Without customers, you don't have a business. You have a hobby.
Those words are from the first chapter of the new book, “Return on Customer: Creating Maximum Value From Your Scarcest Resource,” by Don Peppers and Martha Rogers of one-to-one fame. If you wonder whether they took the one-to-one ideology to a new level or merely gave a new spin to a database marketing concept, you may think the same about “Return on Customer” and lifetime value. Whatever the case, the book is sure to make a splash when it's released next week.
I sat down with Martha recently to discuss the theory behind “Return on Customer.”
What do you mean by return on customer?
Customers are your scarcest resource. You can't really replace one. If you can get two more, you'd have three. But right now what we don't know is how much of a customer's future value we have to use up to make revenue from a customer today. The return-on-customer metric helps us understand exactly what it takes of the future value of a customer to get today's revenue and balances that short term and long term. It also is a way of thinking about managing an entire company. So it's both a metric and a way of life.
What's in it for direct marketers?
Direct marketers have been concerned about customers and customer value for a long time. But those issues have not always been boardroom issues. In fact, if you ask in the boardroom how your company makes money, in many cases the answer is going to be, “Well, it's from this division, or this product or it's from our brands.” The fact is that all of our revenue comes from our customers. So what “Return on Customer” does is it makes important an issue that is going to be demanded very soon. Customer equity becomes the same as total shareholder return. And what this means is that DMers are now going to be accountable at boardroom level. They're going to have responsibilities. They're going to be heard at boardroom level, so they will have a more important voice in the company and a bigger responsibility as well.
How is this different from lifetime value of the customer?
When we talk about one to one and customer relationships, Don and I have been thinking for years about how to identify customers individually, how to differentiate them by need in value — that's where the lifetime value piece comes in … how to interact with them and how to customize for them … adapt what we do to maximize our value of each customer and to do something for a customer that our competitor can't do, who doesn't know what we know about a customer. What “Return on Customer” does is take that to a completely different level, it's almost a different league. And what happens now is that we're really able to think in terms of how that lifetime value is used not just to understand how to make a better marketing investment but how to make a decision that will help us increase the value of a customer over time, to hold someone accountable for that, to make sure that we're not spending more on a customer than we should, that we are becoming as valuable to a customer as we can. The inflection point at which we are most valuable to a customer is — surprise — the same inflection point that they are most valuable to us. Do we know exactly where that is? How much we should spend on each customer? How much should we expect to get back from them and how much we're making on them now and will make from them in the future? We should know today how much our customers are going to be worth in the future and, indeed, we should even know today how much our future customers are going to be worth.
What's the biggest challenge in making this happen?
The biggest challenge in adopting return on customer is not about getting the data in place — I don't want to trivialize that. It's not having the calculations right — we now have the tools and the measurements so that just as economic value-add opens up a lot of understanding about our business, return on customer can do that. The real challenge is helping everyone throughout the organization — CFOs, HR directors, CEOs, people in IT, people throughout the entire organization — understand that everything we do today doesn't just have an impact today, it has an impact tomorrow, and that that impact for tomorrow is measurable today and we can hold people accountable for it today. The changes within an organization in terms of compensation, culture, process are usually pretty challenging, and that's where companies fall down.
Will DMers be able to easily pick up on this?
Direct marketers have the tools in place more than anybody else. What worries me is that many believe that they're already close enough to doing this that they don't have to make changes. And so they're going to get bypassed. In some ways that's unfortunately already happened with some kinds of customer relationships. As we see Wall Street starting to respond favorably to companies that are really building return on customer, we should see true changes in direct marketers' responses as well. The real challenge is going to be overcoming the mindset that's oh, so 10 years ago.
Are any companies doing this now?
We actually see some very good examples. Royal Bank of Canada, for example, is able to have very direct relationships with their customers because they are able to understand the value of each customer. They're able to invest in each customer correctly, and they're able to know what they're getting back on each customer and hold their own people accountable. Michael Dell is a great example at Dell Computers. He believes that every one of his customers is a market. When he thinks of his market share, he doesn't think of the big market share, he's thinking in terms of what share of this customer's computer business do I have? He's very much concerned about the return on customer. Best Buy is now actually measuring return on customer segments. We're seeing some pretty good results on Wall Street as a result of this initiative on their part.
If you want a sneak peek at the first chapter of “Return on Customer,” click here.