Wad-Waf’s Formula for Keeping Customers

Mar 01, 2003 10:30 PM  By

OK, THAT COMPANY’S NAME may sound suspiciously like another you hear bandied about a lot these days, but we promise you it isn’t that one. Wad-Waf is pure invention — an invention of veteran fulfillment consultant Donald R. Libey back in the days when companies actually had time to romance customers. In a gem of an article written for the July 1993 issue of O+F, Libey used an imaginary company, light-bulb marketer Wad-Waf, to illustrate a quantitative customer retention formula that should still work with very little modification. Here are Libey’s assumptions:

DESCRIPTION COST BALANCE
BEGINNING BALANCE $2.25
Send 3 postcards 0.60 1.60
Send 1 reorder reminder 0.40 1.25
Send 1 birthday card 0.65 0.60
Send 1 no-special-reason card 0.60 0.00
Source: O+F, July 1993
  1. Each customer of Wad-Waf orders twice a year and spends $150 per order. A typical customer buys for at least five years.

  2. Wad-Waf prospects heavily and gets 20,000 new customers every year. But only 50% of those customers ever buy from Wad-Waf again.

  3. Wad-Waf wants to keep half of the 10,000 customers who never buy again.

  4. Wad-Waf is willing to spend 1% of its lifetime net profit before taxes (NPBT) on each new customer to raise its customer retention percentage to 75%.

  5. Wad-Waf now has a budget of $45,000 to retain 20,000 new customers.

Do the math, and you end up with these numbers:
Lifetime purchase value: 2 × $150 × 5 = $1,500
Lost purchase value: 10,000 × $1,350 = $13,500,000
Recovered purchase value: 5,000 × $1,350 = $6,750,000
Lifetime NPBT: $225 × .01 = $2.25
Customer retention: 20,000 × 2.25 = $45,000

With $2.25 to spend on each customer, what can Wad-Waf do to get its desired 50% increase in repeat orders? What kind of marketing bang can $2.25 deliver? How can Wad-Waf keep 5,000 of the 10,000 first-time buyers who go away?

By doing just the few things listed in the box above, Wad-Waf can show its customers that it cares about them, or at least knows that they exist. “How much will that effort be worth?” asks Libey. “Possibly $6,750,000.”

A PERFECT 10

You never know what nuggets you’ll find when combing through the O+F archives. A perusal of the July 1993 issue of O+F shows that some things never change. For instance, the hackneyed business phrase “top of mind” was already in use a decade ago. In a more serious mode, this month’s research also provides evidence for the far more substantive point that measuring productivity is crucial to improving it.

  • Of the respondents to a 1993 O+F survey who used benchmarking to measure productivity, an impressive 89% of those firms using “engineered,” or time — motion benchmarks, rather than “historic,” or average, benchmarks, reported a significant increase in worker productivity from the previous year.

  • The most common benchmark, used by 69% of respondents, was for units processed per man hour. Cost per package was next, measured by 53% of respondents; cost per piece was measured by 37%.

  • In measuring the impact of engineered standards on worker productivity — defined as catalog sales versus the number of FTEs — the respondents (all catalog firms) claimed an average of about $170,000 more sales per FTE than companies that did not use those standards.

Way Back When

Firms with the highest levels of performance follow many of the same practices:

  • Measure productivity daily
  • Use engineered (time-motion) productivity benchmarks
  • Batch orders
  • Employ scanning and bar code technology
  • Have incentive programs

The advantages large firms enjoy are often a result of following these practices rather than a consequence of their sales volume.

Source: O+F, July 1993

1993 Cycle Times

Actual Time (hours) Optimal Time (hours)
Shipment received to unloaded 1 1
Unloaded to putaway 8 4
Order taken to available for processing 6 3
Order printout to picking completion 5 4
Order picked to pack 2 1
Returns order receipt to putaway 33 20
Source: O+F, July 1993