How much are your customer relationships worth?

There's always a lot of argument about the way companies value their customer relationships as a percent of the value of the company. The value of customer relationships falls into the category of an intangible asset when looking at the balance sheet of a Corporation.  Brands and trademarks are included in the valuation of the company along with the value of customer relationships as the two major intangibles.

MARKABLES is a cross-border venture of experienced trademark experts who deal with the challenges of trademark valuation from different perspectives.  It is owned and operated by a privately held company located in Switzerland and specializes in company evaluations for M&A.

There really is no accounting data that can be used for evaluation of trademarks and customer relationships. The general methodology used to value intangible data is highly dependent on comparative data.  One of the best ways of valuing customer relationships occurs when a company unit being bought or sold since it's value must stand up to the scrutiny of auditors. The process used for estimating the selling price of a company requires valuing the different assets of the company which also includes the intangible assets of the brand or trademarks owned by the company and the customer relationships of the company.

A study of 6000 mergers and acquisitions (M&A) worldwide between 2003 and 2013 revealed some interesting characteristics of the value of customer relationships and brands and trademarks. Since evaluations were done by experts and documented, the data which were accrued from the evaluations can be used to indicate how experts are valuing the two intangibles of brands and customer relationships.

The outcome of this analysis shows that the value of brands and trademarks has dropped as a percent of the overall value the company from approximately 18% in 2003 to about 10% in this 11 year period. On the other hand, the value given to customer relationships has increased from about 9% in 2003 to 18% in the same time frame. Thus while brands and trademarks seem to be declining at a rate of approximately 0.8% per year in terms of asset value of the company, customer relationships value and as a percent of the company seem to be growing at approximately 0.9% per year.

The bottom line is that companies are seeing greater and greater value being given to customer relationships at the same time they are giving less value to brands and trademarks as a percentage of the value of the business. This does not mean the customer relationships will ultimately replace brands and trademarks in the valuation of the companies. It does reveal that more value appears to be given to customer relationships. These two intangibles, brands and customer relationships, are definitely connected. Continued success will be measured by how well the two intangible variables are integrated and managed. The challenge for every company will be to build a strategy that integrates these two variables so they complement each other with the proper emphasis on each.  

CLV versus EVC

The concept of CLV or customer lifetime value has been used for many years to describe the value of a particular customer or customer segment to a company.  It's easy to get caught up in the concept of what's good for the company because that's where profit comes from. However, it might be appropriate to look at EVC, a new concept, but often overlooked. EVC refers to the economic value of a product or service to a customer. For as CLV measures the value to the company of a product or service, EVC measures of value of the product or service to the customer.

Few organizations pay attention to EVC because even though it is a simple concept. The calculation has some challenging variables. The general formula for EVC can be stated simply as:

EVC = tangible value + intangible value

The tangible value is usually easier to calculate since it will refer to improved productivity, speed, or some other metric that is easy to measure.  The intangible value usually refers to variables that are not easily measured, such as color, ego satisfaction, keeping up with the Joneses or satisfying a whim.

The reason the concept of EVC is a worthwhile metric is that it is one of the easiest ways to compare products and services between competitors and even within an individual company with multiple products and services. So long as the EVC of a product or service is greater than the competitor’s it will have a greater attraction for customers. 

Another reason to use the EVC metric is to compare the value with the price of the product or service. When the price of the product or service exceeds the value of EVC, the attraction of the product or service will likely diminish in the eyes of the customer.

The bottom line is that the concept of EVC should become part of every company’s product analysis.  It is not a measurement that is taken once and forgotten since the value is obviously going to change as the market changes and hence should be a part of every periodic product or service review.  It's time to start measuring EVC.

The State of Customer Loyalty in Small Businesses

A joint study of approximately 900 small business owners presents an interesting insight into what small businesses are doing in the world of customer loyalty. The surveys were performed through a joint study by BIA/Kelsey and Manta in 2014. Some of the top level findings from the study are noted below:

1.      61% of small businesses now generate the majority of their annual revenue from repeat customers.

2.      62% of small-business owners are now spending the majority of their annual marketing budget to retain existing customers.

3.      The survey reported that a repeat customer spends 67% more on average than a new customer.

4.      Only 34% of small businesses have a loyalty program.

5.      Of the small businesses that have a loyalty program, only 46% are in digital form, such as an e-mail list.

6.      Only 29% of small businesses use a customer relationship management (CRM) tool to track customer information.

7.      When asked about the purpose of their customer loyalty program the dominant answer was “improve customer relationships”. Only 39% of those with a loyalty program noted this as their primary purpose. The secondary purpose was to “grow revenue”, which occurred with 36% of the small businesses.

There appears to be a dramatic change over the last several years for small businesses. Surveys done in 2012 found that small businesses focused on customer acquisition seven times more than customer loyalty and retention. In the 2012 Survey only 6% of the small businesses surveyed spent more than half the annual marketing budget on customer retention.

The bottom line is that small businesses seem to be migrating to the concept that loyal customers provide a greater source of revenue from each loyal customer than a newly acquired customer.  It is also obvious, that loyal customers lower the cost of customer acquisition and provide a more sustainable revenue flow.  Customer loyalty programs work for small businesses just as well as they do for large businesses. It's about time that all the small businesses think about customer loyalty and make the decision to make it a strategic component of their business.