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How Much Is A Customer Worth To A Company?


Why would Sprint Nextel willingly jettison subscribers when it's struggling for share?


From the top of a certain street in Brooklyn, where I live, there is a postcard-perfect view of the Statue of Liberty standing watch over New York Harbor.

The other day, as I was walking to the subway, I saw two men standing on the sidewalk, gazing off into the distance and pointing.

They were speaking with foreign accents and a lump formed in my throat as I imagined the conversation between the two of them:

"Isn't she beautiful?"

"That, right there, is the very representation of this great land."

When I passed, I could make out what they were actually saying.

"Looks like there's a better parking spot about 30 yards down on the left."

"Yeah, whatever. Want a coffee?"

The point I'm trying to make is that, to varying degrees, we all eventually take for granted the things that matter most.

Like customers.

Recently, there was an uproar when Sprint Nextel (S) took about 1,000 of its 53 million subscribers "for granted" and dropped them for making an excessive number of calls to customer service.

They called customer service an average of 25 times a month over the past six to 12 months, complaining about problems that Sprint was unable to resolve.

"The bottom line is that we were not able to resolve their issues," Sprint Nextel spokeswoman Roni Singleton said. "We wanted to allow them to find another option that would make them happier."

I think I once broke up with a girl this way. "I can't give you everything you need. You should be with someone who can make you happier."

The wireless penetration rate in the U.S. is above 80%, so the competition for new customers is extremely pronounced, and retaining customers is key.

Right now, Sprint's customer "churn rate" stands at 2.7%, compared with AT&T's (T) 1.7%, Verizon Wireless' (VOD, VZ) 1.1%, and T-Mobile's (DT) 2.6%.

So, why would Sprint Nextel willingly jettison subscribers when they're struggling for share?

Customer service calls cost companies $2 to $3 on average per minute, according to Roger Entner, a senior vice president at IAG Research. A J.D. Powers analysis shows that the average monthly mobile phone bill is $66. Therefore, someone who spends ten minutes on the phone with customer service twice a month is a total loss to the company.

Around 300 bucks a minute, hard at work

"We have to be able to quickly and efficiently serve customers," Sprint Nextel's Singleton said. "When we are unable to consistently solve our customers' problems, it results in a lot of frustration and longer waits for other customers. So after looking through our records, we were able to determine that there were customers whose current needs we couldn't meet."

Here's an example of that frustration:

Barb Swartz, Teradata Magazine's Profitability Analytics Marketing Director, says the telecommunications industry uses something called ARPU (Average Revenue Per User) as its measurement of customer value and success.

She uses the following chart to illustrate why ARPU isn't necessarily the only thing that matters:

In their book, Managing Customers as Investments: The Strategic Value of Customers in the Long Run, Columbia Business School professors Sunil Gupta and Donald Lehmann say the value of a company is the value of its customers, and that "improving customer satisfaction is good in principle but the benefit of this improvement has to be weighed against the cost to achieve it."

If the lifetime value of a customer is below the cost of acquiring and retaining that customer, that's not a customer a company wants. Gupta and Lehmann say:

"Perhaps the telecom industry would not be in such a tough situation today if it had paid more attention to customer lifetime value. But these companies fell victim to the same gold-rush, acquire-customers-at-all-costs mentality that befell hundreds of dot-com startups."

Regardless of the logic behind Sprint Nextel's decision not to continue doing business with unprofitable subscribers, a quick Google search shows a tremendous backlash against the company.

Why worry? If things get really bad, they can always hire Michael Sitrick, chairman and CEO of Sitrick & Company (whose motto is "If you don't tell your story, someone else will tell it for you"), and the man Forbes magazine called "The Flack For When You're Under Attack."

Paris Hilton has hired Sitrick to return her reputation to its former glory. listed some of Sitrick's other "challenges":

Interestingly, Sitrick has quite a bit in common with Sprint Nextel when it comes to client retention.

As Sitrick told Dan Turner of the Los Angeles Business Journal: "If we ever find that a client has lied to us, we resign the client."

No positions in stocks mentioned.
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