Most companies aspire to design goods and services that encourage repeat business. Yet businesses often invest in expensive features without adequately understanding how the features that attract new customers may differ from those that will retain existing ones.
COMPANIES MUST MAKE important decisions about which features to include in the goods and services they offer to customers. Understanding the return on investment (ROI) for a feature is essential to increasing profitability. Adding features increases costs, but it may increase revenues as well, either by attracting new customers or retaining existing customers. Notably, as we describe in this article, the features that retain customers may be different from the features that initially attract customers.
Customer lifetime value is the net profit earned over the course of a company’s relationship with the customer. 1 To maximize customer lifetime value, a company must not only convince customers to buy its product or service once; it must also retain them. Hotel and airline companies, for example, invest heavily in loyalty programs designed to encourage their best customers to come back again and again. About one-third of leisure guests and about one-half of business travelers say they are loyal to a hotel brand. 2 Subscription-based services such as Netflix and Amazon Prime frequently offer free trials to attract customers, hoping that they will recoup their investment when customers sign up and become paying subscribers. Profits flow to video game app developers not when their apps are downloaded for free, but when users decide to keep playing and spend money to upgrade the app or make in-app purchases. Yet in many cases, the notion of generating revenue is no more than a pipe dream: According to one estimate, less than 40% of video game players return to a free-to-play game after the first session; 3 another analysis found that, on average,three-quarters of people who download apps stop using those apps within 90 days. 4
This story is from the Winter 2017 edition of MIT Sloan Management Review.
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This story is from the Winter 2017 edition of MIT Sloan Management Review.
Start your 7-day Magzter GOLD free trial to access thousands of curated premium stories, and 9,000+ magazines and newspapers.
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