Learn To Generate “Return On Customer”
To build long-term value for your business, invest in your relationship with existing customers—your most valuable assets.
Business owners agree that a company's most vital assets are its customers. Unfortunately, most businesses don’t focus on improving return on those assets. More often, business owners focus on near-term results. And that, says renowned business consultants Don Peppers and Martha Rogers, can lead to bad decisions.
In their new book, Return on Customer, the authors outline a strategy to help companies steer their way to lasting success by cultivating deep relationships with customers. While these experts advise a who's who of international marketers, they say the same principles work for small companies, too. Peppers recently spoke with SBR, and shared some valuable insights.
SBR: What is return on customer?
Peppers: The Return on Customer metric is designed to gauge the efficiency with which a business creates both short-term value, in the form of current sales, and long-term value, by promoting behavior that increases the customers' likelihood of purchasing future products or services. It is based on the idea that, while most businesses have an oversupply of products, it is customers who create all value for the business and any company should be concerned with tracking how well its customers create value for it.
SBR: That sounds like a real balancing act.
Peppers: Consider the farmer. In farming, land is a scarce resource. In business, customers are the scarce resource. A farmer could plant the richest, most productive cash crop on all his acreage every year and make a great deal of money in the short term, but his land would soon burn out. The more prudent farmer ensures the long-term productivity of his land by practicing conservation. A business must make the most of its customers in the same way a farmer must make the most of his land.
SBR: Small business owners are familiar with return on investment. How is Return on Customer different?
Peppers: ROI measures the efficiency with which a business employs its capital to create more value. ROC measures the efficiency with which a business uses its customers to create value. You can borrow capital from a bank, but there's no financial institution that will lend you customers. It’s important to make investments that give you a return on investment that exceeds your cost of borrowing, but you also have to choose those investments that will maximize the value possible from the limited supply of customers and prospective customers available to you.
SBR: What steps can small business owners take today to build their return on customer?
Peppers: The single most important step is to begin operating in a manner that helps you earn and keep your customers' trust. This is the surest way to maximize the overall value that a customer creates--whether you measure and track actual customer lifetime values or not. To create value, you must put yourself in the customer's shoes, understand his or her needs, and then act accordingly – and earn your customer's trust.
Obviously, product quality, price, and service all factor in to the customer's current purchase decision. But assuming you are roughly on a par with your competitors, there must be other factors as well. The customer, too, must assess the value he gets from his relationship with you. And for the customer, such a relationship will be of the most value if he feels he can trust you to respect his interests as if they were your own.
SBR: Can you give us an example of how a business created more value for both itself and its customers?
Peppers: USAA, for instance, implemented a Golden Rule: "Treat the customer the way you'd like to be treated, if you were the customer." This mantra for employees enabled the firm to employ new processes, technologies, and training in order to become a virtual icon of good customer service.
A Forrester Research survey found USAA at the top of the list in terms of something they called "customer advocacy." That’s when customers feel a firm is doing what's best for them and not just for their own bottom line. Firms that score highly on the customer advocacy scale are most often considered for future purchases.
It is important to recognize that "reciprocity" like this does not require giving products away at a loss or surrendering self-interest. The opposite of self-orientation is not self-destructiveness. It simply means being fair and honest with the customer, and looking out for their best interest.
Firms that flunk the trust test generally do so because they do not have a culture based on taking the customers' point of view. A culture of trust is also more satisfying to employees. People want to work for a virtuous company. They don't want to be ashamed of what they do at work, or have to justify their business actions.
SBR: Customer-centric is a new business buzzword. What does that mean?
Peppers: A customer-centric business is one that puts its customers at the center of all it does. Any business that attempts to maximize its return on customer is inherently customer-centric. In most usages, it is more of an aspirational term than a description of a particular style or method of doing business.
SBR: Can you give us an example of a successful customer-centric business initiative?
Peppers: Best Buy is a good example. The retailer identified its customers and broke them down into distinct categories of highly valuable customers. The company then trained store employees to recognize and think about the needs of these customers and encouraged them to engage in proactive behaviors to satisfy them.
Best Buy went as far as empowering store employees, who are closest to its customers, to tweak merchandising, signage and layout. One Pasadena store employee suggested reconfiguring the store to better appeal to suburban moms, moving small appliances down onto a low rack along the store's main walkway, rather than leaving them stocked on higher shelves among the major appliances. Sales of small appliances reportedly skyrocketed.
SBR: How does return on customer impact loyalty?
Peppers: A firm working to act in its customers' interests and to earn their trust will enjoy a great deal of customer loyalty. If each time you interact with your customers you learn more about their needs and deliver desired products or services, the customer will inherently become more loyal. This is what we call a "Learning Relationship." It is then far easier for the customer to work out any problems he has with you, rather than try to re-invent the relationship somewhere else. In addition, maximizing your return requires that you treat different customers differently
SBR: Many business owners believe the more marketing the better. Why do you write that this philosophy can backfire?
Peppers: Many companies have noticed a decline in their marketing productivity over the past decade. They have to spend more money to generate the same results, or their response rates to traditionally strong solicitations are falling. Most businesses over-market in order to stimulate current sales. But when you try to maximize current sales, you often cannibalize future sales you would have gotten anyway, or you may irritate customers, or reduce their price expectations for the future.
SBR: Can you give us an example of marketing cannibalization?
Peppers: Consider the actual economic effect of the most recent round of "employee discount" car pricing from the automotive companies. While they all wanted to use "marketing" to prop up current figures, didn't they also steal a considerable amount of value from their own future?
SBR: What's the key to remaining truly competitive in today's marketplace?
Peppers: You must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable and serve them more efficiently.
