In almost all high-tech start-ups (and actually also in most Fortune 500 companies), profit aggregation only happens at business unit or company level and not at customer level. That is mainly because customer responsibility is in Sales. And Sales usually only cares about revenues because that is the key indicator they are measured on. Most managers do not see customer profitability as a priority because they make the false assumption that profits can be optimized by simply adjusting fixed costs (usually meaning human resources). However, understanding customer profitability is important for two reasons: If you have non-profitable customers it has an impact on your bottom line; in order to address this you have to know which customers these are Especially in start-ups, customer profitability relates to opportunity costs, which matters much since resources are scarce and growth goals aggressive … Read more
Especially service providers invest a lot of money in customer loyalty programs, assuming that long-term customers are good for the company. Because of that myth, customer churn and customer retention have become key performance indicators with service providers; budgets and resources are allocated based on those figures and most marketing campaigns are set with the goal to keep customers as long as possible with the company’s services. This paradigm is so strong and unchallenged, it seems worthwhile to have a look at how well all this loyalty money is really spent. While it is certainly important to keep paying customers that contribute revenues to your company, this post focuses on the profitability that long-term customers generate compared to not so loyal customers. We also look at this mainly for settings where a service provider has … Read more
Customer satisfaction is valued highly in almost every commercial organization. Especially large firms spend an enormous amount of money on customer satisfaction programs. Therefore, an important question is: What are the benefits of customer satisfaction for the supplying company? A common assumption is that satisfied customers are more loyal in the sense that they stay in a longer relationship with the supplier. However, marketing research has proven that this linkage is not always so strong and that it largely varies by customer segment and industry. Therefore, vendors and service providers should not rely on such effect, also because the stand-alone value of customer loyalty is not very clear as I will outline in one of my future posts. A much clearer benefit of customer satisfaction seems to be a positive effect on willingness to pay … Read more
In start-ups there is a constant fear by the top management that the prices might be too high and therefore not enough customers will buy. Along with this there is always a tendency to reduce prices or to offer large discounts, in the false hope that this would accelerate Sales. The reason for such fear usually is that price confidence is still low because prices are not established in the market yet, and – again – a wrong understanding of the demand curve. Start-up managers too often assume that low prices will lead to more revenues. Therefore, they try to win new customers by all means, at literally “any price”. However, “price fear” and the resulting low-price-strategy are wrong! Here is why: 1. Price is based on value If you did your homework, your price … Read more
