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HomemibusinessThe Lifetime Value of a Customer

The Lifetime Value of a Customer

The average mature optometry practice can expect to grow its new patient base by 10 to 15 per cent every year. On the flip side, the average business can expect about 20 per cent of existing customers to drop
off every year.On these figures, it is not hard to see that without deliberate strategies to retain existing customers, your practice will go backwards fairly rapidly.

There may have once been a time when a simple recall, reminding customers that they’re due for an eye test, was enough to ensure repeat business. That time
has passed.

Sure, recalls – whether they come in the form of a phone call, form letter, email or a funky, funny postcard – remain an industry staple. In today’s competitive, online and social media-savvy world, however, communication and business strategies must be sophisticated and multi-layered.

It is said that the easiest way to grow your business is to retain your existing customer base. Even a tiny change in customer retention can have a multiplying effect over time. There’s a formula for measuring your patient’s customer lifetime value (CLV), that is, how much they’ll spend in your practice over time.

…it costs five times more to attract new customers than it does to retain existing customers

It goes like this…

(where GC is yearly gross contribution per customer; M is the (relevant) retention cost per customer per year; n is the horizon (in years); r is the yearly retention rate and d is the yearly discount rate.)1

Seriously? Let’s agree the formula is unlikely to be any use to most optical retailers, however the concept of customer retention and a patient’s lifetime value is worth consideration.

In their book, Leading on the Edge of Chaos, father-son team Emmett and Mark Murphy calculated that it costs five times more to attract new customers than it does to retain existing customers; that a two per cent increase in customer retention has the same effect on profits as cutting costs by 10 per cent; that a five per cent decrease in customer defection rates can increase profits by 25 – 125 per cent (depending on the industry); and that individual customer profitability increases over the life of a retained customer.2

Statistics like these really do prove the old adage that “a bird in the hand is worth two in the bush”.

Reducing Attrition

Customer attrition rates can be difficult to measure. With many patients visiting a practice just once a year, if that, patient databases can quickly become out of date. Often the only way a practice is aware that a patient has moved on is when they get a ‘return to sender’ on a recall notice.

Sales and marketing specialist, and regular mivision contributor, John Lees says practice owners “need to be very careful about the term ‘customer retention’”.

“There’s a price to pay for customer retention and it is called ‘customer development’. Customer development, he says, is a gradual, constant process of building value into the patient’s experience every time you have contact with them.

Mr. Lees says it is not enough to have a ‘customer retention policy’ or rely on good customer service – and you can’t rely on past performance.

“You can’t have an attitude that says ‘I have served you well in the past, therefore, I have a right to serve you again in the future’. The customer has every right to turn around and say, ‘But I paid you for that service, I don’t owe you anything’.”

It is not enough, Mr. Lees warns, to aim for “happy customers”, who are pleased with the experience and are happy with your work.

“The danger of the happy customer is that if they see an offer of some kind that appeals to them – a new optometrist opens up closer to them, for example – there’s a reasonable chance they’ll take it, as they perceive service levels on offer will be the same as yours.

“The very happy customer finds you indispensable. It is not a ‘nice relationship’, but a necessity.

Communication

Another of mivision’s regular business writers, Mark Overton, from Ideology Consulting, says you have to constantly remind your patients how good you are.

He says most customers are looking for a “value equation”. “They want to feel they are getting quality, at the right price. The better you can sell that value equation, the better you can educate them, the more likely they are to be loyal to you.

“People are more educated. They have more information available to them. If you’re not communicating with them, if you don’t meet their needs, then they will look around.”

But, he says, if an optometry practice is able to regularly review its business model and stock for relevance – and, most importantly, is able to tell their customers about it – then customers are less likely
to wander.

Know Your Customers

One of the keys to retaining customers is to know exactly who your customers are – and tailor your business, retail strategies – and stock – to suit them. This is where your database helps. Mark Overton also suggests the use of ‘welcome forms’.

“Most practices only administer these to new patients,” he says, but with some patients returning to your practice only every year or two, they should be used more often.

“When you think about it, how different is your life now than it was two years ago?” Mr. Overton asks. “People’s needs change. That is an important part of it.”

No One Size

When you consider the range of patients you see, you quickly realise that developing retention strategies is not a “one size fits all”.

Customer One, for example, is a presbyopic 43-year-old. He or she may purchase one pair of reading spectacles on the first visit. Ideally, they should come back annually for an eye test, but for the first few years, they don’t notice much change in their script and they’re fairly happy with the glasses they’ve got, so they don’t really bother.

Perhaps they’ll come back every couple of years to purchase some new frames, but they might come to you just for a script and buy online, or maybe they’ll go somewhere else in the meantime.

This, says Mr. Overton, is where it is important to regularly update your stock, especially for practices with a fashion conscious clientele. Educating your clients about eye health, and adding value to their experience are also key.

Customer Two is a contact lens wearer – a far more profitable prospect. When mivision interviewed Tim Grant, Area Head, Asia Professional Marketing Vision Care, Alcon, about the contact lens market in Australia, he estimated that “a contact lens patient will produce about three times the profit of a spectacle wearing patient, even if the initial revenue generated may be lower”.3 Studies of optometry practices in Europe have found that contact lens patients are worth about 60 per cent more than spectacle wearers.4

But the value of a contact lens patient is also hard to quantify. Customer Two may visit you fairly regularly for eye exams as recommended, but buy their lenses from you in bulk, equally, they may not see the value in regular eye care, and may shop around on price.

This, says John Lees, is where you need to make yourself indispensable.

“See it in terms of a chemist versus a doctor,” Mr. Lees suggests. “The chemist is dispensable – sure, you get good service but you are just as likely to go somewhere else for convenience because the service is the same.

“But the doctor is not (dispensable). The point is, it is personal. Customers are not aware of this except by response. You need to make yourself indispensable to them.”

Customer Three is a patient that wears spectacles, but has not tried contact lenses. Studies previously reported in mivision indicate that almost half of all spectacle wearers would consider trialing contact lenses if their practitioner recommended it to them – most of the time, the suggestion isn’t made.

In a survey4, conducted across five European countries on patient profitability, the author, marketing consultant and academic, Dr. Mark Ritson, concluded:

“If eye care practitioners focus on the long-term relationships that they can form with their patients, then four things are likely to happen. First, practitioners will begin to see that the profit contribution of contact lenses is initially poorer, but eventually greater than that of spectacles alone.

“Second, they will begin to move their business model from one that focuses on a single transaction to one that builds long-term, recurring relationships with patients.

“Third, practitioners will also begin to realise the additional selling advantages of longer-term relationships with contact lens patients as, on their repeat visits, they purchase spectacles and sunglasses in addition to more contact lenses.”4

Perhaps it is time to start suggesting contact lenses to suitable patients?

Implementing Strategies

You will be able to identify many other patient types in your practice – the main point is that you do need to know your patients, and identify ways to add value for them.

For John Lees, customer retention boils down to “always looking for an opportunity to uplift and help your patients … and don’t ask permission to do your job, which is to ask questions of your patients and provide advice: Make yourself indispensable”.

Or, as Mark Overton puts it: “The best way to ensure customer retention is to build value into the experience of the customer standing before you right now.”

Top Tips for Customer Retention

According to Ideology Consulting’s Mark Overton, there are four key points to boost customer retention rates:

1. Communicate frequently with your patients, focusing on their needs, not your own.

2. Get your service right.

3. Regularly review your products and business model for relevance.

4. Invest in ongoing training to ensure your staff is highly educated and skilled.

Marketing and sales specialist John Lees boils his strategy down to the basics – knowing what makes not just happy customers, but “very happy customers”
that find you indispensable.

Another pivotal point is to guard against complacency: “In the early stages of my career, I mentioned to (a mentor) that I was ‘scared to death of losing customers’,“he said. ”That was great, and that I should go right on being scared to death. When you stop being scared of losing customers; that’s when you will.”


References

1. http://en.wikipedia.org/wiki/Customer_lifetime_value (at 23 October 2012)

2. Murphy, E.C. and Murphy M.A., Leading on the Edge
of Chaos: The 10 Critical Elements for Success in Volatile Times (2002).

3. Shao M. and Gosling S., ‘Optometric Business Plans’, mivision, November 2010.

4. Ritson M., 2006, ‘Which Patients are More Profitable?’ www.clspectrum.com/article.aspx?article=12968
(at 23 October 2012).