Customers = Company Value 

Howard Lax, Ph.D. | Mar 20, 2017 696 views 3 Comments

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The value of a company – your company – is best measured in terms of the current and future value of cash flows from customers. This makes customers your most prized asset.

This is not to say that you don’t have other assets – products and processes, patents and brands, property and facilities, and, of course, the employees who work to turn these assets into cash flows by creating, producing, distributing managing, selling and servicing what you sell to customers. There also are external factors that influence the value of your firm, such as the cost of capital, market conditions, the health of the economy, environmental factors, disruptive technologies, competitors and more. You might say all of these inputs and external conditions are critical to the value of your company, and you’d be right.

Your M&A folks may say look at market capitalization (the total value of shares outstanding) or a multiplier on profits, but the bottom line, both literally and figuratively, is your customers. The impact of everything else is mediated by your customers and their behavior, as it is their behavior that ultimately creates value for you company. Idle assets that aren’t being purchased by your customers aren’t worth much. But if your firm is like most others, your customers, your most important asset, probably don’t always receive the most attention.

Nurturing Customers
This axiom – that the value of your company is best measured in terms of the current and future value of cash flows from customers – suggests that the role of the firm itself might be best defined in relatively simple terms: the goal of your company is nurturing customer relationships to maximize the current and future (or lifetime) value of customers. This literally means rethinking (1) the objective of the company, (2) your customer strategy and the customer experience and (3) how you make decisions regarding corporate assets to maximize value.

Objective. Whatever your larger vision or mission might be, the business objective of your company is clear: maximize the loyalty behaviors of customers. While you may measure loyalty in terms of various KPIs, you need to understand loyalty in terms of loyalty behaviors, the behaviors that create value for your company. In general, these loyalty behaviors are

• continuing to be a customer,
• buying more/other/more expensive things,
• increasing the share of spend and
• recommending the company to others.

Maximize these behaviors and you will maximize the value of your firm. This makes the role of marketing obvious: (1) motivate loyalty behaviors on the part of customers and (2) acquire new customers to motivate.

Customer Strategy. You probably have an overall business strategy, as well as a brand and product strategy and people who manage your firm’s various assets . . . but do you have a customer strategy or someone managing your customer assets?

Most firms simply do not have a customer strategy or senior executive or champion charged with the care of the firm’s most important asset. You no doubt have someone or at least a process for managing and deciding on investments in your other assets, but who is charged with cultivating your core asset? Who determines which investments your firm should make in your customers, what the priorities are for delivering the customer experience?

Absent a customer strategy and leadership, you probably treat expenditures on customers as costs rather than investments and see cutting costs as more important than increasing the customer value. Alternatively, you might have a highly fragmented or siloed organization where the managers of each customer touchpoint make uncoordinated decisions without a greater orchestration of strategy.

The Customer Experience. Experiences matter, but you need to set priorities. Many companies think they need to optimize every customer touch. In the world of infinite resources this might be OK (although still inefficient). In the real world you have only so much to spend and need to justify and prioritize your investments. But if you try to fix everything, everything is a priority, which means nothing is a priority. Given the dramatic increase in the number and type of touchpoints companies must try to manage, prioritization is all the more critical.

The majority of customer interactions are fleeting, leaving no emotional imprint on the customer – as long as those interactions go smoothly. Even the most mundane interactions can leave a scar if things go wrong, but you stand little to gain by further improving the types of experiences that customers don’t even remember.

Tools for real-time customer experience management are vital for effectively managing the customer experience, arming staff with the ability to track experiences and trying to remediate performance problems quasi-real time or soon after they occur. These tools, however, need to be used with an understanding of the larger context of customer relationships and customer value.

Customers experience/touch/transact/interact with your company in a myriad of ways. Some ways you control; others you try to influence. Each and every experience matters . . . somewhat. Clearly some experiences matter more than others. This isn’t a hypothetical issue: those experiences that have the most impact on loyalty behaviors (that is, create more value in terms of their impact on customers) are the most important. Fleeting experiences that have no impact on the larger relationship (those that drive less value) are less important.

Strategy & Tactics to Drive Financial Impact. There is a careful balancing act between strategy and tactics, managing the forest and caring for individual trees. Strategy, in this instance motivating customer loyalty and loyalty behaviors, is somewhat anemic without tactical implementation, be it simplifying the mortgage application, speeding time to repair, making it easier to find particular products or brands on the shelves or online, or recontacting the customer who indicated that she was disappointed her reservation was wrong so you can apologize and offer a discount next time.

Conversely, ignoring the broader impact on relationships and the overall customer base and relying only on operational tactics, such as tracking each interaction and following up on every miscue, is affixing Band-Aids without attending to the health of the patient. Tactics must be instructed by strategy. Fixing every problem might not really be a wise investment; letting low-value customers defect might actually improve the bottom line.

Such strategic insights require taking a step back and realizing that customer relationships are more than the simple sum of each and every interaction. Remember the broader objective: driving loyalty behaviors that create maximum value for your firm. This cannot be accomplished by scrutinizing every transaction in isolation for at least two reasons.

• First, as a practical matter, you must realize that no matter how closely you try to track customer interactions, only a small percentage of customers provide feedback. This may be more than sufficient for strategic direction, but will always fall short of getting real-time feedback on every customer for every interaction.
• Second, every interaction and every customer is not of equal importance: when you are scrutinizing each individual paint stroke in isolation it is impossible to see the larger picture and develop a sense of context and strategy.

The Customer ROI
Do you have any sense of the ROI generated by your CX practices?

Remember: The value of YOUR company is best measured in terms of the current and future value of cash flows from customers. (BTW, with today’s protracted low interest rate environment, the discount on future cash flows is lower than ever, putting an extra premium on the value of retention.) How can you possibly make reasonable decisions regarding maximizing or even enhancing that value if you do not have a solid sense of the impact of improved customer experiences to determine where to invest?

The overwhelming majority of your revenues in any given year – probably more than 95% — will be generated by existing customers. This means that for most businesses, in most circumstances, the most important component of maximizing customer value and the Customer ROI is retention. When you invest in improving the right customer experiences and focus your resources on those priorities you can deliver the optimal customer experience for your business. This is the sweet spot for driving current and future customer cash flows and maximizing your Customer ROI.

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3 Responses to Customers = Company Value

  1. Gautam Mahajan March 21, 2017 at 4:34 am (169 comments) #

    Howard, a vey well written article, and absolutely right. Many service firms such as telecom are valued on their customer assets rather than their physical assets. I have been writing about Customer strategy and ROI. Agree, wholly
    Greta work.

  2. Howard Lax March 21, 2017 at 7:41 am (25 comments) #

    Thanks, Gautam.

    The formula isn’t rocket science, but it’s amazing how few firms actually are managed this way.

  3. Gautam Mahajan March 21, 2017 at 10:10 pm (169 comments) #

    And we have to wonder why

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