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Do you know how much each of your customers is worth?
Each customer can be assigned 3 values:
– a strategic value;
– an economic value;
– a financial value.
The strategic value isn’t measurable with a number. It’s a purely qualitative and subjective indicator.
A customer could in fact have an immense strategic value as a reference for the A company operating in the A market, but he could be almost insignificant for the B company B operating in the B market.
What does this strategic value depend on?
For example, a customer can be defined as strategic if he represents an important reference. Or if he acts as a “pilot website” to install each of our new solutions and thus gain experience for our organization, experience that can then be capitalized by working with other customers.
While I was working at Kodak, one of our “strategic” customers was the then CRT Bank. They already had all of our microfilm storage systems, and then became our first customers to equip themselves with a new-generation printer for print-on-demand.
A customer has strategic value even when his acquisition represents an act of strength, of competitiveness, a threat to the competition. A typical case is when you acquire a historical customer from your competitors: maybe to do this you had to lower your prices, making the marginality ridiculous. But in terms of signal to the market, the acquisition of that customer has a symbolic value and is strategically important.
The economic value is an objective measure. It indicates our turnover with that customer.
The unit of measurement in this case is the turnover.
It can be expressed as the turnover of the first (and perhaps only) sale. Or as the turnover that the customer brings us every month, or every year.
But the most significant value is our total turnover with a customer as long as he remains so.
Let’s take an example: if a customer buys from us for 5 years, and we issue invoices for a total of €500,000, the Customer Value, or more properly the Customer Lifetime Value, is €500,000.
And the annual value of the customer is €500,000 divided by 5 years, then €100,000/year.
These meters are of fundamental importance to understand also how far we can go as Cost of Acquisition of a customer (a KPI I’ll talk about in another post).
The financial value of a customer is closely related to the economic value. While the economic value measures the turnover, the financial value measures the profitability of the customer, i.e. the margin that the customer brings to the company (during the life cycle, or on a monthly basis, etc.).
We charge €100,000 to A customer, assuming costs (for the product or staff) for €50,000. The A Customer has a financial value of € (100,000-50,000) = €50,000.
With B customer we charge €120,000, but with €90,000 of costs because our cost of the product is higher, or because the customer is very demanding and requires a lot of support, service, and so on.
The B Customer therefore has a financial value of € (120,000-90,000) = €30,000. Therefore, it has a higher economic value than the A Customer, but a lower financial value.
Is there a correlation between strategic, economic and financial value?
It doesn’t necessarily exist. A customer may have a high strategic value, but a low economic value, and a low (or very low) financial value. Or high economic value, but low financial value. And so on. There are 9 possible combinations.
It would be good practice to carry out a periodic analysis of the customer portfolio, in order to eliminate “critical” customers from all three points of view. Only in this way it’s possible to find free precious resources with which to give more support to other customers, or to acquire new ones without having to hire additional staff.