Generating higher profits by managing customers as financial assets
By Adam Ramshaw (Director)
and Tracey Ah Hee (Director)
For reprint permission please email
info@genroe.com.au
"Your customer is your most powerful asset" according to Harvard
Business School Professor Frances Frei. Yet, how many organisations actually
manage and monitor their customers as a financial asset?
The road block that many organisation’s face, is that they manage customers as
non-financial assets rather than as financial assets. For this reason, they do
not use the same rigorous tools and processes to manage customers as they do to
manage their other assets.
However, in a very practical sense, customers have the same attributes as other
financial assets and should be treated as such. For example, let’s compare a
typical financial asset, Plant and Equipment, with customers.
|
Feature Set |
Customers |
Plant and Equipment |
| Quality |
Propensity to bad debt
Cost to serve and retain
Customer lifetime |
Propensity to unexpected failure
Cost to maintain and repair
Service lifetime |
| Returns |
Current gross margin
Potential gross margin |
Operating throughput
Maximum throughput |
| Acquisition and disposal |
Cost to acquire
Customer acquisition (Inflow)
Customer defection (Outflow) |
Capital cost
Equipment acquisition
Equipment retirement |
When managing other financial assets, organisations will carefully examine the
entire asset lifecycle from acquisition to disposal and weigh up the pros and
cons of different quality / return trade-offs for each purchase. However, very
few organisations do this same task for their Customer Assets™.
The crux of the matter is that organisations typically do not understand, manage
and report on customers in similar ways to financial assets. To verify this
perception, Genroe conducted a survey of 34 listed organisations in Australia
to assess whether organisations report on customers as an asset. The survey
results show that:
91% of organisations reported regularly on adhoc pieces of customer information
such as the number of new customers and existing customers in total. However,
without reporting by customer value, this can be misleading Customer Asset
information, as the organisation could be acquiring unprofitable customers and
losing profitable ones.
For customer loyalty, 88% of surveyed organisations only reported on basic voice
of customer and customer satisfaction information. However, reporting on the
specific drivers of customer loyalty as correlated to revenue and profit was
rarely reported. The main reasons cited for this were that the customer
satisfaction and voice of customer were perceived to be adequate customer
loyalty information. However, the companies did not know whether customer
satisfaction changes were driving or impeding profitability or it was too
difficult to determine and monitor the underlying customer loyalty drivers.
Only 9% of organisations reported comprehensively on customers as an asset. In
these cases, reporting on customers was linked back to financial indicators and
created a comprehensive breakdown of the customer movements and values that
drive company profit.
Changing the organisation’s view of customers to that of a managed financial
asset is not just an interesting theoretical framework but a practical approach
to meeting business goals. So what needs to change in organisations to drive
the maximum value in the business? There are three key areas to address:
1) Corporate Governance
In the same way that boards
actively manage their non-customer asset base they must actively manage their
Customer Asset base. For instance, no board would contemplate changing the
capital structure of the company without examining how it might affect the
organisation’s credit rating. Yet the same board doesn’t even question how a
marketing campaign might impact the bad debt profile of its Customer Assets,
with an equal impact on the organisation’s credit rating.
Boards and executive management must manage their Customer Assets in financial
terms and have an understanding of how different business strategies impact on
the Customer Asset return/risk profile created.
As another example of the way governance structures should approach Customer
Assets, lets review how a company might approach two analogous situations. In
the first situation a company wants to expand production capacity. Rather than
immediately purchasing new equipment, hiring staff and building new facilities,
it tries first to make the current equipment work harder, i.e. improve the
return on assets. Reducing bottlenecks, optimising configurations, running
closer to full capacity, improving maintenance to reduce downtime, etc, are the
initial focus. Only after all those options have been investigated does it
purchase new production capacity.
In the second situation the same company wants to grow revenue. In contrast to
the first situation, it immediately tries to acquire new customers. This is the
equivalent of buying new equipment when it hasn’t even looked at how well the
old equipment is working. A better approach is to examine the current Customer
Assets to see if they can be worked harder, i.e. can it sell more to the
existing customers (equivalent to increasing throughput) or reduce customer
outflow (equivalent to extending working life).
2) Manage customers as an asset portfolio
Just like
non-Customer Assets, each individual Customer Asset (i.e. customer) exhibits a
different return / quality profile. A company’s customer base is in effect an
asset portfolio to be actively managed.
For maximum return, customers need to be managed in a similar way to any other
investment portfolio by creating a balance between customers with different
returns / quality profiles. The analogy with modern portfolio theory is very
strong because both ideas are based on building an optimal risk/return
portfolio on a spread of assets. In order to maximise outcomes it is necessary
to create a balanced portfolio of different customer types.
This is an active not passive process. Companies that actively manage their
customer acquisition, migration and disposal are able to closely match their
Customer Asset portfolio to their business needs.
3) Reporting
It has already been noted that the
difference between customer reporting and other asset reporting in most
companies is stark. Request a plant and equipment report in most companies and
you will receive a detailed description of acquisition, disposal, lifetime
costs, liabilities, etc. Request a customer report in the same organisation and
you are unlikely to receive an integrated report showing acquisition,
attrition, migration and lifetime values.
Substantial changes are needed in the way organisations view and report on
Customer Assets. Critical Customer Asset information is not their name (in fact
this is the least useful piece of information) and product holdings. Companies
must go beyond this simple view to look at indicators such as customer lifetime
values, migration movements, potential credit risks, customer gross margins,
future customer revenue lost, etc. With this information it is possible to
manage the Customer Asset portfolio more efficiently and effectively.
In summary, many organisations do not realise that customers are a financial
asset and can be managed the same way as all other financial assets. Changing
the organisation’s perspective to managing customers as a financial asset can
make a huge difference to the organisation’s bottom line and future growth.
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