How much do your clients cost?
ESEUNE Business School Weekly Article
Enrique de la Rica
Enrique de la Rica has a Bachelor degree in Information Science from the University of the Basque Country ( Spain), where he studied the Ph.D. courses in Communication Studies. Enrique got a MBA from Eseune Business School (Bilbao, Spain). He has done postgraduate courses and specialization in different institutions, such as the Executive Business Program at Georgetown University (Washington DC, USA).
Today it is the day in which many companies remain face to the product instead of to the client. The traditional Marketing (Marketing outbound) parts of a premise: we have a product; a market exists; inside it, we have to identify our target; positioning; and sell. The Marketing inbound change the importance of the factors. It parts of a different premise: we have a client; we have to find the best offer for him. So nowadays ,there are more the organizations that are migrating towards this new way of understanding the marketing.
The interactions between a company and his client can classify in two categories: outbound interactions and inbound interactions. Outbound interactions are those that are initiated by the company. On the other hand, inbound interactions are those interactions that are initiated by the client. The difference between outbound and inbound interactions is that in the second ones, exist a big value for the companies: the predisposition of the client. A predisposition that is given by the fact that is the client the one who has the willing to initiate the contact, the relation with the company.
The inbound Marketing represents the essence of the relational Marketing (otherwise, the outbound Marketing represents a transactional and conventional Marketing): we have a client who has voluntarily interact with our company and our aim it is to find the best offer for him. Where does the main value of Amazon reside? It is not in its physical assets, nor so even in the force of its brand. Amazon has tens of millions registered clients who frequently interacts with and offers tens of products, from books to musical items.
The premises on which this new type of Marketing is sustained comes from Ancient ages and nowadays has been developed into this assumption: some clients are more valuable than others. So how to determine the value of each client?
Customer Lifetime Value (LTV) is the key: is the value that represents for a company the relation with a client along the whole life of the above mentioned relation. It is something that has always been realized in intuitive way, but in the new type of this current Marketing based on the relation with the clients (inbound Marketing, relational Marketing), this has to be quantified.
Some clients have more value than others. It could be because they have a capacity of major consumption; or for its loyalty to the brand, a client has much more value than a switcher (a non-loyalty person who chooses the product that is sold in an aggressive promotion). We are trying to do a simplistic formula that represents the LTV.
Basically it is:
LTV = It - Ct
Incomes (I) that a client generates in a period of time(t)
Minus the costs (C) that the relation generates in this period of time (t)
To determinate It we have to consider:
- The buying probability of a client in a period of time.
- Gross margin obtained in this period: quantity acquired in the period by the average amount consumed in every visit.
Ct is divided into another three types of costs:
- Costs of Relation (CRt) with a client in a period of time: there are clients who consume a lot but the costs of giving service are high (they consume a lot of time in every interaction: make complaints, generate returns…)
- Costs of Loyalty (CLt) of a client during a period of time: sometimes it is necessary to make special actions like preferential discounts,…
- Cost of Reception (CR) is how much costs to get a new client. It is not easy to determine when a multichannel Marketing campaign is done. It is easier to determine the costs when mechanisms of on-line publicity are used (banners, e-mail marketing, publicity in Google or Baidu…). On other way, it is very complex when the reception of the new client is the result of a diverse combined medias campaign (television, press, publicity in the point of sale …)
LTV = It – (CRt + CLt + CR)
Anyway, as we mentioned before, this is a formula that simplifies the concept. It is difficult to develop the perfect formula of the LTV, because every company has its peculiarities.It is necessary to add other elements as the capacity that has a loyalty client to generate new clients ; additional income generated from the cross-sales (cross-selling); an enthusiastic client (loyal and satisfied) is capable of paying a higher price than other competitors offers. We have also have to take into account others financial parameters.
The importance of these concepts in this new Marketing is not superficial. The Pareto principle is fulfilled in most cases: 20% of the clients generates 80% of the benefits. This turns out to begin with the identification of that 20% of priority clients. We will manage a set of people of whom we need to know everything of them instead of being anonymous clients. The world has changed. The Marketing too.