The benefits of prioritizing customer retention over revenues
Horace Dediu has a characteristically astute analysis of Apple’s business model in Priorities in a time of plenty. The parts I’m particularly interested in is where he discusses how Apple prioritizes their product roadmap:
Conventionally, product development is filtered through a sieve of metrics, market sizing and impact on top/bottom income lines. These “financial” measures of success are considered prudent and optimized for return on equity (also known as the maximization of shareholder returns).
But this can be a toxic formula. The financial optimization algorithm always prioritizes the known over the unknown since the known can be measured and is assigned a quantum of value while the unknown is “discounted” with a steep hurdle rate, and assigned a near zero net present value. Thus the financial algorithm leads to promoting efficiency at the expense of creation. Efficiency may be the right priority when times are difficult and resources are scarce but creativity is the right priority in a time of plenty. And abundance is what being big is all about.
The difficulty is that creativity is hard to quantify, and therefore hard to measure, and therefore hard to prioritize — particularly in large enterprises. Horace speculates that “the creation and preservation of customers” is Apple’s primary focus (above revenues), which changes the way they prioritize:
Seen this way each centralized resource allocation question can be assumed to be prefaced with “In order to create/preserve customers should we…?”
This leads to answers quite different from questions that start with “In order to sell/profit more should we…?”
Much to digest here, particularly around the role of managers to identify the right balance for prioritization, and the right metrics to measure if your primary goal is, in fact, “the creation and preservation of customers”.
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