The Long and the Short of Lifetime Value of Customer

Zappos takes pride in describing itself as a great customer service business that happens to sell shoes. I had to return a pair of shoes. As it had been said very eloquently by many, it was the easiest task I have ever done online. Zappos knows they have not lost me and that I sure will buy more shoes from them.

On the other hand, I went to the local UPS store to drop off the package. I asked the friendly associate to tape my box and affix my printed UPS shipping label. He did, but charged me $1 for a strip of tape. He explained that he makes no money from people dropping off packages and in my case he lost money because he spent time and material and hence had to recover that cost.

It was not a big deal to pay a dollar. But …

Do businesses need to make money off of every customer interaction? The problem with most businesses, especially those run in franchise model with very low operating margin, is that they look for every opportunity to amortize the costs.

They look at customer interactions as transactional and not as a relationship.

The transactional model assumes every customer will visit your store exactly once (at least for the next few years). So the goal is to get the customer to pay. Even a small act you do for the customer needs to be charged.

The relationship model treats the customer visit as one of many opportunities to build a relationship with them. There is no concern about making money from every visit.

A customer who has bought other services in the past is not going to be happy for getting charged for every small thing. A new customer will form an opinion that will drive them away from the store for future services. The store should use every customer visit as an opportunity to build a stronger and better relationship.

The UPS stores are independently owned and operated by local business people. The franchisee, a local entrepreneur, pays a fixed fee and a percentage of revenues to UPS and takes as profit whatever is left after covering costs. Harvard Business School professors Campbell and Datar say in their working paper, “franchising imposes undiversified risks on the store manager and can create hold-up problems where franchisees may under invest in their stores”. This may lead them to measures that are needed to stay afloat but does not help the brand.

We can’t blame the franchisees for trying to stay afloat but customer experience is tied to the main brand. A customer will then relate the same experience to every UPS store and its offering rather than treat it as one off experience with an individual. UPS should incent the franchisees to build better relationships, and help reduce overhead costs by providing simple supplies to the stores to create better experience. This holds true for any business, franchised or not, big or small.

The high lifetime value of the customers in the relationship model requires businesses to look beyond profit from every visit and deliver above and beyond what is required.