Thursday, August 22, 2013

What Is a Customer Worth?

By Bob Weissman
Former Chairman & CEO of Dun & Bradstreet

I was only out of business school for a few months when I learned a fundamental lesson: How to think about the value of a customer.

I had joined a consumer products company that sold liquid household cleaner, and they had just come up with a terrific promotional idea – offering the cleaner in a glass, early American flask with images of Washington, the colonial flag, etc., pressed in the sides. The flasks came in several colors, and there were color striations and bubbles just like in real antique glass.

It was a great idea, that is – until it was discovered that the amber flasks were
unusable because after a few weeks they would break due to a weakness in the glass, spilling their contents. Since we had written the manufacturing specs which the bottle company had followed and since the company now owned several hundred thousand dollars of pretty, but unusable bottles, the President decided to engage the bottle company sales rep in what would certainly be a difficult negotiation.
Fortunately, I was allowed to be a silent observer at that negotiation.

The President opened by recounting the facts of the situation and summed up by asserting that this was obviously a major problem.

As the “new kid”, I was totally unprepared for the sales rep’s response:

“What problem? If you are not happy with the bottles that we delivered to you, return them or destroy them and we will give you a full refund.”

The President was quick to say ‘thank you’.

A few weeks later, I spotted the bottle company rep in our building and offered to buy him a cup of coffee. Once we were seated, I mentioned the earlier meeting and asked why he had given us a full credit, since it was obvious that the problem was at least partially our fault. His response was swift.

“If I had not given you a credit, what would your response have been?”

“We would probably have paid, but dropped you as a vendor,” I replied.

“So there is your answer.  I am going to lose money on that order, but I have been making money on your account for many years, and I expect to make money in the future,” he said.

I pressed on.

“What would you have done if you concluded that the account was unlikely to continue to be profitable?”

He said, “I would have waited for several weeks, then met with your purchasing people and suggested to them that your direction in future requirements were not part of our core offerings. In other words, I would have gently fired you as a client.”

“What would you have done about the credit you gave us?” I asked.

“I still would have given the credit.” He said.  “This is a small industry, and as the story leaked out to your competitors who are also my customers, I would want the message delivered to them to reinforce my relationship with them.”

Then he said something that has stuck with me for nearly 50 years, and which has been an important principle guiding my business career.

He said, “Most businesspeople that I know tend to view each transaction in isolation, judging whether it is good or bad based on its profitability, or whether they or their customer is ‘right’. In other words, they too often focus on what an order is worth instead of what the customer is worth. A more productive way of acting is to ask yourself this question: ‘What is the lifetime Net Present Value of your relationship with that customer’, and then to make business decisions about how you interact with your customer based on your answer.”

Over the years, I have repeatedly been reminded that adherence to that approach is consistently rewarding, while ignoring it was the opposite.

What do you think? I’m open to ideas. Or if you want to write me about a specific topic, let Bob and I know. 

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