Many businesses carefully study the cost of customer acquisition. Budgets for advertising, marketing, promotions and sales are largely defined by their effectiveness in bringing in new customers. The better organizations realize that not all customers are created equal. Businesses can offer high service levels to high volume and profit generating customers. Businesses can also succeed by attracting a large number of lower volume, low maintenance customers.
Companies need to be careful if the techniques they use attract low volume, high maintenance customers. That is not to say these are "bad" customers (though some are). More often than not, the company does not have the proper infrastructure and support structure to effectively address these customers. An example is McDonald's. Very few restaurants can generate ANY profits featuring a $1 value menu offering. McDonald's has the size, equipment, training, brand, marketing, and system to generate billions of dollars of profits with this product offering. If a restaurant uses a go to market strategy which attracts customers seeking pricing, speed and quality to match McDonald's, there is a good chance they will fail. Even if the cost of customer acquisition is very low, the lifetime value of the customer may be less than zero. For those versed in mathematics, the flaw with this business model is obvious.
Landing high volume customers is often managed with expensive sales or marketing programs. A critical mistake that many companies make is to take these high volume customers for granted once they transfer from prospect to customer status. In any business relationship, there are going to be problems that occur in the course of the account maintenance. These mistakes can often be costly for the company to remedy and absorb. Rather than taking a big refund hit that will impact a bonus or commission, the company takes a hard line on the service issue. In turn, this highly prized customer may take their business to the competition. If they are really pissed off, they may influence other prospects or luke-warm customers to steer straight of the company. Sounds pretty bad, right? It is. Now let's be clear. I am not advocating that a company give away all their profits to ultra-demanding customers. Instead, I am suggesting that if a customers truely has a legitmate claim to refunds or credits due to a mistake made by a company, than the company needs to take ownership of the situation and satisfy these high-value customers. Offering customers satisfaction when every things are running smoothly is easy. The trick is to delivery when something blows up. The cost to remedy a customer service disaster can be expensive, so a company is highly motivated to reduce these problems. However, customer service disasters happen to even the best run organizations.
Funds need to be directed to both customer acquisition and customer retention costs. The benefit of spending on customer retention are many. Organizations with the happiest customers are able to win new customers with lower costs than competitors with low customer service ratings. In turn, sales, marketing and customer service talent are easier to recruit and retain. Due to a superior employee base, the top customer service organizations delivery superior results. This virtuous cycle is how some of the legendary customer service companies such as Nordstrom's, Southwest Airlines, and AMEX have outperformed their peers. Although it a simple concept, many organizations' focus on short terms profits conflict with this "do the right thing" approach.
