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From Resource,
May 2005
Copyright by LOMA
What’s Your
Return on Customer?
In any business, striving to meet quarterly sales projections is a vital
task, no doubt about it. But according to Dr. Martha Rogers, one of today’s
leading customer service visionaries, any business that wants to maintain and
increase profitability over the long run had better take the long-term value of
its customers just as seriously.
By Stephen Hall
As
an executive in the insurance and financial services industry, if you had to
choose between just earning $1,000 today and investing thousands today so that
you could earn millions over the next 10 years, which would you do? For most
people, this scenario is a no-brainer: They would invest thousands today for the
sake of a bigger payday down the road, of course. Who wouldn’t?
Funny
you should ask. Dr. Martha Rogers, founding partner of Peppers & Rogers
Group—a management consulting firm recognized as the leading authority on
consumer-based business strategy—said that too many companies are taking the
short-term view and grabbing the $1,000 today in a desperate effort to meet
those ever-crucial quarterly sales projections. As an example, she recalled the
recent experience of a friend at a video rental store in their neighborhood. The
friend, who had done business with the store for years, bought a used DVD for $8
that turned out to be defective. But when she tried to return it, she was told
she couldn’t get a refund because she didn’t have the paper receipt from the
purchase. (Never mind that the store’s database indicated she bought it there
and that a price sticker bearing the store’s logo was in plain sight on the
DVD case.) And so, feeling like she’d just been suckered out of $8, the friend
left, never to return. But according to Rogers, the real sucker here was the
video store, who lost hundreds if not thousands of dollars worth of business
over the next several years—business that her friend would have been happy to
give them if they had only been willing to make a short-term sacrifice to make
things right.
“The
store manager is being rewarded today for how much he makes this week,”
Rogers
explained. “But nobody is penalizing him for how many thousands of dollars
he’s losing today. What if we held people accountable today for the
amount of money that they lose, as well as the amount of money that they
make?”
During
her recent presentation at LOMA’s Customer Service Conference, titled
“Investing in Customers: Initiatives for the Financial Services Industry,”
Rogers proposed that in addition to Wall Street’s traditional measures of a
company’s performance, such as EBITDA and P/E ratios, the need has arisen for
“return on customer” (ROC)—a new kind of business metric that would hold
companies accountable for the long-term equity that they either create or
destroy through their customer service practices.
“Let’s
say your stockbroker came to you and said, ‘I’m reporting to you the
dividends and interest that you earned this year,’” Rogers said. “And you
said, ‘Wait a minute; I want to know how much the underlying value of the
stock went up or down.’ If he said you don’t need to know that, you’d get
a new stockbroker. Yet this is the way many companies present their performance
all the time. They’re only looking at the income, and not at the underlying value of their scarcest resource—their customers.”
From
Mass Marketing to One-to-One Customer Relationships
Rogers
began her presentation by looking back on how
the business world and its customer service approach have evolved over the last
century. “Prior to the Industrial Revolution, we were all happily moving along
in the agrarian farming economy,” she said. “And then there were some pretty
amazing technologies that appeared, such as mass media, mass distribution, and
assembly-line technology, to say nothing of electricity, telephones and radios.
All of a sudden, if you wanted to make money, you could only do it if, instead
of having a few dozen customers or even a few hundred customers, you had to have
thousands or even millions of customers. We had to look at all of them the same
way at the same time, sending the same message out to everybody.” This is when
brands became a kind of substitute for relationships,
Rogers
said, since it was no longer practical for companies to have relationships with
individual customers. “We now had the ability to think about customers as a
big group of people that we could define as being alike, which became the basis
of mass marketing.”
But
that was then, Rogers said, and the era of using technology and information to
cater to each individual customer’s needs—and nurturing what she refers to
as “learning relationships”—is now. “The new technologies facilitate a
new business model,” she said. “We now have the ability to have customer
databases and remember every single thing about every single customer and every
single interaction we’ve had with them. The competitive edge comes when you
realize this: If you can get a customer to talk to you, and you can remember
what he tells you, then you can know something about him that none of your
competitors knows. And that means you should be able to do something for him
that none of your competitors can do—not for any price.”
The
Goldfish Principle
The
antithesis of the learning relationship,
Rogers
said, is the “Goldfish Principle”—a phenomenon that plagues companies who
genuinely strive to achieve top-notch customer service but fail to understand
what that actually means in the Information Age.
“Some
species of tropical fish have no territoriality,”
Rogers
said. “Because they swim in the open sea, it’s not important to them to
understand where they are. And that’s why they make great aquarium fish:
Because they swim around and around, and they never get bored. It’s new
scenery every time they go around.” When it comes to providing customer
service, many businesses behave very much like goldfish in this respect, she
said. “A friend of mine traveled to
Atlanta
for business, during which he had three meetings in three days. And after
pondering whether to move from hotel to hotel every night or stay in one hotel
for the duration of his trip, he decided on the latter. Obviously there’s an
advantage to the hotel for him to do that. So he goes to his room and calls the
front desk that evening for the next morning’s wake-up call. And the front
desk employee who answers the phone has very good customer service skills. She
says, ‘Oh, we see that you qualify for a special program. Would you like for
us to bring you free coffee in the morning?’ And he says, ‘Well, I don’t
really care for coffee.’ She says, ‘How about tea?’ He accepts. The
employee says, ‘And we’ll bring you a newspaper. Is The
Atlanta
Journal-Constitution OK?’ ‘Well, no,’ he says, ‘I’d really like The
Wall Street Journal instead.’ The next morning, he gets his tea and his Wall
Street Journal, and everything’s great. But that night, he calls again to
arrange his wake-up time for the next morning, and the person who answers the
phone takes him through the same routine: ‘Oh, we see that you qualify for a
special program. Would you like for us to bring you coffee tomorrow morning?’
‘No. How about tea?’ ‘OK, that’s fine.’ ‘And how about a Wall
Street Journal?’ ‘No problem.’ And you guessed it: On the third night,
the exact same thing happened. That’s great customer service, but that’s
just zero relationship. That’s the Goldfish Principle in action: a company who
can’t remember a thing. There’s a big advantage to the hotel for him to stay
there three nights instead of one, but there’s no advantage to him to do
that.”
What
a Customer-Based Business Strategy Is—and What it Isn’t
What
this business traveler’s experience illustrates, Rogers explained, is that
whether you call it customer relationship management (CRM), one-to-one customer
relationships, or any other industry buzzword that may apply, there’s a great
deal of confusion and misunderstanding that surrounds the concept of a
customer-based business strategy. “It’s not just the technology, although
the technology is important,” she said. “It’s the first step, but it’s
not the only step in making this happen. And it’s not just personalized
e-mail. I’ve heard people say, ‘Oh yes, we have customer relationships now;
we’re personalizing the e-mail we send out to our customers.’ Well, that’s
great, but it’s not the same thing. It’s not just more sophisticated
segmentation. It’s not just a more efficient call center. It’s not just the
job that marketers do; marketers get customers, but it takes all of us to keep
them and grow them. It’s not just a new sales training approach. It’s not
just good customer service—or what we call ‘random acts of CRM’—that
can’t be remembered the next time we see or hear from a particular customer,
requiring us to start all over. We will not build customer equity with better
targeted harassment, which is a phrase I actually heard once: ‘Oh yes, we’re
building customer relationships; we’re practicing better targeting.’”
So
exactly what is a customer-based strategy all about? According to
Rogers
, it’s about building shareholder value by increasing the value of the
customer base. “It’s using information about each customer to make each
customer more valuable to us, to make us more valuable to each customer, and to
decrease the cost of servicing customers,” she said. “It means that it’s
going to be enterprise-wide. It means applying more resources to the customers
who are now—and will be in the future—more valuable to us, and fewer
resources to customers who won’t be valuable or who are total strangers.
Doesn’t it make you crazy when you go to your cell phone store and say,
‘I’d like to get a new cell phone; how about this one?’ And they say,
‘Yeah, but that price is only for new customers.’ You think, ‘Wait a
minute. I paid you very faithfully every month for the last four years, and I
don’t get the same deal as a total stranger?’”
Also,
the latest advances in CRM and other customer service technologies have created
an expectation among customers that a company should be able to recognize them
through any channel, at any time, across multiple product, purchase and service
lines, as well as remember things for and about them. “This is about treating
different customers differently,”
Rogers
said. “It’s the only thing that makes sense in an era in which we have the
kinds of interactivity, database, and mass customization technologies that now
make us compete not only on best products and best service, but also on learning
relationships.”
Market
Share vs. Customer Share
The
reason it is so important to be able to cater to each individual customer’s
wants, needs and preferences is quite simple,
Rogers
explained: At the end of the day, they are the sole source of profit and
revenue. “I’ve asked CEOs where their revenue comes from, and they say,
‘From our terrific products.’ And I say, ‘Really? Your products pay you
money?’ And they say, ‘Well, then it must be from our vendors and our
brands.’ I say, ‘Wait a minute. Those people don’t pay you; you pay
them.’ And of course, it isn’t long before we finally realize that it’s
really our customers who pay us money. And guess what? They are the only ones
in the whole world who do. It’s the only source of revenue we will ever
have—not just the customers we have today, but the ones we will have in the
future. We have to realize that customers are therefore our scarcest resource.
We can always come up with new products; if we have customers, we can get
somebody to give us capital. But there are only so many customers out there, and
each of them will only do so much business in their lifetimes. So our goal has
to be to figure out how to get the greatest possible share of their business
throughout their lifetime in order to build our business, because that’s the
only way we’re ever going to do it.”
What
this requires,
Rogers
said, is a reversal of the mindset that typically
governs how customers’ needs are addressed. “Traditionally, we began
with a product or service, something we wanted to sell, and then we would go out
and try to find customers for these products,” she said. “With that
approach, what we’re trying to do is win market share. But now our goal is to
focus on one customer at a time, and then try to find products for that customer
over the entire lifetime of that customer’s patronage with us. And then we do
it with another customer, and another one, and so on. And if we focus on the
most valuable customers in our industry, and we get as much of their business
over their lifetimes as we can, then market share will take care of itself.”
Short-Term
Sacrifice for the Sake of Long-Term Payoff
Rogers
compared this approach to maximizing enterprise
value with the decisions and actions of a responsible farmer, who forgoes
short-term profit surges in the interest of maintaining a steady profit over the
long run. “Consider good Farmer Wilson, who is all about cultivating land very
carefully,” she said. “He inherited the land from his father, who inherited
it from his father. And his land remains very productive for a long time,
because he invests in fertilizer, he always leaves some land fallow, he
cultivates in contours, and he rotates his crops, among other things.
“Now,
contrast that with bad Farmer Miller,” she continued. “Miller does not
practice conservation. He just plants the current cash crop for every available
square inch of land that he owns, and he doesn’t waste money on things like
fertilizer and water systems. He reduces all of his expenditures as much as he
can, making as much money as he can. He gets more profit per acre than
Wilson
does. But over time, his land burns out. Now, once that happens, how does he
make money the following year? He could sell to a developer. But how is he going
to make money in agriculture? He’s got to buy more land. But in the meantime,
property values have gone up, so it costs a lot more to buy land now.”
Rogers
pointed out that even though Farmer Wilson
could always earn more in a given year by adopting Farmer Miller’s practices,
his understanding of the long-term view keeps him from doing so. This may sound
sensible enough, she said—except that in the business world, many executives
end up following Farmer Miller’s example. “Has anybody ever been to a
fourth-quarter meeting, where everybody started making decisions that they knew
in the long run weren’t going to pay off because they had to make short-term
figures? That’s what happens when you trade $8 today for $1,000 over the next
few years. And we see it happening all over the world.”
Increasing
Your Return on Customer (ROC)
This
short-term view defines an enterprise’s value solely in terms of the profits
it makes today. But
Rogers
explained that in addition to current profits, an enterprise also creates value
in another form—customer equity. Now, she said, what is needed is a metric
that will capture the effects of both types of value creation—a metric she
calls “return on customer.”
“This
rate at which we create economic value from our customers is a measure that we
can hold ourselves accountable for,”
Rogers
said. “We can reward our people for it, and we can report it to outsiders.”
In some ways, she said, customer equity is very similar to capital. For example,
Stern Stewart & Co., a global consulting firm, created a metric called
economic value added (EVA). “The famous example for them was when IBM
discovered one year that they had made an 11 percent profit, yet they couldn’t
figure out why they had no money in the bank. Finally, they applied the EVA
metric to their business situation and realized, ‘Oh, it must be because we
had a 13 percent cost of capital this year.’ So just as tracking EVA helps us
to understand the true cost of capital, tracking return on customer helps us to
understand the true cost of current revenue. Any firm that doesn’t track
return on customer risks destroying value, even as it earns a nominal profit,
and it may be destroying that value without even knowing it.”
On
the other hand,
Rogers
added, customer equity is unlike capital due to its intangible nature.
“Unlike trucks, factories or pipelines, it could evaporate overnight, which
poses a problem in terms of customer goodwill,” she said. So does this mean
you’ve spent a little bit more of your equity with a customer whenever they do
additional business with you? Not unless you use this transaction as an
opportunity to learn more about your customer and their long-term needs.
“Let’s imagine that you’re a car dealer, and you have a customer who has
bought several cars from you,”
Rogers
said. “You can ask the life insurance actuarial people how long this customer
is going to live, and therefore, how many more cars you could sell them; from
there, you can determine their approximate lifetime value. Now, if he buys a car
from you, does his equity go down because you cashed part of it out? Maybe—or
you can look at it another way: It’s also an interaction with a customer, so
you could use that opportunity to find out that he has a son who’s 15, and is
therefore going to need a third slot in the garage filled. So maybe he’ll need
a used car pretty soon, and maybe you can use this opportunity to talk him into
getting your credit card or using your service more. In this case, you cashed
out part of the equity, but you increased it at the same time.”
As
another example,
Rogers
recalled talking to a regional manager for Fisher Brown Insurance in
Pensacola
,
Fla.
, two years ago. “He said that he made it his business to handle every single
complaint that came into the region himself,” she said. “He prided himself
on the fact that every one of those complaints turned into additional business.
So he was able to increase the equity while simultaneously increasing the
current value of his customers.”
Companies
that Measure ROC
To
prove that this long-term perspective on customer equity can be applied within
the financial services industry,
Rogers
talked about a couple of banks that are doing just that. “At Royal Bank of
Canada
, they’ve been modeling the measurement of customer lifetime value for more
than 10 years,” she said. “They call it behavioral-based modeling, and they
have a system that calculates the customer-specific lifetime value (LTV) effects
of various product revenues and of direct, customer-specific costs, among other
things. This means that every decision they make every day is based on overall
efficiency and on balancing the immediate cash impact of an action with LTV
changes specific to that customer.”
Rogers
cited the Canadian Imperial Bank of Commerce (CIBC)
as another financial services institution that takes the big picture of customer
value into consideration. “They have 9 million customers, and they have a new
customer data system that’s prompted the bank to begin optimizing by customer
rather than by product,” she said. “They figured out that they had rather
poor customer insight before, but now they’re able to link all customer data
across 17 different product data systems.” What this means is that CIBC has
portfolios of between 200 and 10,000 connections that are assigned to business
units that essentially function as portfolio managers. “According to John
Moore, CIBC’s senior vice president of personal banking and customer insight,
customer optimization analytics has enabled them to get the right share of
customers,”
Rogers
continued. “What that means is that customers get the appropriate next offer.
They don’t hear about loans if they have told CIBC, ‘Don’t talk to me
about loans.’ Now, this involves more than 500 variables to be analyzed. And
from a technology standpoint, that makes it possible for us to understand how
CIBC goes about maximizing the value that the customer gets from them.”
The
Prerequisites of a Customer-Based Strategy
Once
a company decides to get serious about measuring customer equity and ROC on a
regular basis and to make short-term sacrifices and investments for the sake of
long-term gain,
Rogers
said, then it needs to have four implementation capabilities in place.
“First, you have to be able to identify individual customers every single time
you talk to them. Maybe you can do that through an account number, but that can
only work if you can link it to every other account or policy that this customer
has. It could also be done through a phone number or something else, but it
needs to be a unique customer identifier that enables you to remember the
information the customer gave you on the phone yesterday before they came to the
Web site today, or vice versa. This allows whoever answers the phone to pick up
the conversation where it left off. And when you can do that, then you can see a
complete picture of every one of your customers.”
This
piece of the puzzle enables the second capability that is needed: the ability to
differentiate your customers according to the value they have to you, as well as
by what they need from you. “It is very, very important that I’m able to
tell my customers apart,”
Rogers
said. “And I’m able to do this because I interact with them, which is the
third implementation capability you need. Instead of just thinking about how to
generate messages about my company, I’m thinking, more importantly, about how
to generate feedback from each of our customers and to remember what each one
tells me.”
Having
this valuable customer data at your disposal sets the stage for the fourth
capability: customizing some aspect of what your company does to an individual
customer’s needs. “We change our behavior toward this particular
customer,”
Rogers
said. “Every day, we’re actually asking every customer to change her
behavior toward us—to buy more, to pay more attention, to learn something.
Doesn’t it make sense that we would have to expect to change our behavior
toward each of our customers in order to make that work?”
In
closing,
Rogers
left conference attendees with six rules that are crucial to a successful
ROC-oriented business approach. “First, customer equity equals enterprise
value,” she said. “Second, earn the trust of customers. They don’t often
care how valuable they are to you; they only care about what they need from you
and what they’re getting. Third, both long-term and short-term have to be
balanced, because if we ignore one, we won’t have the other. We have to take
care of the short-term, or we won’t have a long-term; but we have to
take care of the long-term, or else we’ll probably end up in jail. Fourth,
lifetime value measures are very, very important—increasingly important—but
the rate of change in lifetime value is the number you actually want. And you
want to use leading indicators and become more and more accurate in your use of
those leading indicators. The fifth rule is that sooner or later, maximizing
return on customer requires relationships with individual customers. We may
start with groups or segments; we may move from there to portfolios. But
eventually, we will be looking at our least and most valuable and our most
growable customer groups, one customer at a time. And finally, the last rule of
ROC is to educate your employees about how mission-critical this is, and then
empower them; teach them that increasing the value of the customer base is what
their job is. Teach them that even if we all have completely different tasks,
increasing the return on customer is at the heart of every decision that they
make, every single day.”
————————————————————————————
Editor’s
Note: Don Peppers and Martha Rogers’ latest book, Return on
Customer: Creating Maximum Value From Your Scarcest Resource, is scheduled
for a June 21 release date. For more information on Peppers & Rogers Group,
please visit their Web site at www.1to1.com.
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