Modelling Customers as a Stock with Flows

In an attempt to understand the e-Business Levers, we built a simple Cause and Effect model, which showed Number of Customers being influenced by Customer Satisfaction:

Number of Customers is influenced by Customer Satisfaction


Customers represent a Stock in System Dynamic terms - somewhat like a bath tub, with new customers (hopefully) flowing in and other customers (unfortunately) flowing out. Both inflow and outflow are controlled by taps, which regulate the flow. But who turns the taps?

Let's build the picture in stages, starting with the detail we want to change:

Cause and Effect repesentation: Customer Satisfaction influences the Number of Customers


Then we represent the Customers as a Stock - a pool, that exhibits dynamic behaviour over time:

Customers as a Stock

New Customers flow into our system. The size of the flow is regulated or influenced by our Lead Generation activities. Like all marketing activities, there is a delay before the desired inflow of New Customers takes effect. Our Stock of Customers increases - the bath tub fills up somewhat.

New Customer inflow resulting from Lead Generation activies increases the pool (Stock) of Customers

For a variety of reasons - No Longer Convinced, no further need etc., existing Customers also flow out of the Stock, in accordance with the Churn Rate:

Customers exit the Stock for a variety of reasons, in accordance with teh Churn Rate

Happy customers stay around longer and are not so susceptible to competitor activities, so that The Churn Rate - or turnover rate - is influenced by the level of Customer Satisfaction: As it increases, the Churn Rate - and hence the outflow of Customers - decreases.

Increasing Customer Satisfaction decreases Churn Rate and the Outflow of Customers

But Customer Satisfaction has another effect - happy customers recommend our company and our product to others, working as an indirect source of Lead Generation. Our inflow and Customers Stock both increase.

Word of Mouth is effected by Customer SAtisfaction.

But the magnitude of positive Word of Mouth recommendations is a function of the current number of (satisfied) Customers. As more recommendations are made, the Customer Stock grows, leading to more recommendations, leading to increased inflow. We now have a virtuous circle and can experience the benefits of a positive snowball effect:

More recommendations lead to more Customers, who recommend ...
 Click for a larger image


And the beauty of it is, that Word of Mouth recommendations not only mention - i.e. make people Aware of - our company, they also (usually) Inform and even Convince the listener. Now our Customers are hand-holding our prospects as they traverse the Awareness Cycle.


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