Saturday, April 17, 2010

More About Customers as Assets

One of the goals of The Customer Institute is to publish a book which describes customers as assets and how to manage those assets. When customers are viewed as assets they take on a different perspective. For example Apple computer has taken the position that customers are assets and have developed them to the point where they can introduce a new product, such as the iPad and almost guarantee huge sales. Ben Fowler wrote an interesting piece dated April 6, 2010 in his blog (voiceofcustomerguru). Customers of Apple respond to Apple product announcements with little hesitation because they believe that Apple products deliver high quality.

Compare Apple to US automobile manufacturers during the 60s and 70s. They built cars with great styling and innovation but the product quality was inferior to those being sold by the Japanese whose products had less style and innovations but superior quality. The US automakers damaged their customer asset to the point that even today when their product quality is equal to the Japanese, they must offer incentives and lower prices to get sales.

The US economy has changed in the last 50 years. Whereas 50 years ago the size of manufacturing was twice the size of consumer service. Today the ratio is the same but with consumer service twice the size of manufacturing. Consumer service requires a different accounting system than the one used for manufacturing. When cars are sold there is an immediate transfer of asset from the car manufacturer to the new owner. The asset transfer is complete.

When we are dealing with the customer asset, we need to look at the value of that asset over time rather than in a single time period. There are have a number of books and articles written about measuring the value of a customer. One book that has been around for a while is "Managing Customer Value: Creating Quality and Service That Customers Can See" by Bradley Gale. The typical calculation of long-term customer value is based on the average life of a typical customer. If the customer life is three years, the value is based on three years. However, many of the books and articles written about calculating the value of a customer have not dealt with the value as an asset and its implications when looked at from an accounting perspective.

Note the following example and some of the accounting discussion is being done without the oversight of an accountant and must be viewed with some scepticism.

There is an excellent example of this weakness of viewing the customer asset in a book by C. Fornell titled "The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference." The example the author uses examines the case where it costs $1000 to acquire a customer. If the customer lifetime is 3 years, the net income for those 3 years is -$100. If the company has acquired 1000 new customers for the year, the cost of acquisition is $1,000,000 and the net income from those new customers is $300,000. However, that is not the way the accounting system would report the performance of the company. The accounting system would show a loss of $700 for each customer acquired for the first year or a total loss of $700,000 for the 1000 new customers. The second year an additional 1000 new customers are acquired for another $1,000,000. This year the total sales is $600,000 so that the total loss for the year is only $400,000. When you include the third year the lost is $100,000 for each and every year thereafter as long as the average customer lifetime is 3 years.

The customer asset must be viewed in the light of the value to acquire it and the revenue expected from each customer. One of the keys to building the customer asset is consistent performance and value similar to Apple. Toyota has just dramatically reduced it customer asset by mismanaging its communications with its customers.

The bottom line is that customer retention is a key to success in the consumer service marketplace and the foundation for building the customer asset. Companies need to know the length of the average customer lifetime before they start a campaign to acquire new customers. What is usually missing in many companies is the cost to acquire a customer and the average customer lifetime. We have been taking the wrong measurements.

This analysis does not examine the process of building the customer asset. We will have to investigate further to understand how Apple has achieved so much asset value from its customers.


Anonymous said...

That is very true. The effects of Customer Retention
often get over looked by most businesses. Cultivating your satisfied customers is the key to lowering the initial cost of a customer.

No money for advertising? Try doing follow up calls, or contacting your past customers. Simply thank them for doing business with you. A simple thank you goes a long way.

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