Your CMR initiative has defined customer typology based on customer process differences. You have developed a deep understanding of the unique wants and needs of individual customers. You have identified opportunities to let your customers manage their relationship with your firm. You have invested a lot of resources—both time and money. Is the result an expense or an asset?
When we think of corporate assets we typically think of equipment, buildings, accounts receivables, and other old-world balance sheet listings. For most businesses the most valuable business asset isn’t on the balance sheet. It is the value of the customer base and the strength of the customer relationships.
One of the best studies I have seen on the subject came from Kaj Storbacka, founder and chairman of CRM Group Ltd. and a board member at the Center for Relationship Marketing and Service Management at the Swedish School of Economics. In his study, “Customer Relationships as Assets,” he says, “The most important asset in the future is customer relationships. Increased relationship value leads to increased shareholder value.”
Why is this so? Customer lifetime value is a measurable asset. And everything we’re talking about concerning CMR strengthens customer loyalty, which results in an increased lifetime value of your customer base. Being able to develop lifetime customers and to maximize their profit potential can increase the capitalized value of the company. Perhaps we will see companies valued one day on their price- to-customer-relationship ratio, when people come to accept Storbacka’s premise that increased relationship value leads to increased shareholder value.
A stock’s price to earnings (P/E) ratio is calculated on current earnings, whereas the expected future prices are calculated based on expected future earnings. Investors bid the price up now because they expect the prices to be even higher later. When expectations of a company’s future are high, the multiplier applied to future expected earnings increases dramatically. For example, Amazon.com maintained a very high capitalization before it even made a profit because expected earnings were high. The more loyal the customer base, the higher the multiplier.
Customer relationships as a company asset is not a new thought. It was first addressed by Frederick Reicheld in his now famous book, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Harvard Business School Press, 1996). He pointed out that U.S. corporations lose half their customers in five years, half their employees in four, and half their investors in less than one, and that disloyalty stunts corporate performance by 50 percent. Two quotes from The Loyalty Effect make the best case for investing in CMR as a way of increasing your base of loyal customers as a corporate asset:
“Today’s accounting systems mask the fact, but inventories of experienced customers, employees and investors are a company’s most valuable asset.”
“There is a secret to success. You cannot control a human inventory, which of course has a mind of its own, so you must earn its loyalty. People will invest their time and money loyally only if they believe that their contributions to your company will yield superior returns over time. The secret is therefore to select these human beings carefully, then teach them how to contribute and receive value from your business system—or better yet, give them incentives to learn these lessons for themselves. The key to decreasing inventory losses is to manage a virtuous cycle of loyalty, learning and value creation.”
When Reicheld says you can’t control a human inventory he makes the case for CMR. That’s exactly why it is arrogant for a company to think it can manage relationships with customers who have minds of their own. CMR is a process of selecting the right customers carefully and teaching them how to contribute to and receive value from your business system. That’s the process that will optimize customer relationships, earn loyalty, and create customer lifetime value as a corporate asset.
The founders of PreVision Marketing suggest the way to drive customer relationship efforts to the bottom line is through what they call Customer Relationship Optimization. They believe success is more than building a process in which a customer can interact with a company via any one-to-one medium (telephone, the Internet, or in person) without needing to repeat his or her history and profile at each point of contact, and more than delivering cohesive messaging across channels. Although critical to company operations, they say, such activities are just the beginning for true Customer Relationship Optimization.
They believe this optimization requires new financials:
To optimize your business economics you need deep insight into the trade-offs associated with different customer investment strategies. And you need to leverage your customer information beyond marketing to identify business productivity improvements across the orga
nization. Today’s most innovative leaders are not only organizing their businesses around their customers, but creating customer- driven business plans and new customer financials.
Customer-driven business plans are what we’re talking about when we empower the customer, and it is financials we’re talking about when we ask if Wall Street will care.
To help view customer relationships as an asset, the following are some of the effects on shareholder value:
effective cross-sell and up-sell
larger share of customer
lower acquisition costs
lower costs to serve
faster cash flow
steadier cash flow
increased future earnings from customer lifetime value
Beyond that, stronger relationships often result in customers recommending the firm to others.
Some say customer lifetime value has decreased in relevancy and that the concept is an anachronism. Today’s customers have ever rising expectations, the pace of new product and service offerings is accelerating, and corporate America is in an upheaval with companies regularly acquiring and divesting operations—literally jumping in and out of product areas and industries. There is also an increased mobility of consumers in switching jobs, moving, and changing lifestyles.[5 ]In this environment the only way companies will be able to develop the kind of loyalty that will increase customer lifetime value is with the use of CMR initiatives, which make the company more important to the customer. For CMR the model is turned around and measures the company’s lifetime value to the customer. The power of CMR restores the viability of customer lifetime value and its effect on a company’s capitalization value.
Kaj Storbacka’s study showed customer relationships drive shareholder value because a firm’s market capitalization is based on evaluations of future earnings. He believes it is management’s task to grow market capitalization in two ways:
by increasing competitive gap: using the relationship initiative to differentiate the firm from its competitors and create superior returns
by creating sustainable cash flow: creating barriers to competitor entry and customer exit, developing believable new business models, and sustaining superior returns
Kaj Storbacka, “Customer Relationships as Assets—Evaluating the Impact of CRM on Your Organization’s Profitability and Shareholder Value,” CREDO, Paris, March 15, 2001.
Frederick F. Reicheld, The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value (Boston: Harvard Business School Press, 1996), p. 3.
Ibid., pp. 4, 5.
 “Are You Simply Managing Your Customer Relationships, or Are You Optimizing Them,” PreVision Executive Briefing, spring 2001, p. 1.
[5 ]Arthur O’Connor, “New Thinking About Customer Value Metrics, Part 2,” ecrmguide.com, July 11, 2001, p. 2.