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Janet's Blog: 7th Feb 2013

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The cost of the lost: How much are you worth?

I worked out roughly how much I have spent in my local pub over the last 10 years and it came to £18,000 just me!!

Publicans and restaurateurs spend lots of time and money trying to find new customers yet the irony is that if they could SEE the cost of the lost they would spend more time and money training their staff instead.

Most restaurateurs and publicans do not have a clue how much any of their regular customers have spent or are likely to spend with them because, unlike a veterinary practice, an opticians or Tesco’s, they simply don’t have the systems in place to know how much they are worth to the business. There are so many affordable systems available to measure customer loyalty yet very few see the value of it. However if I said that the loss associated with an average pub customer is £24,500.00 they might think differently.

In today’s world, customers have more choices than ever in the marketplace and Internet has given them an outlet for expression. If the experiences they have with our business become too difficult or don’t provide enough value for them, the business loses them as a customer and as a potential advocate.

Customers leave for many reasons. Some move (3%), some die (1%), some are influenced by friends (5%), some are lured away by the competition (9%), but overwhelmingly, customers leave because they are dissatisfied with the product (14%) or turned away by an attitude of indifference on the part of a business employee (68%). The message from all these numbers is pretty clear: 82% of our customers leave because they are dissatisfied either by our product or by our service.

Restaurateurs should worry about dissatisfied customers for the following reasons:

• The average dissatisfied customer will tell 8 to 16 people (about 10 percent will tell more than 20 people) about what rotten treatment he or she was made to endure at the hands of their business,

• Each one of those dissatisfied customers has a circle of influence of 250 people, and usually 10% of the people fall in the primary target group, which means 25 people.

• Of those told, 2% (one in 50) will not purchase services from that business.

• However, satisfied customers express their satisfaction to 5 other persons only.

• 96% of the customers that are dissatisfied with the services do not complain to the person or business responsible (that means that for every customer who bothers to complain, there are 26 others who remain silent and this is where the name of my company comes from)

• 91% of unhappy customers will never purchase service from that business again.

• The cost of getting a new or replacement customer is estimated to be five times greater than the cost of keeping existing customers.

• If a business solves a customer’s problem, 82 to 95 percent of them will stay. The impact of poor service goes beyond the disappointment and loss of a single customer. There are two basic factors involved in calculating the cost of a defecting customer:

1) The DIRECT COST -The average Customer Lifetime Value (CLV)

2) The INDIRECT COST – The ripple effect

Let’s use a pub as an example to give you an idea of how much a dissatisfied customer can cost.

DIRECT COST – 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:

1. The average cost per transaction

2. The average number of transactions per year

3. The average number of years a customer remains in a business’s primary target group

Assume an average purchase of a pint of ale is £3.50, and that the average customer pops in twice a week for a couple of pints, so approximately he will purchase about 200 pint a year. That means £700 (£3.50 per transaction x 200 transactions) per year, per customer. How long does an average customer remain in a local pubs’s target group? Let’s estimate just 5 years to be conservative. That means that the lifetime value of an average customer is £3,500 (£700 per year x 5 years). That £3.50 customer has just turned into a £3,500 customer.

Direct losses associated with a lost customer

A. Average customer spend per transaction                                £3.50

B. Number of transaction per year                                                 200

C. Revenue per year (A+B)                                                    £700.00

D. Customer lifetime in years (Average)                                          5

E. Customer life time value (CXD)                                     £3,500.00

The indirect Cost – The Ripple Effect

The Ripple Effect is the impact of a service failure beyond the initial incident and initial customer. The potential lost revenue. Our previous statistics shows that the average customer will tell 8-16 people about a bad service experience; and that they have a circle of influence of 250 people, where an average of 10% falls in the business’s primary target group, and that 2% of those told will tend to avoid businesses they have heard negative things about.

So, let’s assume the worst case scenario: that a customer has a negative experience in the pub, and says he’s never coming back. He then tells an average of 12 people about his experience, all 12 people share that information with your primary target group of their circle of influence (250 people x10%) which equals to 25 people, 2% of those told (0.5) subsequently will choose to avoid the pub in the future.

Direct losses associated with a lost customer

F. Unsatisfied customer tells 12 people on average (E x 12)             £42,000.00

G. Circle of influence of 250 x 10% = 25 (Fx25)                           £1050,000.00

H. 2% of those told will not purchase (G x .02)                                £21,000.00

 

With the Ripple Effect, therefore, the potential cost of a single £3.50 service failure over a five year period in a pub is as high as £24,500. And this is just from ONE dissatisfied customer and a £3.50 pint!

Total loss associated with one lost customer

Total cost of a lost customer (E + H) £24,500.00

And remember this example only takes into account the cost of negative word-of-mouth. It does not take in account the cost of getting a new or replacement customer which is estimated to be five times greater than the cost of keeping existing customers, nor the missed opportunities for recommendations. That compounds the cost of losing a customer to astronomical figures.