Have you ever lost a customer because of a mistake you or someone
else in your organization made? Have you ever thought of the potential cost of that defecting customer? There’s a reason that conflict resolution training and service failure recovery training is so important in today’s competitive environment.
Here is a model to illustrate how important it is that we minimize defecting customers. Follow along with numbers from your own company to give you an idea of how much an angry customer can be costing you.
There are two basic factors involved in calculating the cost of a defecting customer:
The average Customer Lifetime Value (CLV)
The ripple effect
Calculating a CLV
The Customer Lifetime Value is the average amount one customer might be expected to spend with one business over a lifetime. It involves three components:
i. The average dollar amount per transaction
ii. The average number of transactions per year
iii. The average number of years a customer remains in a business’s primary target group
Let’s use a coffee shop as an example. You might think that losing a single customer because of poor service in that business isn’t a big deal. Think again.
Assume an average dollar amount per transaction of $3.00, and that the average customer is there once a day, for approximately 200 days a year. That means $600 ($3 per transaction x 200 transactions) per year, per customer. How long does an average customer remain in a coffee shop’s target group? Let’s estimate just 5 years to be conservative. That means that the lifetime value of an average customer is $3,000 ($600 per year x 5 years). That $3 customer has just turned into a $3,000 customer. And it doesn’t stop there.
The Ripple Effect
The Ripple Effect is the impact of a service failure beyond the initial incident and initial customer. A large body of research shows that the average customer will tell 7-10 people about a bad service experience; and that people will tend to avoid businesses they have heard negative things about, and patronize businesses they have heard positive things about.
So, let’s assume the worst case scenario: that a customer has a negative experience in the coffee shop, and says she’s never coming back. She then tells ten people about her experience, all ten people also fall in the primary target group, and all ten subsequently choose to avoid the coffee shop in the future. The CLV is now multiplied by 11 (the initial customer, plus the ten others). With the Ripple Effect, therefore, the potential cost of a single service failure over a five year period in a coffee shop is as high as $33,000. Even if these numbers are only half correct, it’s still a lot of money for a single bad coffee experience!
If this isn’t motivation to work on your dealing with difficult customer skills, I don’t know what is!