My experience with keynotes is that typically they are not that memorable. This was not one of those keynotes.
Matt used the fundamental economics of a service company to explain how to increase Customer Lifetime Value. He persuasively made the case for thinking beyond the conversion. It’s a case that should appeal to anyone who works in B2B marketing analytics.
In this post I’ll recapitulate his presentation.
Matt started by pointing out that many companies that used to sell products now find themselves in the business of selling services.
Software companies have built themselves on the Software as a Service model. Computer companies sell “cloud computing.”
Walter Stahel cites other examples in markets that might surprise you:
- Schindler elevators is selling carefree vertical transport instead of elevators.
- Xerox is offering custom-made reproduction services instead of just selling photocopiers.
- Safety-Kleen and Dow Europe sell the services of chemicals instead of selling chemicals.
- Safechem and Dow Germany are renting solvents to dry cleaners.
- Mobil Oil is selling engine oil quality monitoring instead of engine oil (for its ‘Mobil 1’ synthetic oils)
- GE Capital and ILFC lease aircraft.
- Interface Inc. leases nylon carpets.
The conventional marketing funnel no longer works for marketing and sales in a service company.
The source of revenue for a service company is not the initial sale, it’s the (monthly) recurring revenue from the customer. You want this revenue to continue for as long as possible. What happens after the sale is important to a service company.
Metric #1: MRR = Monthly Recurring Revenue
The value of a customer is not measured in the price of the product, it’s the total amount of value from customers over the time that they remain a customer, the customer lifetime value.
Metric #2: CLV = Customer Lifetime Value
Retaining customers becomes a vital goal in a service company. Great service companies work to improve their retention rate. They deliver a great offering. They provide excellent customer service.
Metric #3: Retention Rate: the % of customers that come back and buy again next month (e.g., 95%).
Metric #4: Churn: Percent that don’t (e.g., 5%).
Here’s a little Matt Trifiro jiu-jitsu for you. What is the average customer lifetime in a service company? It’s the inverse of the Churn Rate.
Metric #5: Average Lifetime (in months) = 1 / Churn Rate
Metric #6: Customer Lifetime Value = Avg Lifetime x Avg Revenue per Month
What about the cost of acquiring a customer? In a conventional product sale, the cost of acquisition must be less than the price of the product. In a service business, that is unlikely to be the case.
Metric #7: CAC = Customer Acquisition Cost
Metric #8: Revenue (CLV) – Cost (CAC) = Profit
To embrace the realities of service company economics, Matt introduced something he calls the “Uber Funnel:”
In the Uber Funnel, B2B marketing analytics pays attention to the entire customer lifetime value. It works to increase retention and lower churn. It optimizes marketing to increase conversion and lower customer acquisition costs.
Even companies that don’t believe they are in the service business can learn from the economics of service:
- What happens after the sale is important.
- How can you continue to add value to your customers to extend your engagement and lifetime with them?
- What can you do at each stage in the funnel to increase conversion and lower churn?