Return on Customer - PCC - ebook

Internationally acclaimed business gurus and best-selling authors Don Peppers and Martha Rogers kicked off the CRM revolution and changed the landscape of business competition with their classic bestseller, The One to One Future. Now, in Return on Customer, they have written an even more revolutionary book, redefining the very concept of what it means to be “profitable” as a business.  Virtually every manager agrees that a company’s most vital asset is its customer base – the lifetime values of all its current and future customers. Yet when companies track their financial results, they rarely take into account any change in the value of this critical asset. As a result, managers remain blind to one of the most significant factors driving genuine, lasting business success, and instead become preoccupied with achieving short-term financial goals.  Return on Customer is the first book to focus on how firms create value, not just by driving current profits, but by preserving and increasing customer lifetime value. In a powerful blend of theory and practice, Peppers and Rogers demonstrate how to create shareholder value more efficiently by concentrating on Return on Customer(SM), a revolutionary business metric focused on a company’s scarcest resource – customers. By paying close attention to Return on Customer, companies can improve their profits while still conserving and replenishing long-term enterprise value.  Relying on their years of experience working with many of the world’s leading companies, Peppers and Rogers take readers far beyond marketing, sales, and service. Return on Customer will revolutionize how companies think about their basic competitive strategy, product development efforts, and even the issue of business ethics and corporate governance. Return on Customer(SM) is a registered service mark of Peppers & Rogers Group, a division of Carlson Marketing Group, Inc. “To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable, and serve them more efficiently. And you want more of them. Unfortunately, the financial metrics you learned in business school are not easily adapted to account for the value companies generate from this scarce resource, with the right balance between current-period sales and customer lifetime value. But striking that balance is necessary if you want to know whether you’re better off investing in customer acquisition, or in product development, or opening new stores, or plant efficiency, or better qualified personnel, or more service, or cost reduction. While you may believe in your heart that a particular decision creates shareholder value, there’s no financial metric currently available to tell you how much shareholder value you actually created, or even whether you created any at all. But Return on Customer can help you. Return on Customer is a breakthrough financial metric that can quantify the actual shareholder value you are creating (or, possibly, destroying) with your various business actions and initiatives.”  —from Return on Customer

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Most people are familiar with the concept of return on investment—how well a firm creates added value from a given investment. There is, however, no equivalent metric that measures how well a company creates value from its most scarce and therefore most valuable asset—its customers. Return on Customer(ROC)is a new business metric that is designed to measure the amount of value a business creates by acquiring, retaining and then growing its customer base. It is calculated in this way:


■ Current period cash flow is the revenue the company will generate in this period through the sale of products and services.

■ Customer equity is the net present value of all cashflows the company expects to generate from customers over their lifetimes.

■ Change in customer equity is the increase or decrease generated in this period by the actions of the company.

When ROC is positive, your firm is creating value from your customer base, either by increasing sales in the current period or by enhancing the likelihood the customer will do more business with your firm in the future. This lifetime value of future business is captured by changes in customer equity, which in essence is the current discounted-cash-flow value of a customer's future business. Conversely, when ROC is negative, your firm is destroying customer equity or customer lifetime value, making it less likely you will be able to generate profits from your customer base in the future.

Return on Customer represents the costs and trade-offs that are inherent in business. For example, if a firm carries out an aggressive telemarketing campaign, it might increase current period sales but also erode the likelihood customers will buy again in the future. That harm to the customer lifetime value won't be captured by any other established business metric, and yet it might even exceed the boost in current sales that was achieved. Conversely, if a firm always focuses on customer equity, it may not generate enough profit on a current basis to stay in business. To maximize Return on Customer, companies need to optimize their mix of short-term profit and long-term customer equity created.

The arguments in favor of return on capital as a management metric are:

Seven key arguments for ROC 1Scarcity: Customers are any company’s scarcest resource.

In this era of globalization, capital is exceptionally mobile and costs have been reduced as far as they can go. There is an excess of most products and most services. In today's business environment, nothing is as scarce as customers.

In many markets and product categories, there are too many products chasing a finite pool of customers. Traditionally, it was assumed that availability of capital was the limiting factor ingrowing an enterprise. Today almost anyone can get access to all the capital they need, and it is customers that are difficult to find and hard to keep. To remain competitive, businesses have to figure out:

How to keep customers longer

How to grow small customers into bigger customers

How to make each customer more profitable

How to serve customers more cost effectively and efficiently

How to get more customers

In essence, the key challenge in business today is to get customers to trust your firm. The more a customer trusts you will act in his or her best interests, the more business they will give you both in current-period transactions and likely future transactions. Traditional marketing treats each new customer transaction independently whereas in the real world, customers have long memories. Their future intentions are influenced heavily by how a company has treated them in the past. Trust is the glue that binds a customer to a firm, and makes those customers predisposed to do more business in the future.