Generational revenue analysis

CPA Journal, The, Feb 2001 by Campbell, Alan D

CPA IN INDUSTRY

Generational revenue analysis (GRA) considers how customer relationships affect revenues and profits. The basic premise behind GRA is that a company derives enhanced intangible value from knowing the source of new customers-whether from advertis ing, employee efforts, or customer leads or referrals-and from analyzing how leads and referrals provide incremental generations of revenue. In professional and financial services firms, GRA is especially useful for analyzing marketing strategy, cost-benefit ratios, and customer profitability.

Leads Versus Referrals

A lead occurs when someone gives the name of a prospective customer directly to a company. A referral occurs when a current customer informs a prospective customer about a company. GRA's effectiveness depends upon a good system for recording leads and referrals and tracking the revenues and profits derived from each successive generation. The most common method for recording this information is asking new customers or clients how they learned about the business and systematically recording this information.

For example, Charles is a new customer referred by Paul. The company records Charles' name and the revenues and profits he generates as a level-one referral on Paul's customer record. If Charles refers a new customer, George, then the company records revenues and profits realized from George on level one of Charles' customer record and level two on Paul's customer record. The referral tracking can continue in this way for as many generations as desired for marketing purposes.

A lead may reflect customer satisfaction, but it could also indicate a desire to reciprocate, to satisfy a salesperson, or to receive a discount.

Most people would prefer to be referred to a company and have the choice of contact, rather than have their name given as a lead. Referrals generally outrank advertising, information from sales representatives, and other forms of marketing and promotion as the dominant influence on the buying decision.

The Referral Value Chain

For professional services firms, the ability to create a loyal customer base is the cornerstone of success. Each customer is acquainted with about 250 people, which are in turn acquainted with another 250 people, and so on. By delighting just one customer, a business has the chance to grow geometrically. Management consultant Tom Peters suggests that corporate clients consider customers as appreciating assets, just like more traditional investments on balance sheets.

Customer dissatisfaction can have the opposite effect: A study by the White House Office of Consumer Affairs found that 90% of unhappy clients will switch firms and share their dissatisfaction with approximately nine other people. Other consumer research indicates that dissatisfled bank customers complain to 11 acquaintances and dissatisfied automobile customers tell 22 acquaintances (Ivan R. Misner, The World's Best-Known Marketing Secret: Building Your Business with Wordof-Mouth Marketing, 1994). Although amazing clients or customers with the level of service is necessary for a positive referral, something tangible that provides both an incentive and a means to referral is also important. Useful promotional items with the company's name and contact information are particularly suited for this purpose.

Active and Passive Referrals

Direct and Indirect Referrals

A direct referral occurs when the individual making the referral and the new customer obtained from that referral have direct contact in person, through the mail, e-mail, or via telephone. An indirect referral occurs when the individuals referred to the company have no direct contact (for example, where contact exists solely through a message posted on a computer bulletin board). Referrals can be classified accordingly in the following matrix as a basis for additional analysis.

Examples. An active-direct referral occurs when a customer contacts another individual either in person or through a communication medium and recommends the company's products or services. An active-indirect referral occurs when a customer does not directly contact another individual; a talk-show host's personal on-the-air endorsement would be an example of a powerful active-indirect referral.

An example of a passive-direct referral is a customer wearing a T-shirt or cap that promotes the company's products or services. An example of a passive-indirect referral would be a customer displaying a bumper sticker promoting the company's products or services. A passive referral could become an active one if the individual is asked about the company.

Benefits of Generational Revenue Analysis

Applying GRA to marketing strategy, cost-value analysis, and customer prof itability analysis can identify essential steps to obtain new customers at a low cost, assess the relative merits of cutting costs or adding value to the company's products and services, and decide whether to drop unprofitable customers.

Marketing strategy. GRA leads to a clearer understanding of the source of new business by categorizing new customers into groups: those obtained through advertising, employee efforts, leads, or referrals. Categorizing the referrals in the matrix and quantifying the resulting revenues and profits will provide insights into the company's most effective means of generating new customers. Communicating GRA findings to managers and employees through newsletters, seminars, and training sessions will focus marketing efforts.