Customer Goodwill

Lost Through Service

Quality Errors
 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

8-Dec-10 -2-
 Impact of Problem on Customer Loyalty
TARP Research Finding,
(TARP; formerly known as Technical Assistance Research Programs, a
research and consulting firm established at Harvard in 1971)

Selling Quality to the CFO,March 2000

Note, http://www.tarp.com/research2.asp
Customer Loyalty will drop by about 55% ( Financial Services )
if the customer encountered a problem.
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 Impact of Problem on Customer Loyalty ( continue )

Financial Services
 100 Customers Encountering
problems, 45 of them will probably
repurchase the next time and the
other 55 will leave.

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

8-Dec-10 -4-
 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%)

8-Dec-10 -5-
 Customer Loyalty & Improvement initiative
Required Data;
• Non Motor Customer ( base on 2004 figure) = 80,000

 Improving Error Rate from 5.67% to 1.71% will expect

to gain 1.15%
 Total Customer Gained = 1.15% X 80,000
= 919

Customer Lifetime Value (CLV) Consider CLV for Non
Motor Insurance is, CLV = RM 290.41
 Potential Revenue Gained = CLV X 919 = RM 266,805

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 Revenue loss of customer goodwill
due to lost through service quality errors.
 No of Customer will leave,
Financial Services
Suppose 30% of projected customer
experiencing 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

8-Dec-10 -7-
 Customer Lifetime Value

“Customer Lifetime Value is usually defined

as the total net income a company can expect
from 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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 Customer Lifetime Value
T

∑[(1+ d) Fit Sitπ it ]

−t

t =0

LVi = Lifetime value of customer i

t = Time period.
T = Length of the planning horizon.
d = Discount factor
Fit = 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 t
πit = Average contribution from a purchase by individual i in time t.

Definition Calculation Model Examples

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 Customer Lifetime Value
Customer 1

 The probabilities of purchase for customer i (if

she/he purchased from MAA last time) this year
are 0.8 for MAA, 0.1 for X and 0.1 for Y

Definition Calculation Model Examples

8-Dec-10 - 10 -
 Customer Lifetime Value

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

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

Customer 1 Lifetime Value Year 1

CLVY1 = $200 X 0.8 = $160.00

Customer 1 Lifetime Value Year 2

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

Customer 1 Lifetime Value Year 3

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

Therefore,
Customer 1 Lifetime Value = $354.08

Definition Calculation Model Examples

8-Dec-10 - 12 -
 Required Data;
Customer Goodwill Simulator • Discount Rate = 10%
• Contribution Profit = $200.00
• Time Period = 3 Years

Customer 1 Customer 2 Customer 3

Customer 1 Lifetime Value Customer 2 Lifetime Value Customer 3 Lifetime Value

Year 1 $140.00 Year 1 $120.00
Year 2 $228.43 Year 2 $192.73
Year 3 $284.70 Year 3 $232.40

Customer Lifetime Value

Year 1 Year 2 Year 3
Customer 1 $160.00 $272.40 $354.14
Customer 2 $140.00 $228.43 $284.70
Customer 3 $120.00 $192.73 $232.40
Average CLTV $140.00 $231.18 $290.41

8-Dec-10 - 13 -
 MAA’s Estimated Customer Equity
n 3

CLV to Comp =
∑ CLVi ∑ CLVi
i
= i
= RM 290.41
n 3

 MAA’s Estimated Customer Equity

= RM 290.41 X 80,000
= RM 23,233,058

Definition Calculation Model Examples

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 Return On Quality

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

(25 - 10.2)
%ROQ= X 100 = 59.2%
25

• Calculated Return on Quality is 59.2%, indicating

that the improvement expenditure is profitable.

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 Shareholder Value

Improvement in Overall Quality will increase the

shareholder value.

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