Friday, October 17, 2008

Customers Are Your Greatest Asset

I think we miss a very important point when we think of customers. We miss the fact that they are an asset. When we look at the balance sheet of companies, we see the buildings as an asset, the equipment as an asset, the inventory as an asset and cash as an asset. We don't usually see the customers noted as an asset. Companies will often note personnel skills as an intangible asset, the brand name as an intangible asset and sometimes the customer data base as an intangible asset.

I believe the IRS added Section 197 to the Revenue Reconciliation Act of 1993 which now provides that customer and subscription lists, goodwill and going-concern value are now regarded as intangible assets and may be amortized over a 15 year period.

When I look at the customer as an asset I see an asset that is very complex, that changes value over time, that changes value with the size of the company, that changes value with the level of customer service (support), and changes value with age of the products or services offered.

I had a client who had a bright orange 8 1/2 x 11 inch poster distributed to each of his managers that read "CUSTOMERS ARE WHAT MAKE PAYDAYS POSSIBLE." He asked that each manager hang the poster over his desk as a constant reminder.

The Oxford dictionary defines asset as: property available to meet debts; any possession; any useful quality. MY DEFINITION of the customer asset is: TREASURE. Meaning precious; something valued for its rarity as a beloved or highly valued person.

I can use the Oxford Dictionary definition to get:
Customers are a form of "property" that provide revenue "to meet debts"; and
Customers represent a "possession" without which there is no business.

The impact of managing the customer asset under ideal conditions would lead to customers who would never leave to go to a competitor. The reality is that the better customers are managed, the higher the retention rate and the greater the opportunity to grow your market share (with an implied improvement in total profit).

When the customer asset is well managed customers who are a positive asset are identified and the company can focus on retaining those customers. At the same time, those customers who are not a positive asset can be eliminated.

Operations Impact
When the customer asset is being managed the role of Operations is
1. focus on maintaining good communications and relationships with customers
2. focus on meeting current and future needs and desires of customers
3. focus on a strong compliant resolution system
4. focus on continuous improvement in quality of products and services

Measurement Impact
When the customer asset is being managed, the impact on the internal measurement system will be to:
1. measure retention
2. measure defection - where did they go and why
3. measure complaint resolution
4. Measure delivery performance (products and services)
5. Measure the variance/gap between performance and needs/desires of customers

The bottom line is that customers are very important assets. The customers should be continuously evaluated to determine the quality of the customer asset base. If the company does an audit of its assets (plant, equipment, inventory, etc.) on a regular basis, why not take an audit of the customer asset on a regular basis? The objective is to determine whether or not the customer asset value is increasing or decreasing in value. Most companies cannot answer this question quantitatively.

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