Thursday, January 05, 2006

Competing in the Third Wave

First of all, what is the "third wave"? There's a treatment of the term and its origins here. This book which is published by the lovely people at Harvard Business School looks to be really good and really thorough. However, I don't have time to get through it as it's very technical and rich in schemata. (I like to use the latin plural, don't you?)

I did want to note this paragraph where the authors, Jeremy Hope and Tony Hope, discuss Reichheld's loyalty business model. These studies could inform a lot more discussions on association membership than I think is the case.
Based on an analysis of various service companies, Reichheld suggests that there are certain common features that determine longer-term customer profitability in the service industry. Specifically, by identifying and measuring six factors, companies can, over an appropriate time period that will vary from company to company and perhaps even customer to customer, form a clear view of the long-ter profitability of their customers. The factors are these:

1. The cost of acquiring a customer
2. The base (or gross) profit from the goods or services provided to the customer
3. The profit from increased purchases arising from the additional spending of satisfied customers
4. The reduced operating costs of serving loyal customers
5. The profit from transactions with new customers who have been referred by loyal customers
6. The profit from the price premium charged to loyal customers who are less sensitive to price.
So, we know a lot of this is going on with respect to association membership, and we particularly observe the "reduced operating costs" part. But it is instructive to look at the way Reichheld and others have articulated these benefits. (I like to use the word instructive because it makes me feel very sort of professorial. Indeed.)

By Tony Hope and Jeremy Hope
ISBN # 0875848079