The Lifetime Value of a Customer


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food cover

A couple of years ago Chris and Josephine, who ran our local village store, retired, sold up and went travelling. Before they came to our village Chris had sold cars and Jo had been a tax inspector. It was certainly not a ‘natural’ progression in their careers, but nevertheless they grabbed the shop by the scruff of the neck, sold everything you could ever need, and if they didn’t have a collapsible food cover for keeping flies off cakes and cookies then they’d get you one.

Not so the new owners. I’ve only been in once and they yelled at me to take my dog outside. I’d only gone in for the Sunday papers. I left, muttering something about the lifetime value of customers and have never been back. Last week someone told me that the stock levels were frighteningly low and the wife was still less than charming. Honestly, I’m surprised that the store is still open.

My experience could easily have been measured using the Net Promoter Score (NPS) in terms of ‘would I recommend?’ (no).

The new owners will have paid Chris and Jo a figure for the stock plus an amount for the value of the business. I have no idea what was paid in this case, but a common calculation is x times the annual profit – where x can be anything from 1 to 5 or more. The difference between the value of the tangible assets (i.e. the stock, fixtures and fittings) and the amount paid for the business is classed as good will in the accounts. It really is the good will of the customers and the presumption that Chris and Jo’s customers will, over time, keep on spending and will not, as I did, give up on the first attempt.

The same rules apply to big Business-to-Business (B2B) organisations. And for public limited companies (PLCs) you don’t have to wait for the whole business to change hands to calculate the value of the customers’ good will. PLC’s shares are traded on the stock exchange between stockbrokers and from the traded price it is possible to get a quick fix value of the company and, by extension, the value of the customers.

The PLC will have its tangible assets checked, counted and valued, usually once a year, by a team of auditors from an external accountancy practice as part of the preparation for the annual report.

But how do you measure the good will of the customers in a complex B2B organisation? NPS won’t work because there is no point-of-sale that can be audited – no store to visit, no assessment pf it’s cleanliness, stock-holding, staff culture and willingness to get that collapsible food cover. Or a website or a ward or a forecourt or a dining area.

Experience shows that B2B is made or broken by relationships, not experiences. Relationships require trust and understanding; common goals, win-win scenarios and working together easily. On-time and in-full deliveries that meet the quality criteria should, nowadays, be a given.

And this is where InfoQuest has more than 25 years of history and benchmarking scores. InfoQuest’s B2B clients can pose up to 62 questions and statements to their most important customers, drilling down and assessing the strength of the relationships (and, on average, they hear back from more than 70% of them). Are those customers Totally Satisfied? Are they going to include our client in the next Invitation to Tender (or are they going to scrub the tender process and simply carry on working with our client in a win-win partnership)?

B2B companies don’t crumble in the same way that a mom and pop store can crumble. But you can get the wrong person in the wrong position. And our experience shows that that position doesn’t have to mean sales or Key Account Management. In B2B people buy from people, and in B2B you can have a myriad of folks all working alongside and having relationships with the customer. This is the value of the business, and it needs auditing. Just like your stock needs to be audited.

The new owners of the village store are still in business. But I bet they’ll never get their money back.

John Coldwell
From an operations background, John's attitude towards B2B customer satisfaction surveys is that they must be useful. Interesting doesn't interest him. You should be able to grab the feedback by the scruff of the neck and do something with it. For the past 15 years John has been running InfoQuest's full-day senior-team post-survey workshops around the world.


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