I recently witnessed a great retailer lesson at my local food grocery store. The woman in front of me had a very large order (sigh!), and was telling the cashier about a dinner party she was hosting that evening. It was apparent the customer was in a hurry, and frustrated she hadn’t been able to get the boneless chicken she needed for the main course. The cashier was surprised and said: “But we sell boneless chicken.” “Yes I know,” the customer replied, “but the butcher said you are out, so I’ll have to pick it up somewhere else.” You could tell she was annoyed as she left to find the chicken she needed at another store.
As I listened to this I thought, “Chicken, butcher, knife. How can they ever be out of boneless chicken?” So the question is: “How much is boneless chicken?” This customer was seriously inconvenienced by the store, and is on her way to shop at a competitor. Consider the typical numbers for such a scenario. The woman spends $175 per week on food, and would normally shop at this store for another seven years. The store has a gross margin of 4% on food. The Lifetime Value (LTV) of this customer is the profit she represents to the store over her purchasing life. A reasonable estimate is $2,550. This is calculated by average sales times number of purchases per year times years as customer times gross margin.
For the lady needing the boneless chicken, the butcher’s indifference may have been the last straw in a series of missteps that cause her to shop elsewhere. Boneless chicken actually costs more than you think. In this case, it’s worth $2,550 in lost profit from a single customer over the next seven years. It is well known that unhappy customers tell their problems to other customers, creating immense negative word of mouth. So defecting customers cost more than you might think. Imagine the impact from more customers defecting due to poor performance at other points of contact with the store.
Levels Of Spending
The concept of customer Lifetime Value is even more critical in agriculture where the customer base is shrinking, and the spending differences between Gold, Silver, and Bronze customers is large. One of our Midwest customers has average annual sales to his grower segments as follows: Gold $139,535; Silver $64,183; and Bronze $5,747. Let’s look at a potential Lifetime Value of a Silver customer for this retailer.
AgKnowlogy has the purchase history of over 150,000 customers and 200 retailers in our database. The loyalty of these customers is 74%, which translates into an average customer lifespan for all customers of four years. Silver customers account for 30% of your sales and roughly 15% of your customers. Since they are generally high quality, I stretched the life expectancy in our example to 12 years. I also assumed the customer brings the retailer just one new customer as a referral, and that new customer only purchases at 50% of existing customers I used a margin of 15% across all purchases for this example. This single Silver customer is worth almost $158,000 in profit during the time he is a customer.
Given the trend of grower consolidation, not enough retailers think strategically about customer loyalty. If the Lifetime Value of one Silver customer can easily be worth the profit in our example, retailers must diligently protect this LTV. Paying close attention to customer experiences at every point of the customer corridor is one of the most important tasks you have. Profit from customer retention drops directly to the bottom line.
Back to boneless chicken. I don’t know if the butcher and the cashier would have let the frustrated customer walk out unsatisfied if they understood her Lifetime Value. I would like to think not. Now think about your business. Can you and your staff readily identify the long-term value of your Gold and Silver customers? Is every contact your business has with customers underpinned by the actionable knowledge of their Lifetime Value?