Evaluating Customer Loyalty as an Asset

Hip hop fans know it’s “money over everything,” and unfortunately most companies today think that way without really realizing where that money comes from in the first place: their customers.

If you investigate the majority of IPOs or quarterly earning statements for any company, you’ll find metrics on every financial aspect of the company’s business, but you’ll rarely see any mention of customer acquisition, retention, satisfaction, or loyalty. This is partly the fault of a market that doesn’t require such metrics, and partly the fault of companies seeking short-term gains over long-term customer satisfaction. By treating customers as a short-term profit source, only good for meeting next quarter’s goals, we devalue the long-term positive financial impact loyal customers have on every business in every industry.

It should come as no surprise that companies that lead in customer loyalty metrics grow revenues roughly 2.5 times as fast(Harvard Business Review) as their industry peers and deliver two to five times the shareholder returns over the next 10 years. But most companies neglect such an obvious benefit because they haven’t acquired the capabilities to manage customer satisfaction, and it’s difficult to promote such an ideal over short-term shareholder value.

Shareholders expect a return on their investment, and many don’t have the patience to wait. Due to this pressure, there can be a blind focus on quarterly earnings and short-term profits that overlook the customer experience. By attending to customer needs first, it may be necessary to temporarily set aside functional priorities. This will almost undoubtedly cost more now, but will generate significant returns over time, if only you can get the shareholders to buy into the plan. (It should be said that most of the companies that lead in customer loyalty are able to resist shareholder pressure, or avoid it altogether, because they are founder-led, customer-owned, or not publicly traded.)

Likewise, most cost-reduction principles put into place by businesses often lead to negative outcomes for customers. Restaurants switch from fresh ingredients and made-to-order dishes to frozen and pre-made meals. Call centers enact incentives to minimize customer call times. Retailers make returns intentionally difficult or do not allow them at all. All of these measures will certainly save money in the short-term, but the trickle down to customers is a sub-par experience that will cost dearly in the long run.

One of the biggest reasons companies focus on the bottom line and not customer satisfaction can be traced to modern accounting practices. We say modern, but most of the accounting practices used today were originally created in the 1890s and have more or less remained unchanged since. In addition, as companies are not required to provide customer value metrics, most don’t. Though they are not a requirement, creating additional accounting metrics for customers is worthwhile for numerous reasons.

First, it creates a clearer picture of company valuation and earnings projections. If you can transparently and accurately show how your user base is growing and spending, taking into account current customers, attrition, and new customer acquisition, you’ll have a much clearer view of where your business is headed than simply looking at the bottom line.

Second, providing such metrics can influence “design thinking,” which is about seeing the world through the customers’ eyes instead of the shareholders. By smartly tracking customer data, companies are able to improve the individual level of personalization for every customer and anticipate future pain points before they arrive.

And finally, by making the customer your focus, employees performance and investment in the company increases dramatically because they know they are positively impacting people’s lives, not just chasing a buck.

Within companies there are many organizational stumbling blocks to the ultimate goal of improving the customer experience. The most common one is Group Bias. Simply put, in many companies, groups or teams operate in their department with their own individual goals and seldom interact with each other or the company as a whole. This siloed thinking forces specific groups to focus on singular performance metrics, and in fact, many different groups within an organization may meet their individual goals, but this does not mean they improved the customer experience.

In order to organize around customer needs instead of functional models, leadership is crucial. The job of leadership is to inspire, guide, and engage every employee in the work that needs to be done. Instead of hammering home the bottom line, leaders can easily build the case for customer value. The long-term numbers speak for themselves and when a company is actively pursuing the goal of improving their customer’s lives, every member of the team gives more. It takes a focused and sincere leader to implement and maintain such a vision, and to ensure that everyone on board sees the big picture.

You see the benefits of a customer focused approach and you’ve got your employees on board. Now, how are you going to convince the investors? Use a new metric.

Customer Based Corporate Valuation (CBCV) is an approach that has been recently developed to showcase how a customer based approach will positively impact long term financial success. The first thing it does is shift companies away from the “growth at all costs” mindset and instead moves toward revenue durability and unit economics while bringing a much higher degree of precision, accountability, and diagnostic value to the company.

The big change is that instead of looking at the bottom line and working backwards, the way most businesses do their accounting, CBCV makes projections from the bottom up, starting with customer metrics and building these out to show how they affect business overall.

This is done by putting together four simple models:

● A customer acquisition model that forecasts the inflow of new customers
● A customer retention model that forecasts how long customers will remain active
● A purchase model that forecasts how frequently customers will transact with a firm
● A basket-size model that forecasts how much customers spend per purchase

By bringing these models together companies are able to understand the most important facts about their customers: how many will be acquired, how long they’ll use the company’s service, how frequently they’ll use it, and how much they’ll spend. The long-term benefits of customer satisfaction are central to CBCV. By summing up all the projected spends across customers, a quarterly revenue forecast can be created that is much more transparent and precise than current models, which gets shareholders to buy into a customer-first mindset as well.

The Bottom Line

Functional priorities are important in any organization, but customer satisfaction should be the ultimate goal, not short-term profits. As we’ve seen, taking the time and money to grow customer loyalty is good for long-term financial performance, and ultimately accelerates growth. This can be done when strong leaders create a customer-centric organization that avoids small group biases, and ensures everyone maintains a big picture mindset. And finally, by taking the initiative to record and analyze long-term customer value, focusing on bottom-up metrics like CBCV that allow for more accurate and transparent projections, even the most stodgy shareholder will see the value in putting the customer first.