The Value of Customers, part 2

Release Date: March 3, 2020 • Episode #106

In the second of a two-part series on the value of customers, host Steve Walker discusses with Rob Markey, a partner at Bain and Company and recently published author in the Harvard Business Review, how companies often overlook the compounding value of customers and instead get distracted by looking too much at the present and not planning for the future.

Read Rob’s Article

Transcript

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Steve:
In our last episode, we got a brief history on common metrics used to gauge customer loyalty and the importance of customer feedback. Now let's talk about the practice of maximizing the value of your customers.

Rob:
The power of customer loyalty is in its compounding effects. You change attrition by one percent and that means you've actually increased the growth rate by one percent. That one percent compounded year after year after year becomes a very large number.

Steve:
Why it's so hard for companies to see the potentially compounding value of their customers. On this episode of The CX Leader Podcast.

Announcwer:
The CX Leader Podcast with Steve Walker is a production of Walker, an experience management firm that helps companies accelerate their CX success. Find out more at walkerinfo.com.

Steve:
Hello, everyone. I'm Steve Walker, host The CX Leader Podcast and thank you for listening. On The CX Leader Podcast we explore topics and themes to help leaders like you leverage all the benefits of your customer experience and help your customers and prospects want to do more business with you. In our last episode, our guest, Rob Markey gave us some insights into the origin of that "oh so common" metric companies use today: the Net Promoter Score or NPS and emphasizing the importance of customer feedback. On this episode, we're going to discuss the value of customers and why it's difficult for companies to think in terms of loyalty. Back for Part 2, my guest, Rob Markey, is an author, speaker, podcaster, and partner at Bain and Company, a global consultancy that helps leaders solve industry defining challenges. And he also recently published an article in the Harvard Business Review on the value of customers. Rob, welcome back to The CX Leader Podcast.

Rob:
Thank you.

Steve:
I want to start off by talking more about the article you wrote for the Harvard Business Review. It's called "Are You Undervaluing Your Customers." It's great article. I just finished reading it a couple days ago. But if our listeners want to read it, there's a link on our website, cxleaderpodcast.com. So, Rob, tell us the kind of background: what was your motivation and reason for writing this piece?

Rob:
You know, it was the result of looking at a large number of companies that I had worked with over the course of my career, as well as other companies that I had observed, whether they were members of the NPS Loyalty Forum that we host or just companies you'd admire. And staring at that list, thinking how many of those companies that, you know, sort of topped the rankings on Net Promoter Score or customer satisfaction or the J.D. Power Awards, how many of them stay there over a long, long period of time? And as I stared at that list, I was realizing that the vast majority of what you might term enduring loyalty leaders were owned by their customers or owned by their founder or otherwise controlled by the founder or the founder's family. So, you know, Nordstrom – publicly traded – but the Nordstrom family really drives it. The USAA just wonderful organization owned by its customers, Vanguard owned by its customers, like you get the list is long. And looking at that, saying, why is it that public companies can't stay at the top? And that's kind of what led me to this… this observation that it's not because, you know, I know my clients, they're not dumb people. They're smart people. They're really good at what they do. And they believe in earning customer loyalty. But they can't they can't stick with it. Why? Because they're afraid of losing their jobs when an activist investor comes in and takes advantage of a decline in their stock price because they were making an investment in retaining customers as an investment in long term at the expense of this quarter. And so, you know, that led me down this path of exploration with a bunch of my clients and a bunch of folks in the industry to really just explore this question. Why isn't lifetime value… why isn't customer value being pursued as seriously as this month's… this month's, this quarter's, this year's earnings.

Steve:
I recall… and you're… you're again, early on your comment about the lens of accounting and accounting doesn't necessarily take this into account, but in some ways we're getting there, you know, because the market value of public companies, you know, used to be in the old days explained a lot by their balance sheet. And today, you really can't explain it with the balance sheet. So there's you know, there's going to have to be some metrics that evolve there. And I think that that's some of what you're advocating for in your in your article, correct?

Rob:
Oh, absolutely. I mean, you say that this… the balance sheet is really important historically. The history of accounting actually starts in the 15th or 16th century with only balance sheets like that was the only thing that that people paid attention to. And the income statement wasn't even a thing. And it really has only developed in the last couple hundred years that there was, even awareness of the income statement and really the last century that the income statement became an important driver of valuation. The idea of discounted cash flows became an important concept. And what's changed now that… the most is that with technology, we are able to do things… we are able to look at the business in a different way than we could back when I started my career. We can aggregate all the accounts of a customer into one… one unit. We can look at all of the behaviors of a customer across the entire enterprise and identify where they're interacting with us so that we can figure out what it costs us to serve them and we can figure out the impact of different interactions they have. We can do A/B testing or even more sophisticated experimental design to figure out the value of different kinds of interactions or treatments or pricing models. And so all these things allow us to understand the lifetime value of a customer and therefore look at the business differently. The traditional way of valuing a company, meaning.., I say traditional: the last 50 years or so with projected cash flows, discounted to today, the present value of the cash flows – depends on a really good projection of those cash flows. But the way that people tend to make those projections in the investment community is they extrapolate historical revenue and costs or margins and they use that as the basis for those projections. Without a real understanding of what's going on underneath those or if they have an understanding, it's just sort of a qualitative one. But the power of customer loyalty is in its compounding effects. You know, you, you change attrition by one percent. That means you've changed… and if everything else stays the same, that means you've actually increased the growth rate by one percent. Well, you know, that… that one percent compounded year after year after year becomes a very large number. And we humans stink at compounding math. We… That's why, you know, savings rates are too low. People are always looking at today and not putting enough weight on tomorrow. And so we now have this ability to incorporate that into corporate valuation and basically give credit to companies that are earning customer loyalty in the form of, you know, buying more of their stock at higher prices, which means we protect the management teams who are making those decisions. If we do it right.

Steve:
I love this concept of compounding effects as it applies to CX. One of my other interests is American history, and I actually was just reading some stuff about Benjamin Franklin, who was a big fan of compounded interest, and he had a quote that said that those that understand compound interest earn it and those who don't pay it.

Rob:
There you go. That is a… that is a beautiful statement. I am going to steal that from you, Steve.

Steve:
Well, you can Google it. It's… he's actually got several good quotes about it. But, you know, this is… the guy was really a wise man. He was fascinated by this. And he wrote a lot about this as a as a concept. But the concept that… that you're getting this return over time on investing a little bit more in your customers, I think is… is really powerful. And you talked about your grandfather and how, you know, all this sort of was in his head. What we're trying to do for our organizations is put that into some sort of database or management system that lots of different people can access. And when I talk to my entrepreneurial friends about what it is that we do, they go like, well, yeah, you know, I know how to do that. I don't need you to help me do that. And their right. But on the other hand, when I talk to them about, you know, we can actually measure some things today that we could predict future behavior, that tends to really resonate, you know, because I don't I'm not sure everybody has really thought that through yet.

Rob:
I think that if you ask the average very seasoned executive, whether big business or small business, what would be the profitability impact of improving your customer retention by five points, I bet you very, very few of them would be able to even come close to estimating the impact five years out in terms of revenue growth, margins, overhead cost, coverage. You know, the bottom line impact.

Steve:
With your model, would you have some sort of range that you would suggest that that might?

Rob:
Well, no. I mean, all I'm saying is if…

Steve:
Yeah, that would be phenomenal.

Rob:
… you caught somebody on the street or you just ask them instinctively in a meeting. You know, you don't get to use your computer, what would it be worth if we would if we could improve our retention rate by 5 percent? I think they would be off by orders of magnitude in terms of their estimates because they may be thinking about one year or two years. But there have… it's very hard to get to even five years of compounding math. Plus, most people really don't understand the hidden costs of attrition and of replacing the lost customers. Not only the sales cost, but the onboarding cost, the lost revenue in the early tenure of those new customers because they're not spending at the same level as customers who left. The… you know, it's just it goes on and on. And so, you know, part of… part of my goal is to change the way that organizations look at their financials so that they can see those effects more clearly. And I… I've come to the conclusion that the 30 or so years I spent trying to do that from the bottom of the organization, up or through marketing or through CX or operations, it wasn't wasted, but it might have been slightly misdirected. You know, how many times do you hear people say, well, if your CEO doesn't believe it, it's not going to happen? That's true. But why is it that CEOs don't pay… or CFO don't pay enough attention to this? And it's because their investors don't care enough about it. And why do their investors not care enough about it? Because we're not giving them the information they need. So one of the things I did is a few months ago, I started working with the Financial Accounting Standards Board to develop a set of accounting standards for the disclosure of customer data that would enable you as an investor to see with more clarity and transparency. What's going on with the customer base is. Is this company improving the quality of customers acquired or are they keeping them longer? Are they selling more to them? Are they… are they earning more of their business over time in spite of whatever else is going on in the business? I think that kind of, you know, coming at it from the top down is necessary to marry up with, you know, what you've always talked about, Steve, of really understanding the ROI of your CX initiatives.

Steve:
Yeah. And I think where you're going to is to to marry up this experience data or soft data with the actual hard data that investors are using and making that connection for them with… with some new metrics. Correct?

Rob:
I am and I commented in a, I think, funny way. But maybe you'll maybe I'll say no, that's totally logical. But if the leadership team has committed to investors that they're going to generate a certain improvement in the value of the customer base, then the next question ought to be, will, how you know and what will be the indicators of success internally and therefore, how will you manage the growth, the improvement in the value? And you instantly get to the point where you say, OK, well, internally, I need instrumentation that allows me to see the quality of customers coming in. The cost per new customer, how much revenue I'm getting and things like the net promoter feedback so that I can, I can gage: am I improving the experience such that I am likely to earn more of those customers business next year than I got this year? Am I doing the things necessary to enhance the quality of the relationships that will grow the value of this business? And so they come together in the management of the relationships for maximizing the value of the customer base.

Steve:
Rob Markey is an author, speaker, podcaster and partner at Bain and Company and also just recently published in the Harvard Business Review, an article called "Are You Undervaluing Your Customers?" Rob, you're actually calling for a revolution here in management technique. What…

Rob:
No, I am. I am, absolutely.

Steve:
What… what is it going to take in terms of, you know, how do you change kind of the existing systems? And then also, what are the skills that are going to be required to pull this off going forward?

Rob:
Well, if you've got… if you've got clarity about what the goals are and you've got good ways of measuring your progress towards those goals, the next question is, so what are the skills required to… to manage towards those goals? Basically the skills for enhancing customer relationships. And it ends up being, you know, kind of on steroids version of some of the things that we always talk about in the CX world: figuring out which customers are the ones that merit the most investment. Figuring out how to anticipate their needs better than your competitors do so that you can serve them so well that they are not just, you know, not just kind of like happy to do business with you, but excited about it, or at least that they're pulling for your success. That's a… that's what a promoter is. There's somebody who, you know, they want to see you succeed and they want to help you get there. It requires, therefore, doing things like on a real time basis, being able to use the data that you get out of the business. The… the I think what you often and what the folks at Qualtrics often talk about is the O-data from the business to help predict what the next best action is going to be with an individual customer and use the models that you develop to do that so that you can do that at lower cost. There's a whole… there's a whole skill set around that, and in it all at the end of the day boils down to developing the kind of human centered design, the the anthropological view of the business, the the empathetic view of customers that allows you to to look at the world through their eyes and look at your own business, through their eyes in ways that a process based or functionally based or even a product based organization rarely does. I think that doing that leads you down another path as well, which is to ask the question, why is it that there's these warring factions inside of companies and they're not usually not open warfare. But let's just say competing priorities related to product development and compliance, you know, the technology that basically boiled down to the competing tribes within an organization, you know. Ultimately boils down to, in many cases, a misaligned set of incentives that can't just be fixed by changing people's goals and metrics and compensation. I think some of it has to be dealt with by making changes in the way people interact with each other on a day to day basis and even how they identify themselves. So let's… let's actually get people to stop thinking of themselves primarily as a salesperson or primarily as a better, better, you know, like a compliance person and instead put them on teams that are organized around customer needs. USAA did this really well: put… taking people from, say, the auto lending business and the auto insurance business and putting them together into a team to say, you know what, you're not in competing product groups. You're both trying to help customers satisfy a need they have for buying a car. And when they did that, it just changed. It's silly that the what you call something in a team that you put people on changes the way they do their jobs. But it does and it changes the degree to which those folks collaborate to make things happen for customers as opposed to argue with each other in order to make things happen for their team, their product, their function.

Steve:
It's that time of the program where we ask our guests to provide the take home value. And now let's do take home value part 2.

Rob:
If you want to head down this path of managing an organization to maximize the value of a customer base, the very first place you should start is to begin figuring out what is the value of our customers and do it in a way that gets the finance team not just to buy in, but actually own it. What are the drivers of customer value and how do those ladder up into the value of the company? And ultimately, if you're a publicly traded company into our share price. When you've got that and finance owns it, then you've got the foundation that you need in order to make the right investments in customer experience and product in pricing, that will maximize the value of the business.

Steve:
Hey, Rob Markey is an author, speaker, podcaster and partner at Bain and Company. And his article in the Harvard Business Review is titled "Are You Undervaluing Your Customers?" Rob, thanks again.

Rob:
Thank you.

Steve:
And if you want to talk about anything else you heard on the podcast or about how Walker can help your business customer experience, feel free to email me at steve.walker@walkerinformation.com or give us a call here in the U.S. at +1-317-843-8890. Remember to visit our website cxleaderpodcast.com to subscribe to the show and find all of our previous episodes podcast series contact information so you can let us know how we're doing. The CX Leader Podcast is a production of Walker, where an experience management firm that helps companies accelerate their CX success. You can read more about us at walkerinfo.com. Thanks for listening and we'll see you again next time.