The Life Time Value and Company Values

The best boss I ever had was Ron Urcil, a grocery store manager of West End IGA in Brandon, Manitoba. He was my boss through my high school years and undergrad university. I can still see Ron smoking like a chimney, swearing like a sailor, and telling the most hilarious jokes. Rumor was he had been a stand up comedian before getting into the grocery business. Ron taught me a lot about customers, merchandising and hard work. Although he oversaw a pretty big staff, Ron would always take time to ask his front-line employees how they were doing.  I was one of them.  I was the guy stocking shelves, pushing carts, bagging groceries for the cashiers (usually selecting the ones that I had crushes on!) and answering price-checks. He knew that we were his front line employees when dealing with customers and we better keep the customers happy.

Fast forward 15 years or so since I left IGA and I still think of Ron whenever I read something on the lifetime value of a customer. The idea behind the concept is that if you serve the wants and needs of a customer with the right product, at the right place, with the right price, and with proper communication, the customer will make repeat purchases. The customer is not to be considered for just one buy; he or she is a lifetime of satisfied buys. But then I think about Ron, and his street smart approach to how not all satisfied customers are desirable. The story I'm thinking about goes like this:

Every week, a couple would come in to West End IGA and buy a bunch of perfect bananas. Then, later in the week, they would return a few bad banana, requesting money back for the entire bunch- or a full replenishment of a bunch. But, they wouldn't just do this for produce. They would also run the scam with meats. I'd seen it a few times and Ron noticed it too. One day, the couple was at it again, so Ron tapped me on the shoulder and said, "Come with me Bob, watch and learn how we are going to handle this."

We approached the couple and Ron, with a broad smile said, "Great to see you today! How are you?" After the couple responded, Ron continued, "I know that you're regular shoppers here.  We love having you shop here. We've also noticed that you've been having trouble with some produce and some meat. Here's what we'll do.  Bob and I will help you shop today. Think of us as your personal shopper for produce and meat.  We want you happy with what you pick so none of us will have the hassle of a return.  Of course, if the ones we pick out end up end up being returned, well... then that's not being honest."  The couple agreed and never returned to the store. Ron had fired undesirable customers. He was so eloquent. He sent them away. Ron's reason for firing the couple, of course, was driven by dollars and cents.

There is another reason why companies ought to legitimately fire customers- and it is does not receive nearly the profile that it ought to. Some customers simple request for unethical / immoral purchases. In my consulting, I advise companies to fire both non-profitable customers (unless their is strategic reason to keep them) and to have a code of ethics in business. This way, if a customer violates the standards, the decision to fire the customer is a lot easier. I've heard the argument so many times that business will do whatever- and sell whatever- so long as it is legal. This has not been my experience. Companies and brands have values. They stand for things. If the brand does a transgression, consumers will demand accountability. Management also has things that are important to them.  Here's an example to make my point. Companies like CafePress, TShirt Hell, and Zazzle,  which position themselves "offensive design companies" have limits (The limits might still be minimal, but they are there). Consider Zazzle's response to an intentionally offending purchase order.

"We are sorry to inform you that we are unable to process your Zazzle order due to violations in your Zazzle design. You can expect the returning funds to be available in your account within the next 7-10 business days, depending on the processing speed of the financial institution that authorized the initial transaction.

You can easily modify your product and reorder to fit within the allowed guidelines. Instructions for this process are outlined below. If you choose to modify and reorder, we will give your new order special attention to make sure your customized products arrive quickly."

Zazzle will shoot down designs that contain content that can reasonably be viewed as discriminatory based on everything from race to disability-or wildly explicit and suggestive material. 

In short, they are saying, change what you write or get lost. And they do it in such a nice way, that my favorite boss Ron would be proud.

Striking Out the Value Equation

Society benefits from a more educated population. There are tons of studies out there that demonstrate how a more educated society has more innovation, higher standards of living, and is more peaceful. My personal belief is that education is wonderful because it facilitates social and economic mobility. Philosophically, then, I support the subsidization of higher education to make education accessible to people of all socio-economic groups. I love the rags to riches stories.

Striking down value
That brings us to today. Tens of thousands of Quebec students marched and protested a $325 per year tuition increase. Their march blocked roads and made traffic jams. Their protest got commercial shipments late. Some sick people missed their doctor's appointments. Hard working employees were late for work. Munchkins in day-cares had to wait longer for mom or dad to pick them up. These are real costs to individuals and to society. The protests down the streets destroy economic value. To the "striking students", this is not the way to win friends and influence people.

Tuition rate value
Let's put this student "tuition hike" in perspective. Since most of the student strikers are undergrads, I'll use undergraduate tuition numbers. I'll pit McGill University's tuition (for Quebec residents) against the tuition prices that they would pay at other comparable-tier schools.

McGill's tuition is comparatively so low, you can barely see it on the chart. But wait a minute. Let's exclude the private universities from the comparative sets. Don't some of these state universities (like University of Michigan or University of Southern California) have privileged rates for state residents? How would Quebec tuition rates stack up against these subsidized rates? Let's take a look.


Here too, the Quebec rate is a huge bargain. In fact, it is the least expensive tuition rates in Canada (Bloomberg) and it doesn't come close to American resident state school equivalents.

Why do universities charge so much? It is expensive to educate a student. Without accounting for overhead (you need classrooms, computers, projectors, pensions for staff, cleaners, security, cleaning staff etc), the marginal cost for educating each additional student is about $16500 per year. This is why even private schools with huge endowments charge around $35k per tuition per year.

The expert value
One of the coolest things about working in academics (especially at a place like McGill) is meeting world-class subject experts. I've engaged with profs who have won the Order of Canada, advised American presidents, and who have been nominated for Nobel Prizes. Many others have been inventors while others have been on the cover of magazines. These are individuals, who are paid thousands of dollars per day for their expertise in the business world. Yet, they choose to be in lower paying university environment because they love their field and enjoy sharing their passion with students. It's not a bad deal to pay $400 per a course to learn from a world expert who commands $7000 per hour long speech. Obviously, most profs are not at this level, but the professorial talent bench is often stocked with best-in-subject matter experts.

The degree value
Ever wonder how much a university degree is worth? According to "The Big Payoff: Educational Attainment and Synthetic Estimates of Work-Life Earnings" (.pdf), high school graduates can expect, on average, to earn $1.2 million over the course of their lifetime; those with a bachelor's degree , $2.1 million; and people with a master's degree, $2.5 million. So an undergraduate degree is worth about $900,000. So the $1625 tuition hike over the course of an undergrad degree ($325 x 5 years) represents about .1% per year hike of future earning benefits that the undergrad degree provides. The hike is not a lot.

The Value Equation
We are left with this reality. The annual tuition increase amounts to less than the price of an iPhone or pair of designer jeans. The $1625 and is a pittance of future income earning benefits the degree provides. Education has a very simple value equation. Tuition is way under priced. The benefits of a degree even with full market tuition is still worth it. ($200,000 in tuition for $900,000 in benefits) This blog is a reminder to striking students to learn this most basic value equation. If striking students can not understand this, perhaps university is not for them.