
Lifetime value = (Annual billings – annual cost) x number of years.
= ($50,000 – $40,000) x 15
= $10,000 x 15
= $150,000.
In practice, therefore, every person engaged in creating value on this $50,000 project is working on a project stream that is potentially worth $750,000 in turnover and $150,000 in profit, when you adopt a lifetime view of 15 years.
So you need to ask yourself, “Are my people treating that customer like they are worth $750,000? Are they doing everything possible to delight the customer so they will return to us for future projects and become customers for life?”
The profit-first trap
The short-sighted approach is the “profit first” mindset, where you focus on this year’s project and the $10,000 profit.
In this “profit-first” scenario, you strive to:
- Push up the $50,000 price and get more billings, if possible (called “cost blowouts”)
- Reduce your $40,000 cost, so it costs less to produce and deliver
- Focus on the immediate $10,000 opportunity and strive to increase it by all means possible.
In doing so, the tendency is to over-charge, cut corners, reduce the resources used, hire cheaper staff, select lower quality components, buy from cheaper suppliers, avoid responsibility for rework, delay delivery to suit your workflows, and so on.
There are endless ways that businesses play the short-term “profit-first” game, which is short-sighted and typically bred into the organisation from the leader. It inevitably leads to customer unhappiness and conflict. However, this is seen as just one of the risks to be managed, and any objections just get pushed back or overcome with excuses, or better still, find a way to blame the customer!
The customer-first opportunity
In contrast, the “customer first” approach seeks to maximise the value of the customer at every turn. The goal is to make the $50,000 value worth more in the customer’s eyes and to deliver on time, on schedule, and within cost. If there are issues, the automatic response is to fix them, fast. The big difference is that the leader has their eyes on the long game and will even accept their costs rising above $40,000 if need be, thereby squeezing and reducing the potential $10,000 profit in the short term.
Now, imagine a larger company that wins a new customer with a project budget of $300,000, costs of $230,000, and a profit margin of $70,000.
Applying the lifetime value calculation (assuming the need is recurring), the numbers over 15 years are:
Billings – $4,500,000
Costs – $3,450,000
Profit – $1,050,000
Now imagine, that because the customer is so pleased with the outcome of your customer-first business approach, they award you an additional project of the same value of $300,000, also recurring.
The numbers now are:
Billings – $9,000,000
Costs- $6,900,000
Profit – $2,100,000
Now imagine that because they are so delighted with your performance, they refer you to another client with a $300,000 annual project with the same margin.
The numbers over 15 years become:
Billings: $13,500,000
Costs: $10,350,000
Profit: $3,150,000.
In summary, whether you are aware of it or not, by working to deliver a project with a gross profit of $10,000 in a year, you are sitting on a vast income potential when you apply the concept of lifetime value to your business philosophy, and let it seep through the organisation.
You are not in a business turning over $50,000 a year (or $300,000 a year in the larger example). By having successfully won a customer, you are sitting on a potential income that is vastly greater, which only becomes apparent when you take a long-term view.
There are other spinoffs of the customer-first approach:
- You get repeat business
- You get additional projects
- You get referrals
- You have fewer unhappy customers
- You have happier, more satisfied staff
- You have less financial stress
- You can focus on delivering more value, and improving quality and processes
- You can look at reducing costs through volume gains and process efficiencies
- You have greater certainty in the future, with loyal customers on your books.
If this is so obvious, why aren’t more companies obsessed with delivering outstanding customer service?
It’s because they think short-term and decide that a clever business strategy is to increase prices, reduce costs, and manage the business with this month’s results and this year’s income as the focus, never mind the long-run view.
All of you reading this will have experienced abysmal service from large companies, medium companies, sole traders, tradies and more. From airlines, to department stores, to motor dealers, to your coffee shop. With customer service levels that leave you feeling ripped off.
You will also have experienced outstanding service from companies and providers that you would be happy to stay with over the long term, provided they maintain their customer focus and competitive performance.
The DesignStrat solution
The business choice is a simple one, and it starts with the leaders. If your company is fixated on short-term profits at the expense of customer service, DesignStreet has consulting resources that can help you change your business approach and focus. And results.
Creating a customer-first business strategy often requires a major overhaul of the business and a fundamental re-orientation from the top down. However, it is a very exciting process, with a major financial payoff over time.
The DesignStrat business consulting process can help your business focus on what is really important – the customer. It draws upon the ServQual model of Customer Expectations vs. Perceptions theory pioneered by Zeithaml, Parasuramna and Berry.
In addition to securing the bottom line, DesignStrat can help you secure your future.
