Managing the Million-Dollar Asset
Historically, businesses have viewed customer service operations as a cost-adding activity that subtracts from rather than adds to the bottom line. Companies frequently refer to customer service (encompassing field service or distributor service) as a “mop-up” crew, creating a perception that customer service is mainly a reactive function concerned with enrollments and sales that have already been made, and with little relationship to future sales.
These companies superficially respond that distributors are paid to take care of the customers, and that any budget for distributor service is difficult to justify since distributors are paid well to recruit and develop their customers and other distributors. Thus, managements scrutinize customer service operations for cost-reduction opportunities rather than for ways in which customer service can contribute to increased revenues and market share.
Throughout the 1980s, this casual view of customer service resulted in relatively high distributor and customer turnover rates in direct selling companies, reflecting the many distributors who failed to see the fulfillment of their expectations, or customers who believed that the prices charged for products were unjustified. The product – price – service model lacked sufficient foundation in the service component that they would leave after they had received indifferent service from their company of choice once they had signed up and begun ordering products. But it was also a time of economic expansion, with great new products and services in all business sectors, and with great emphasis on capturing new markets via the introduction of new products and services. Yet, with the cost of acquiring a new customer through distributor recruitment estimated at five times the cost of keeping an existing one, profit margins became increasingly thin—and still efforts to cut customer service costs continued!
It was a mixed blessing when U.S. businesses, which were in the habit of measuring results by the quarter and sometimes by the month, realized that they were being squeezed out of the world markets by Japanese and German companies, which had been investing for the long haul in their customer relationships, and were profiting at the expense of U.S. companies by doing so. While U.S. managements were not blind to the value of repeat business—customer retention—very few were ready to quantify their customers as assets, or to recognize their customer service efforts as asset management. These attitudes spilled over into the direct selling sector. However, overseas competition forced businesses to rethink their customer service attitudes, and by the end of the decade there were signs that the concept of “customer value” would probably supersede the focus on excellence, quality, and customer satisfaction that dominated so much of management thinking during the 1980s.1
Figure 1. Customer-Base as Assets
Figure 1 represents the first known publication of data representing the customer base as assets, and reflecting the revenue enhancement that can result from improving the management of those assets. In this context, improved asset management is most often equated with improvements in customer service in any one of literally hundreds of ways, with the net result of retaining customers by ensuring that they have little incentive to deal with others.
An earlier version of this figure was published in July 1986, issue of Customer Service Newsletter, under the heading, “How customer loyalty goes to the bottom line.” The version shown here, which was introduced several years later, is the first to portray customer service as asset management. It has had considerable impact in that respect.
On the basis of American Management Association data for conventional business, a company with a 70 percent customer retention rate is typical of most U.S. companies, and an annual account growth of 10 percent among existing or retained customers is a reasonable expectation. This is the starting point for our analysis of the statistics that back up the power of distributor retention in the direct selling industry. We have taken the liberty to begin the analysis by treating the 10 percent growth as representative of the growth in customer and distributor networks by active distributors, although the retention rate in direct selling has been shown to be the inverse of conventional business.
The data in the figure have been calculated on this basis and reflect the increases in ten-year revenues that can be anticipated from improvements in customer service that will increase distributor and customer retention as shown. Starting with a group of customers representing $1 million in sales during the first year, Figure 1 shows these totals after ten years:
- 70% customer retention rate $4,038,000
- 80% customer retention rate $6,012,000
- 90% customer retention rate $9,562,000
- 100% customer retention rate $15,937,425
This can be phrased as follows. Using the ten-year revenues from a 70-percent customer retention rate:
- 10 percent increase in retention will increase revenues by 49 percent
- 20 percent increase in retention will increase revenues by 137 percent
- 30 percent increase in retention will increase revenues by 295 percent
This original approach to customer service as asset management does not mean that managers should attempt to reach the 100 percent retention level, because it’s highly likely that the cost of providing that level of service would outweigh the returns.
What it does suggest, however, is that as customer service manager you will want to test and probe this theory of retention to modern distributor service applications and different levels of service—and the cost of the service features required to attain those levels—and then set service levels at the optimum point, when the asset return over a comparable period will be most favorable in terms of the cost of attaining it.
In the 1990s, senior managers began to think along these lines. As we applied the conventional principles in the direct selling environment, we paid special attention to the compounding effect when applied to distributors who brought in multiples of customers at a time. Part II of this series presents conservative extensions and a practical application of the power of retention as we now better understand it and the elements that make retention a worthwhile pursuit.