Will CFOs Rebel If We Put Customers First?
Growth for the sake of growth is one of the basic business tenets of today.
We’ve all felt the effects of it. If not directly through our own employers, then most recently through the financial crash of 2008.
The roots of this obsession go back to the invention of modern accounting in the 1890s.
But it was Milton Friedman who introduced the age of shareholder primacy in 1970. And since then companies have existed to maximize shareholder value.
This blind pursuit has devolved into managing earnings expectations for investors.
Many managers know this. Yet few behave as if they do.
Under relentless pressure from above, we feel obliged to produce quick profits by cutting back on services, imposing additional fees, and generally shortchanging our customers and employees.
We’re only human after all. And when the resulting profits look good on the income statement, the pressure eases for a little while.
But this kind of short-term thinking is harmful. It scares off potential customers, encourages defection, and makes us vulnerable to poaching by customer-centric competitors.
Customers are the ultimate source of corporate value.
Though corporate accounting practices certainly don’t encourage measuring customer value.
But marketing, at least, should. Because we’re finally coming around to the idea that customer loyalty is at the heart of sustainable growth — the C-suite and investors included.
The companies that are leaders in customer loyalty grow their revenues roughly 2.5 times faster than their industry peers.
And they deliver 2 to 5 times the shareholder returns over the next 10 years.
We need to make sure that we’re nurturing our existing customer base and always working to provide a better customer experience.
Because the basic purpose of a business is to create and acquire customers.
And the most efficient thing for a company to do is to retain and develop existing customers.
Today, unlike in the 1890s or 1970, we have the technology to do this.
Large companies are starting to add this data to their annual earnings reports. And investors have begun incorporating customer value into traditional valuation models.
But a lack of reporting standards and requirements ensures that CFOs have an incomplete picture.
The efforts to improve the measurement of intangible assets go on but consistently run into issues with evaluation methodology, differences in industry practices, and the cost of compliance.
That shouldn’t stop you from taking the lead.
Do you know the lifetime value of your customer base?
We need to focus on customer value as an asset. Not as a means to pursue short-term profit.
Only by consistently and reliably disclosing the information you’re making with growing your customer value can CFOs make a truly informed decision about rewarding your efforts.
HBR suggests you begin by tracking these 3 auditable metrics:
- The number of gross new customers acquired during the reporting period and net new customers remaining at the end of the period.
- The number of existing active customers (existing = customers for 1 year or more, active = have made a purchase in the last 12 months).
- Revenue per new and existing customer.
There’s a good chance you’re already tracking these metrics. If you aren’t, don’t waste any more time.
Make sure that your leadership has a clear understanding of why customer value is critical so that you can develop robust value management processes and tools.
By combining design thinking with loyalty-earning technologies you’ll benefit from the financial value inherent in increasing customer value.
Your goal is to organize around your customer’s needs
That way you’ll only ever offer them exactly what they want.
You need to push decision-making down to the frontline employees who know the hearts and minds of your customers best. Empower them to better serve your customers.
And make sure your entire organization is focused on the customers. Reduce cross-functional friction and align everyone in the service of your customers.
Traditionally, our operating models are built around functional and product expertise.
Finance, legal, marketing, sales and operational (along with other functional departments) typically control resource allocation, goal setting, and decision-making.
This improves competitive performance but encourages silos.
And in-group bias — even when inter-department goals are aligned — creates conflict among silos and even members of a team that are pulled from those silos.
When every department aggressively manages its own metrics, each functional team can celebrate individual wins. Usually, at the expense of the customers.
Your leadership is critical when you embark on making a shift like this
Because the first thing is to get everybody on board when you want long-term success.
Loyalty leadership needs to be constant and persistent.
You need to educate your employees, CFOs, and board members about your efforts to strengthen customer relationships.
Teach them how the success of this loyalty-based strategy is measured.
Demonstrate how decisions that may depress short-term earnings will bring bigger payoffs in the long run (increased customer acquisition and retention, lower cost to serve, etc.).
Employees are inspired by the satisfaction that comes from making customer’s lives better.
And happy customers will keep coming back and bring their friends.
This is what will set you up for revenue growth and shareholder returns that will far surpass your competitors.