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Return on Customer: Creating Maximum Value From Your Scarcest Resource - Hardcover

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9780385510301: Return on Customer: Creating Maximum Value From Your Scarcest Resource

Synopsis

Internationally acclaimed business gurus and best-selling authors Don Peppers and Martha Rogers kicked off the CRM revolution and changed the landscape of business competition with their classic bestseller, The One to One Future. Now, in Return on Customer, they have written an even more revolutionary book, redefining the very concept of what it means to be “profitable” as a business.

Virtually every manager agrees that a company’s most vital asset is its customer base – the lifetime values of all its current and future customers. Yet when companies track their financial results, they rarely take into account any change in the value of this critical asset. As a result, managers remain blind to one of the most significant factors driving genuine, lasting business success, and instead become preoccupied with achieving short-term financial goals.

Return on Customer is the first book to focus on how firms create value, not just by driving current profits, but by preserving and increasing customer lifetime value. In a powerful blend of theory and practice, Peppers and Rogers demonstrate how to create shareholder value more efficiently by concentrating on Return on Customer(SM), a revolutionary business metric focused on a company’s scarcest resource – customers. By paying close attention to Return on Customer, companies can improve their profits while still conserving and replenishing long-term enterprise value.

Relying on their years of experience working with many of the world’s leading companies, Peppers and Rogers take readers far beyond marketing, sales, and service. Return on Customer will revolutionize how companies think about their basic competitive strategy, product development efforts, and even the issue of business ethics and corporate governance.

Return on Customer(SM) is a registered service mark of Peppers & Rogers Group, a division of Carlson Marketing Group, Inc.

“To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable, and serve them more efficiently. And you want more of them.

Unfortunately, the financial metrics you learned in business school are not easily adapted to account for the value companies generate from this scarce resource, with the right balance between current-period sales and customer lifetime value. But striking that balance is necessary if you want to know whether you’re better off investing in customer acquisition, or in product development, or opening new stores, or plant efficiency, or better qualified personnel, or more service, or cost reduction. While you may believe in your heart that a particular decision creates shareholder value, there’s no financial metric currently available to tell you how much shareholder value you actually created, or even whether you created any at all.

But Return on Customer can help you. Return on Customer is a breakthrough financial metric that can quantify the actual shareholder value you are creating (or, possibly, destroying) with your various business actions and initiatives.”

—from Return on Customer

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About the Author

Don Peppers and Martha Rogers, Ph.D., are the founding partners of Peppers & Rogers Group, the world’s most respected management consulting firm concentrating on customer issues, now a division of Carlson Marketing Group, Inc.. They are the coauthors of the best-selling “one to one” series of business books, including The One to One Future, Enterprise One to One, The One to One Fieldbook (with Bob Dorf), The One to One Manager, and One to One B2B. In addition, they have written a comprehensive graduate-level textbook on CRM, Managing Customer Relationships, used in colleges and universities around the globe.

From the Inside Flap

Virtually everyone agrees that a company's most important asset is the value of its customer base. Yet the value of this vital asset is routinely ignored in managers' day-to-day, quarter-by-quarter planning. RETURN ON CUSTOMER is the first book to focus on assessing and tracking customer equity, the lifetime value of a firm's current and future customers, and taking specific actions in every facet of the company to increase that equity.

First, Peppers and Rogers reveal the critical importance of measuring customers' long-term profitability, productivity, and loyalty. In a powerful blend of theory and practice, the authors use their years of consulting expertise with many of the world's leading companies to identify the specific products, add-ons, and services that will best increase the size and value of their customer base. They look at popular marketing techniques--such as the relentless use of telemarketing--and weigh their effectiveness in maximizing, or hindering, return on customer. Finally, they guide managers through the specific strategies that will help to conserve and replenish customer value, from marketing and sales to research and development, distribution, technology investment, and more.

As revolutionary as Peppers and Rogers' pioneering bestseller The One to One Future, RETURN ON CUSTOMER offers a dramatic new way to make customer retention and value part of a company's core competitive advantage.

Excerpt. © Reprinted by permission. All rights reserved.

CHAPTER 1
AN OPEN LETTER TO WALL STREET

Businesses succeed by getting, keeping, and growing customers. Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, dispatch service trucks, stock inventory, file for patents, operate call centers, negotiate contracts, write software, or engage in any other kind of business activity whatsoever.

Without customers, you don’t have a business. You have a hobby.

The problem is that business success is extremely difficult today–probably more difficult than it ever has been. All the easy growth has now occurred. Every household in the industrialized world already has one or two or more cars, a washing machine, television sets in different rooms, and a cell phone (or several). Once an economy matures, customers are no longer so hungry to buy, but businesses are even hungrier to sell.

Yes, we’ve all benefited from the unprecedented improvements in productivity over the last couple of decades, but higher productivity has also put renewed pressure on profit margins. No matter how much streamlining you do today, you’re just keeping up. Everyone in your firm is already doing a job and a half. The cost cutting you thought was a temporary inconvenience has now become a permanent hardship.

And then there’s the impact of globalization. Offshoring and business process outsourcing may help you control your costs, but globalization, too, comes with a price tag. Your products are being reduced to commodities, as more competitors find their own opportunities in your section of the globe, and at least part of the reason you can’t get any pricing traction is that someone in the Far East is already undercutting you.

Even though price increases may be nearly impossible to sustain, the cost of selling and marketing is still going up. The more you spend on marketing, the less you have to show for it. Response rates decline, sales effectiveness erodes, and customers continue to become more demanding. New and improved products may temporarily solve your problem, but knockoffs and competitive innovations now appear in days. And we’ve seen a lot of new and improved products introduced, as companies all try to innovate their own way out of the same problem.

In category after category, in market after market, companies are wrestling with the fact that their products and services are simply in oversupply. Too many personal computers chasing too little demand. Too many airline seats chasing too little traffic. Too many varieties of fresh fruit in the produce section, too many kinds of bottled water, flavored popcorn, and coffee beans. Too many consultants, systems integrators, and executive-recruiting firms. Too much advertising space chasing too few advertisers. Too many frozen foods, breakfast cereals, skin creams, razor blades, cold remedies, and hair rinses. Too many trucking services, wireless minutes, and drums of chemicals.

The only thing in short supply these days? Customers. Customers are difficult to find and hard to keep.

THE SCARCEST RESOURCE

In today’s business world, customers are even scarcer than capital. If you have a customer for your business, you can almost certainly get the capital you need to serve her. But the market–any market–contains only a finite number of customers, who will each do only so much business in a lifetime, with anybody. Even if there are lots of customers, it’s still a finite number.

To remain competitive, you must figure out how to keep your customers longer, grow them into bigger customers, make them more profitable, and serve them more efficiently. And you want more of them.

Unfortunately, the financial metrics you learned in business school are not easily adapted to account for the value companies generate from this scarce resource, with the right balance between current-period sales and customer lifetime value. But striking that balance is necessary if you want to know whether you’re better off investing in customer acquisition or product development, or opening new stores, or plant efficiency, or better-qualified personnel, or more service, or cost reduction. While you may believe in your heart that a particular decision creates shareholder value, there’s no financial metric currently available to tell you how much shareholder value you actually created, or even whether you created any at all.

But Return on Customer* can help you. Return on Customer is a breakthrough financial metric that can quantify the actual shareholder value you are creating (or, possibly, destroying) with your various business actions and initiatives.

* “Return on Customer”(SM) and ROC(SM) are service marks of Peppers & Rogers Group, a division of Carlson Marketing Group, Inc. Registration pending.

THINKING LONG-TERM

Let’s face it: Businesses gauge their success today almost entirely in terms of current-period revenue and earnings. Wall Street demands that a firm “make its numbers,” or the stock price will likely founder. Certainly, public-company CEOs think this is the case, and they’ll go to great lengths to meet Wall Street’s expectations.

A 2004 survey revealed that meeting short-term Wall Street expectations is such an urgent need at publicly held firms that three out of four senior executives say their company would actually give up economic value in exchange for doing so! More than half of the executives said they would “delay starting a project to avoid missing an earnings target.” Four out of five executives said they “would defer maintenance and research spending to meet earnings targets.”

Quarterly reporting of financial results has certainly created a highly competitive business landscape. But it also drives executives to pursue contradictory business goals. Company managers are expected to strive for long-term value and growth in order to increase true shareholder value, even while they are also pressured to deliver against more and more aggressive short-term goals. Moreover, as financial systems become more sophisticated, we measure performance with continually shortening yardsticks. Some companies now boast about their ability to close a quarter in one day. Stock market analysts focus on short-term results as a proxy for long-term potential.

The problem is that the more short-term a company’s focus becomes, the more likely the firm will be to engage in behavior that actually destroys long-term value. The obsession with current revenue and earnings at many firms has generated a pervasive culture of bad management.

Don’t get us wrong. It’s a good thing for publicly traded firms to respond to investor demands, and it’s good that a free market for a company’s stock can discipline an errant management team. The real problem has to do with the way a firm’s future earnings and cash flow are evaluated by investors and by the stock analysts who interpret the firm’s numbers for them.

Investors are in fact very interested in understanding a company’s long-term value, but at present there is no better or more reliable indicator of long-term value creation than, well, short-term financial performance. The discounted-cash-flow (DCF) method for valuing a business is based on forecasting the firm’s future cash flows, but in the end even the most sophisticated predictions rely mostly on aggregate business trends, projections of market growth, and competitor activity, and in any case all such projections begin with today’s numbers. So, like the butterfly whose wings cause a tornado a continent away, small fluctuations in current earnings or revenues wreak massive changes in projected company valuations and share prices, as their effects are extrapolated and magnified years into a company’s financial future.

TIGHTROPE: BALANCING SHORT-TERM REPORTING WITH LONG-TERM SUCCESS

This creates a difficult problem for managers, because any firm’s current earnings are likely to go up and down frequently, owing to unexpected and unpredictable events. The natural noise of commerce is hard to dampen out of a firm’s “earnings trajectory” from quarter to quarter, but investors’ preoccupation with current numbers requires a firm to try, simply in order to preserve its public-market value.

One symptom of this malaise is the rash of executive scandals and questionable accounting practices that have plagued the investment community in the last few years. Senior managers know they can “game” the price of their own company’s shares by pumping up their current sales, or by smoothing out their short-term results, and then all they have to do is sell their own stock or cash out their personal options sometime before reality catches up with the market.

As bad as the most recent round of corporate scandals has been, however, this obsession with current numbers has had a far more corrosive effect on overall management decision making. Focusing on the short term to the exclusion of other concerns allows managers to shirk their primary responsibility altogether–which is to preserve and increase the value of the enterprise.

Think about it: Almost every senior manager at any public company has had the experience of attending a meeting called for the express purpose of hitting the year-end numbers, or even quarter-end numbers. Perhaps at this meeting they decided to put off some valuable R&D work, or maybe they trimmed a costly but important service improvement. Chances are, t...

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