In these tough times, why should you invest to develop people when they might leave as soon as the program is complete?
Consider the alternative: Don’t develop employees — they will stay!
Or worse, you’ll have to leave and turn the lights out behind you!
Even organizations that are beneficent, evolved, and married to the idea of being a good place to work need to make money. How can you exploit that paradox and help realize the goal of true strategic corporate employee development as well as give your company a boost that goes beyond the bottom line?
When the economy slumps you may feel that cutting training and employee development is necessary because it feels like just a cost or a luxury. The truth is, it is now more critical than ever. By using specific key performance indicators in the design of your program you can create a link between your employee development and results.
So how do you get started? Think about the results you want to improve. "I need more sales" may be true but it is not a result. "I need training" is just as bad.
"We need to offer our customers something they cannot get anywhere else so that they buy more from us over a longer period and bring others to us" is where to start. That something is not only your product or service. It is the experience your customer has with your company.
The reason you start there is because every customer has a value you can measure in terms of dollars and cents. It’s called Lifetime Residual Value of a customer. That value includes metrics that are driven by employees’ specific activities. Here’s the formula:
Average Value of a Sale
X Average Number of Sales per year
X Average Length of "Customer Life"
= Basic Residual Value of a Customer
X Referral Rate
= Lifetime Residual Value of a Customer
Let’s take each one of those and explore how you can develop employees to drive up the numbers.
Average value of a sale is the average amount the customer spends per transaction. What can you do to increase that number beyond "Want fries with that?" Home Depot discovered that; by watching its customers, the company can tell what kind of project a particular customer is buying for. Home Depot has trained its employees to help the customers go through a checklist to make sure they have everything when they get home so they don’t have to make a return trip. That’s something I, as a customer, sure appreciate. Can you develop your employees in a similar way?
Average sales per year translates to how many times the average customer spends the "average value of a sale" in a year. I worked with an independent car dealer who offers a "free" carwash with an oil change on Saturday mornings to people who have purchased a car from him. He also serves "free" coffee and doughnuts. Now, his oil change is a few dollars more than the local chain shop, but at least you can get out of the car, get a doughnut and have your car washed all in one stop. The program increases his traffic, drives up the average value of a sale and increases his referral rate. Is there anything your employees can do to increase the number of times somebody makes a purchase?
Customer life is defined as how long the average customer stays with you measured in years. I’ve moved six times and have lived in three different counties in the last 10 years, yet I still get my hair cut by the same person in a town nearly 20 miles from my home. Why? I don’t go there for just a haircut. I get treated as though I’m special. I’m waited on. I’m brought a cup of coffee, a magazine, cookies and, if the garden is producing, some fresh vegetables. We sometimes talk over a cup of coffee after the haircut about the climate of business in the area or what’s happening in our lives in general. She has one customer that drives 60 miles one way to get a haircut. I’ve referred several people and they all say that they’ve never been treated better. And you know what? I don’t even know what that haircut costs. How can you develop your employees to cultivate that kind of relationship?
Basic residual value of a customer is where the average company stops measuring. It is a valuable number but we all know that you can’t live on today’s receipts alone. When I worked with Schwann’s Home Delivery, I discovered the company’s philosophy on referrals. It came from its founder Marvin Schwann. Legend has it that he said, "Asking for referrals is like shaving. If you don’t do it every day you start to look like a bum." That is why the next number in the formula is so critical to drive strategic growth for your company.
Referral rate is how many good referrals (ones that turns into a customer) that the average customer brings to you. How could you and your employees develop a system that asks for referrals that turn into customers just like the best ones you already have? There are two ways to go about it. If your customers are end users, then you can cultivate the referrals through specific activities in the transaction. Schwann’s invests heavily in training and developing its field staff to nurture those referrals. And it’s no wonder, based on the legendary philosophy handed down by the founder. If you are in a situation where your customers are competitors and loathe to give out that kind of information, look to your supplier base, banker, attorney and, yes, even your business adviser. Then explore ways to develop your employees that have contact with those constituencies so that they engage in activities that drive referrals from those sources.
Profits and corporate employee development go hand in hand, especially during a slump as you may be experiencing now. Even though you may struggle to meet obligations during these challenging times, don’t neglect the one resource that can position your company to take advantage of the inevitable rebound: your people. In other words, look beyond the bottom line.
Steve McCombs is director of Kolb+Co. Performance Advisers, LLC, a performance measurement and enhancement consulting affiliate of Kolb+Co., a Milwaukee-based business advisory and CPA firm (www.KolbCo.com). He has more than 20 years’ experience in training, quality assurance, and performance measurement and enhancement. He can be reached at 1-800-461-8843 or smccombs@KolbCo.com.
Sidebar
A case in point: Ben and Jerry’s Ice Cream
In March of 1999 Gary Henderson, then liability claims manager for Ben and Jerry’s, presented an astounding application of the Lifetime Residual Value of a customer (LRV) formula at an American Society for Quality conference. Here is how the formula looked for them:
Average Value of a Sale$3.00
X Average Number of Sales per year 150
X Average Length of "Customer Life" 3
= Basic Residual Value of a Customer$450.00
X Referral Rate 4
= Lifetime Residual Value of a Customer $1,800.00
That’s not too shabby for a $3.00 pint of ice cream. But the truly astounding part is the referral rate. Why? When you saw Ben and Jerry’s Ice Cream at the top of this piece, most likely you knew exactly what I was referring to. Now consider how much media advertising you see for Ben and Jerry’s. Almost none. How did you know about them? Word of mouth, the same way referrals travel. The firm grows its business on referrals, and referrals only come from "wow" experiences with a product.
Here is how Gary applied the LRV formula: Ben and Jerry’s is a chunky ice cream, meaning there are actually chunks of nuts and fruit in the product. On very rare occasions, a fruit pit or nutshell will get through the equipment and cause a problem with a customer’s dental work that may involve a trip to the dentist costing a few hundred dollars. The company’s policy in the past was to refuse to cover the cost of the dental repair, which sometimes resulted in a lawsuit asking for reimbursement for the dental work plus pain and suffering and legal fees, which Ben and Jerry’s generally lost — along with the customer. Gary showed how refusing to pay a claim for a $500.00 crown in most cases resulted in a loss often 10 times greater in legal fees and settlements, not to mention the $1,800.00 in LRV.
By re-training its employees to handle the claim differently and make arrangements to pay it directly to the dentist, the firm saved the $5,000.00 in legal fees plus $1,800.00 in LRV, and maybe even pushed the referral rate a little higher for that specific customer.
Now think about this: Just by your reading this story, Ben and Jerry’s just got another referral and maybe a few thousand others!
May 24, 2002 Small Business Times, Milwaukee
