Creating Maximum Value from Your Scarcest Resource

Volume 19, Number 4 Article by Sanjit Kumar Roy December, 2007

Return on Customer: Creating Maximum Value from Your Scarcest Resource : By Don Peppers and Martha Rogers, Doubleday, pp 304, Price: $24.95 (hardbound). :

In their latest book, noted authors Don Peppers and Martha Rogers have tried to answer the intriguing business question, ‘What is the right balance between the current profit and the long term value?’ A proper answer to this question is the prime responsibility of every CEO of a modern company. Companies vie for immediate results and hence there is a conflict between investing for long-term value and the need for immediate results. According to the authors both the long term and the short term value for a company comes from a single asset, the customer. Customers are the scarcest of resources for a business, even scarcer than capital. Products and brands do not earn profit for a company. There is only one source of revenue for every company, and that is its customers, both present and potential.

This is the first book to focus on how firms create value not just by earning current profits but also by preserving and increasing customer lifetime value (CLV). Using an effective mix of practice and theory, the authors have demonstrated how to improve their profits, while still conserving and replenishing long term value. Companies can efficiently create shareholder value by concentrating on Return on Customer (ROC), a revolutionary metric put forward by the authors. Return on CustomerSM is the registered service mark of the Peppers and Rogers Group, a division of Carlson Marketing Group, Inc. ROC is a deceptively simple formula for measuring the rate at which the overall enterprise value is created by customers. A customer can create value for the company in two ways: (1) by increasing the company’s current-period cash flows and (2) by increasing its future cash flows. For example if a customer has had a bad experience with the company and becomes less interested in doing business with the company in future then the firm loses value at that very instant. The customer lifetime value declines and the firm loses the current value in the same sense in which a share loses its current value.

By maximising ROC a company not only optimises the mix of the current period and future profits but also creates a powerful financial justification for developing and maintaining a customer orientation for the company. Companies that generate positive ROC have high customer trust and satisfaction as well as happy and satisfied internal customers, i e employees. ROC is the speedometer for organic growth. It is equivalent to the total shareholder return, except that ROC can be further subdivided into smaller and smaller groups of customers’ rights to the granular level of the individual customer. As a result of this, managers can view how to create value faster by employing different strategies for different groups of customers. ROC makes direct contact between a company’s total shareholder return and the day-to-day decisions of the company’s middle level managers.

The form of the ROC equation is same as that of the well known ROI. Return on Customer is calculated as follows:

i + CEi

CEi-1

where i = cash flow from customers during period ‘i’

CEi = change in customer equity during period ‘i’

CEi-1 = customer equity at the beginning of period ‘i’

The authors have put forward some arguments in favour of ROC as a management metric in the form of principles of ROC:

1. Customers are a company’s scarcest resource
2. When companies don’t treat customers as a scarce resource, they focus excessively on the short term, which is detrimental
3. ROC is a balanced metric, focused on the scarce resource
4. For generating a positive ROC companies must take the customer’s perspective
5. Maximising ROC requires treating different customers differently
6. ROC creates better leverage for the company’s competitive strategy
7. The company’s shareholders have to buy into the concept of ROC for it to work for the company.

The authors emphasise that it is not possible for a company to achieve ROC without comprehensive data management and implicit trust in the corporate DNA. It will not only create shareholder value quickly but also create antibodies to help the company resist trust violation and other fraudulent activities. They also stress the importance of ‘Learning Relationships’, whereby a company that acts in its customers’ interests earns their trust and loyalty and learns more about their needs in order to deliver the desired products and services and further reinforce customer loyalty. Several case studies are included in the book, adding value to the author’s argument.

A serious shortcoming of the book is its failure to elaborate on the quantitative aspect of the concept. However, the relevance of its central theme, its wide applicability, and the easy flow and readability of the book make it a good resource for those interested in sales and marketing, accounting, investor relations, production, service delivery, competitive strategy and mergers and acquisitions.

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