The Quadruple Whammy: Why Your Customers Are Worth Much Less in a Recession!

The recession is already having a number of unanticipated consequences. One of these is that the value of customers, pretty much all customers, is falling.

Customer value is falling because of a quadruple whammy of factors:

1. Revenues are falling – as customers feel the recession starting to bite, they are already starting to make savings on everything from not booking expensive foreign holidays through to buying more own-brand foods. This reduction in revenues is felt by pretty much all companies already and the recession has hardly got going yet!
2. Costs are increasing – as companies loose customers, their costs fall at a much slower rate, particularly their fixed costs. The fixed costs of running a supermarket are the same whether you have one customer or a thousand. And some costs even rise as companies try and squeeze further savings out of their downstream suppliers.
3. The Cost of Capital is increasing – as the cost of borrowing increases by several percentage points, so does the weighted average cost of capital used in customer net present value calculations. Even if customers hadn’t stopped buying and costs hadn’t risen, customers would still be worth less.
4. Risk is increasing – customer behaviour is becoming more variable as they stop buying at their favourite store and start shopping around for bargains. Or just stop shopping completely. As the variation in their behaviour increases, so does the risk attached to them. And as the risk increases, the customer’s future risk-adjusted value decreases accordingly.

As customer value falls, customers who previously were profitable will no longer be profitable. But what should you do about it?

1. Should you improve revenues by targeting promotions at them? – what if they rebel against such blatant marketing?
2. Should you improve revenues by improving the customer experience? – but what exactly should you improve and at what cost?
3. Should you improve revenues by passing on the true cost to serve to the customer? – but what if they refuse to pay the true cost, (after all they haven’t had to so far)?
4. Should you encourage them to go elsewhere (and to take their variable costs with them) by stopping all spending on them? – but what if you inadvertently do a Sprint 1,000 and get pilloried on YouTube?
5. Should you cut costs by reducing product or service quality? – but what will you do when customers find out?
6. Should you cut costs across the board so that customers become profitable again? – but do you have the knowledge and skills to cut costs through applying Lean Thinking without destroying value?
7. Should you cut costs by outsourcing aspects of delivery to lower-cost providers? – but how will customers respond to another unintelligible foreign voice on the end of the phone?
8. Should you try and reduce the variability in their behaviour by tieing them to your loyalty programme? – but what should you offer as an incentive for regular behaviour?
9. Should you use profitable customers to cover the costs of unprofitable ones (like you do today)? – but what if you run out of cash before the recession is over?
10. Or should you do one of the hundreds of other alternative actions available to you instead?

These are difficult questions to answer. But answer them you must if you are to continue to make a profit and to stay in business. Don’t waste any time. Your customers are worth a little less since you started reading this post! Exactly how much and why, you can only answer when you start to measure customer value. You know what you have to do.

What are YOU doing in the face of falling customer value?

Do tell us by leaving a comment or emailing me at graham(dot)hill(at)web(dot)de.

Graham Hill
Independent CRM Consultant
Interim CRM Manager