Customs;-- P'odact Fr of ¡tab fity Analysis should assemble portfolios o( negatively correlated individuals so that the financial contributions of one offset the deficits of another 10 maximize the portfolio's risk-adjusted lifetime value.

COMPETITIVE ADVANTAGE Companies must not only be able to create high absolute value, but also high value relative to competitors at a sufficiently low com. Competitive at I vantage is a company's ability to perform in one or moieways diat competitors cannot or will not ma (eh, Michael ftjrter urged companies to build n sustainable competitive advan-tagc.:,i: But few competitive advantages ¡ire sustainable. At best, they may be leverageahle. A feivrogeabie ad ivtillage is one thai ;i company can use :is a springboard to ueiv advantages, much as Microsoft has leveraged its operating system to Microsoft Office imd then to networking applications. In general, a company ihat hope« to endure must be in the business of continuously inventing new advantages,

Any competitive advantage must be seen by customers as ¡l customer advantage, t-'or example, if a company delivers CasteT than its competitors, this will not be a customer advantage if customers do nof value speed, Companies must focus on building customer advantages, Then ibey will deliver high customer value and satisfaction, which leads m high repeat purchases and ultimately to high companv profitability.

Measuring Customer Lifetime Value

The ease for maximizing long-term customer proflLability is captured in the concept of customer lifetime value. Customer lifetime value (CIV) describes the not present value of the stream of fmure profits expected over (be customer's lifetime purchases. 1 lie company must subtract from the expected revenues the expected costs of attracting, selling, and servicing that customer, applying the appropriate discount rate (e.g.. 10%-20%1 depending on cost (5 capital arid (isk attitudes). Various CIY estimates have been made for different products out! services,

■ Carl Scwell, in Customers fin Ufe (with Paul Brown), estimated that a customer entering his car dealership for the first time represents a potential lifetime viflue ofoveT S300.000-19 If the satisfied customer brings in other customers, the figure would be higher, Similarly, General Mo tors estimates its lifetime customers to bewortft $£7&iQ0O on average. These .li!1.-figure values are a graphic illustration of the importance of keeping the customer satisfied for ilie life of (he automobile to better the chances of a repeat purchase.40 It Even though tacos may cost less than a dollar each, executives at Taco Hell have determined that a repeat customer is worth as much as 511,00«. By sharing such estimates of customer lifetime value with its employees, Taeo Hell's managers help employees understand the value of keeping customers satisfied,*1

a Mark Craiuer, former chairman of the Technical Assistance Research Programs Institute lTAW'), estimated ihat a loyal supermarket customer is worth SM,i!0t) annually. '■'

We can Work out an example of estimating CI.V. Suppose a company analyzes its new-customer acquisition cost:

Cost of average sales call [including salary, commission, benefits, and expenses}: S^tOU

■ Average number of sales Calls to convert an avofagc prospect in to a customer: 4

A GM ouster ,■ srtons tUfisli(KW»m a! Htisftiiis CnemM it) ilk ftoiw V.Jlagc 1. Jiois Wtol iJ is is "Q ®1 ■. sj come bxHla Hcs^is and W.I each tw needs a cai

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