A Revolutionary Way To Measure And Strengthen Your Business
Most managers will say that customers are their company's most important asset, but few have a plan for increasing customer lifetime value. In Return on Customer, management consultants Don Peppers and Martha Rogers explain how companies can improve their basic competitive strategy, product development and corporate governance by focusing on how they create value. According to the authors, "The only value your company will ever create is the value that comes from customers — the ones you have now, and the ones you will have in the future."
To maximize the value a firm creates, the authors write, it must maximize its "Return on Customer" (ROC), which has the same equation as an ROI equation. "ROC equals a firm's current-period cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period," the authors write. They define customer equity as "the net present value of the future stream of cash flows a company expects to generate from the customer."
The ROC Speedometer
To help readers understand the conflict between current profit and long-term value, the authors describe how they can reach an optimum level of overall value creation by presenting numerous analogies that describe how mistakes can be avoided. One example that they use is the idea that the ROC can be seen as a speedometer that should be pushed to the limit to maximize the value being created by the firm.
The authors explain that an ROC-efficient company conserves and replenishes its stock of customer equity by investing in the development of new products, building relationships, prioritizing customers, creating better customer service, acquiring new customers and retaining current customers.
With the goal of increasing the overall return generated by a customer, the authors explain that companies must change the customer's behavior. Doing this requires managers to put themselves in the shoes of their customer to better understand the customer's needs, and then building programs around what they find. To do this properly, firms must first earn the customer's trust. As Peppers and Rogers note, "A firm's Return on Customer is maximized at the point that the customer most trusts the firm."
To maximize customer trust, companies must avoid the behaviors that erode that trust. Any actions that a company takes in pursuit of short-term profits can make a company appear ridiculous or even hostile. Customers can see through these actions and can recognize the cynicism of a company that "sees only dollar signs when it is communicating with them," the authors caution. To demonstrate how customers feel about this type of company, the authors point to the popularity in the United States of the "Do Not Call" list as an example of how much customers detest interruptive marketing.
Another example that the authors provide of the detrimental effects of a company's obsession with current-period profits rather than long-term customer value is Citigroup's experience in Japan. In 2004, Japan's Financial Services Agency ordered Citigroup to close four of its private banking offices after it investigated allegations of stock manipulation and misleading investors. The Japan Times reported, "The bank tied salaries closely to sales performance, giving incentive to managers and employees to break rules if it meant large profits." The authors explain that this kind of toxic behavior endangers customer service and destroys value at a company where it remains unchecked.
Taking the customer's perspective not only helps a company understand his or her needs, the authors explain, but also helps it anticipate the customer's wants and needs. This anticipation can improve the efficiency with which the customer is served, which saves a company time, effort and money while saving the customer aggravation.
To illustrate this, the authors describe the way St. George Bank's ATMs "remember" customers individually and prompt them for their usual transactions when they insert their cards. An on-screen message might ask a customer whether he or she would like the usual $100 cash with no receipt, rather than obnoxiously asking the customer once again to "choose a language for this transaction." The authors point out that this type of service makes the bank more relevant, and perhaps essential, to its customers.
Why We Like This Book
The authors have taken the concept of creating firm value to a higher level by dismantling the short-term value equation and reconstructed it using a more accurate financial metric to create long-term value. Filled with timely examples from many industries, Return on Customer describes a better way to grow enterprise value by building better, longer relationships with customers.