Customer Goodwill

Customer GoodwillLost Through Service

Quality Errors

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Presentation Outline Impact of Problem on Customer Loyalty Customer Loyalty & Improvement initiative Revenue loss of customer goodwill Customer Lifetime Value

Definition Calculation Model Example

Customer Goodwill Simulator Estimated Customer Equity Return on Quality (ROQ) Shareholder Value

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Impact of Problem on Customer LoyaltyTARP Research Finding,

Note,Customer Loyalty will drop by about 55% ( Financial Services ) if the customer encountered a problem.

(TARP; formerly known as Technical Assistance Research Programs, aresearch and consulting firm established at Harvard in 1971)

Selling Quality to the CFO,March 2000http://www.tarp.com/research2.asp

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Financial Services 100 Customers Encountering

problems, 45 of them will probablyrepurchase the next time and theother 55 will leave.

If 95 customers encounteringproblems,=> 45/100 X 95 = 42.75 customers will probably repurchase the next time.

Impact of Problem on Customer Loyalty ( continue )

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Customer Loyalty & Improvement initiative

Improving Error Rate from 5.67% to 1.71%will expected to gained 1.15% of customer(73.50% - 72.36% = 1.15%)

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Improving Error Rate from 5.67% to 1.71% will expect

to gain 1.15%

Total Customer Gained = 1.15% X 80,000

= 919

Consider CLV for Non

Motor Insurance is, CLV = RM 290.41

Potential Revenue Gained = CLV X 919 = RM 266,805

Required Data;• Non Motor Customer ( base on 2004 figure) = 80,000

Customer Lifetime Value (CLV)

Customer Loyalty & Improvement initiative

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No of Customer will leave,Suppose 30% of projected customerexperiencing problem and the other 70%experiencing no problem.1. Total Customer leave (no problem),

= 26%X (70%X80,000)= 14,000

2. Total Customer leave (problem)= 55% X (30% X 80,000)= 13,200

Lost Of Customer Goodwill= (14,000 + 13,200) X CLV= 27,200 X RM 290.41= RM 7,899,152

Revenue loss of customer goodwill due to lost through service quality errors.

Financial Services

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Customer Lifetime Value

“Customer Lifetime Value is usually definedas the total net income a company can expectfrom a customer.”

Source : Novo, J,2001,Maximizing Marketing ROI with Customer Behavior Analysis, http://www.drilling-down.com

Definition Calculation Model Examples

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]d)(1[ itit

T

0tit

tSF π∑ +

=

−

LVi = Lifetime value of customer it = Time period.T = Length of the planning horizon.d = Discount factorFit = Expected frequency of customer i’s purchases in the product

category per time period t.Sit = Expected share of customer i’s wallet for this brand in time tπit = Average contribution from a purchase by individual i in time t.


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Customer 1

The probabilities of purchase for customer i (ifshe/he purchased from MAA last time) this yearare 0.8 for MAA, 0.1 for X and 0.1 for Y

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t = 2 yearsCustomer 1 probabilities of purchase (MAA) for 2 years from now are,(0.8X0.8)+(0.1X0.3)+(0.1X0.1)=0.68

t = 3 yearsCustomer 1 probabilities of purchase (MAA) for 3 years from now are,(0.8X0.8X0.8)+(0.1X0.3X0.8)+(0.1X0.1X0.8)=0.544

Definition Calculation Model MAA Examples

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Customer 1 Lifetime Value to MAA Required Data;• Discount Rate = 10%• Contribution Profit = $200.00• Time Period = 3 Years


Customer 1 Lifetime Value Year 1


CLVY1 = $200 X 0.8 = $160.00


CLVY2 = CLVY1 + ($200 X 0.68)(1+0.10)-2 = $160 + $112.34 = $272.34

CLVY3 = CLVY2 + ($200 X 0.544)(1+0.10)-3=$272.34 + $81.74 =$354.08

Therefore,Customer 1 Lifetime Value = $354.08

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Customer Goodwill Simulator

Customer 1 Customer 2 Customer 3

Required Data;• Discount Rate = 10%• Contribution Profit = $200.00• Time Period = 3 Years

Customer 1 Lifetime Value Customer 2 Lifetime Value Customer 3 Lifetime ValueYear 1 $140.00Year 2 $228.43Year 3 $284.70

Year 1 $120.00Year 2 $192.73Year 3 $232.40

Customer Lifetime ValueYear 1 Year 2 Year 3

Customer 1 $160.00 $272.40 $354.14Customer 2 $140.00 $228.43 $284.70Customer 3 $120.00 $192.73 $232.40

Average CLTV $140.00 $231.18 $290.41

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MAA’s Estimated Customer Equity


CLV to Comp = 41.2903

3

RMCLVi

n

CLVii

n

i ==∑∑

MAA’s Estimated Customer Equity

= RM 290.41 X 80,000

= RM 23,233,058

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Return On Quality

• Calculated Return on Quality is 59.2%, indicatingthat the improvement expenditure is profitable.

Consider,Discounted Improvement Expenditure = RM 10.2 million$ Improvement in Customer Equity = RM 25 million

% R O Q = X 100 = 59.2%(25 - 10.2)25

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Shareholder Value

Improvement in Overall Quality will increase theshareholder value.

Documents

Customer Goodwill