Part 2 of a 3 Part Series

QUESTION:  I operate a local service business. What must I do to create a lasting bond with my customers and others with whom I do business?

ANSWER: In part 1 of this series we stressed that “loyal” and “satisfied” “customers are not synonymous terms. The worth of a customer is determined by a metric called Customer Lifetime Value (CLV), which is the net margin generated by the customer over the lifetime of the customer’s relationship with your company. Several factors influence the CLV, two key ones being the length of the relationship (retention) and the number of new customers referred by the customer.

Loyal customers are retained longer and refer more new customers than the average customer. For example, if the yearly sales to the average customer are $2,000 with a margin of 40%, and he/she is retained for 3 years and refers one new customer each year, the CLV would be $4,800. However, if the “loyal” customer is retained for 6 years and refers 2 new customers per year, the CLV increases to $14,400. This is a much simplified example used to illustrate the scale of difference between the average and loyal customer. A free detailed 20 page PDF on this subject can be obtained by emailing This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

A simple way to identify your loyal customers is to conduct a Net Promoter Score survey. Customers are asked if they would recommend your company to friends and colleagues; the ones that say they would are your loyal customers. (See above PDF for details). Your primary task is to convert as many customers as possible to the loyal category.

How is the CLV used?

Promoting the importance of loyal customers throughout the company helps to create a customer centric culture without which few companies can survive in the present business environment.

Regular recalculation of the CLV gives a snapshot of the company’s progress. This influences the marketing strategy and budget, including the allocation of funds between the cost of acquiring new customers and developing existing ones.

Most companies are segmented in one way or another and calculating the CLV for each segment makes it possible to compare performances and more efficiently allocate funds and other resources.

A note of caution, when using the CLV to justify future expenditures – future dollars are not as valuable as current ones so the CLV must be discounted to get its Net Present Value. This calculation is explained in the above mentioned PDF.

Part III of this series will discuss ways to convert satisfied customers into loyal ones and discuss the vital importance of a loyal and engaged workforce – loyal employees beget loyal customers.

Frank Friend is a management and marketing consultant, www.ffauk.com, and a volunteer counselor with the Naples Chapter of SCORE, Counselors to America’s Small Business.

To learn more about management issues facing your small business, contact  SCORE Naples. Counseling is provided FREE of charge to all U.S. citizens and legal aliens.  To register call 239-430-0081 or visit our web site http://scorenaples.org/face-to-face-counseling

If you would like an answer to your question, please fill out the form located at  http://tinyurl.com/askscore . A counselor will contact you within 48 hours.  Please include your name, email address and a contact phone number.