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Topic:

Creating Maximum Customer Value

April 20, 2011

Creating Maximum Customer Value

When we plan our budgets, we shouldn't think only about capital. Customers are a far more scarce and valuable resource that we need to manage just as closely.

We try to use our monetary budgets wisely. If we miscalculate and need to replace some financial investment that didn't work out as we'd hoped, and we can show we have a smart business plan with a good offer and customers who want it, then we can get more money by borrowing from a bank, or getting the budget increased. But if we use up a customer, then we can never replace her; we may be able to get another one, but we should have had two. And there are only so many customers available for the products and services you and your competitors offer. Once we use them up, we're out of business. Think about it: The only reason you have a business is because you have customers. If you don't have customers you don't have a business, you have a hobby.

And let's make no mistake: Companies use up customers every time a customer gets an irrelevant message or has to wait too long on hold at the service center or has an unresolved problem--or even just an unanswered question.

Considering that customers provide as much "ROI" as other investments, it may be time to rethink how you calculate their value. Return on investment (ROI) is a measure of how much value you can create for your company in exchange for the money you have to use. Return on Customer (ROC) is a measure of how much value you can create for your company in exchange for the customers you have to use.

The calculation for ROC is fairly straightforward--it's the firm's current-period cash flow from customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period. But what that really means for a company is that your customers have a value to you today, and as of today, the rate of change of that value means the value will be different (and predictable) for tomorrow or next quarter or next year. A customer interaction that goes well can increase that value not only in the moment, but also over the long term as a customer buys more or more frequently or refers friends and associates. Conversely, a poor experience will destroy value in the moment, as well as over the long term as a customer buys less and spreads negative word of mouth. And just as our leading indicators of the lifetime value of customers changes from company to company, and across industries, for example, we also envision an evolution of understanding a customer's referral value as he becomes--or not--a big Internet influencer.

The main goal of ROC is to provide a true customer-based financial measure that helps us balance our long-term success with this quarter's numbers and helps everyone in the company see the tie between customer experience and shareholder value. It's a way to ensure customer value today and tomorrow.



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