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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