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The fundamental question

Jan 1, 2011 12:00 AM


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I hate to deal in “absolutes,” but I believe there is one overwhelming truth in industries such as print that largely involve customized products and services: Nothing counts — not equipment, technology, demeanor, experience of staff, physical facility, size of staff, anything — unless it can be converted into perceived value to customers. Business is all about formation and retention of customers.

Determining customer value

Companies dealing with the “double whammy” of a recession and print under siege from alternative media understand the difficulty of replacing lost customers. In the heat of battle, there's a tendency to act as though the value of an existing or prospective customer is confined to its projected sales and profits. Sales and profits are not to be demeaned as yardsticks of a client's value. However, other criteria should be considered.

The business literature suggests that Lifetime Value (LTV) is the basis on which customers should be evaluated. (Some economists and academics driven to believe they must contribute something unique to the marketing literature now refer to CLV — Customer Lifetime Value.) I agree with the need to use LTV as the most important metric in determining the value of a customer.

Calculating LTV

Listed below are some of the elements of the LTV calculation that should be considered in addition to sales and profit.

  • Referrals: Some customers provide information about other buying organizations that lead to new customers, some of which might generate greater sales and profits than the referring account.
  • Testimonials: In this era of word-of-mouth marketing, testimonials have assumed increasing importance in new account development.
  • Sales acquisition costs: Some accounts involve hidden but substantial costs on every job. These costs might involve multiple estimates, above-average customer service department involvement, poorly prepared files, late return of proofs or an elaborate bidding process. All of this adversely affects a customer's LTV. On the other hand, other customers might award and process work in a painless manner that minimizes acquisition costs, thereby increasing LTV.
  • Regularity and predictability of work: This is an important determinant of cash flow. It also is a major issue in staffing management. Distribution services tend to be more regular and predictable than manufacturing (printing), and this has driven graphic arts companies to provide distribution services in recent years. A print buying organization that can help smooth peaks and valleys of production and cash flow has elevated value.
  • Market share within an account: There is insufficient attention to, and appreciation of, the importance of this factor. In general, the greater the market share, the more likely that price will be mitigated as a factor in supplier selection.
  • Payment history: Some accounts remit payment within terms. Other accounts remit payment in 90 days. Payment history is not always a reflection of ability to pay. This track record should be factored into the calculation of lifetime value.
  • Value-added sales: Lifetime value of an account is elevated if its work generates above-average value-added sales (defined as the invoice value minus the cost of materials and outside purchases).

Coupled with account-specific sales and profit, these components of LTV will provide a general idea regarding the value of a customer. My experience is that even an imprecise attempt to calculate the LTV of each customer results in an elevated appreciation of many second-tier accounts that are characterized by a long-term relationship, minimal spoilage, and the proverbial wheel that doesn't squeak. It's easy to overlook these accounts.

Dick Gorelick's marketing expertise graced the pages of print industry trade magazines for 25 years. See our tribute as well as Dick's past columns at www.americanprinter.com/gorelicksmanagement.

Dick Gorelick passed away on September 12, 2010. Dick was a prolific writer who always worked far ahead of his deadline. While Gorelick & Associates has formally suspended its operations, Dick's writing remains timeless.