IMPORTANT SUMMER READING

Peppers and Rogers’ New Book

I’m recommending Don Peppers’ and Martha Rogers’ new book, Return on Customer, to my clients this summer. It’s a seminal book--one that will no doubt catch on. It addresses a really important subject: how to make customer value (the value of customers to your firm) a core business and strategy driver, if not THE core business driver.

It’s a good book to hand to your executives to make your case about the value of pursuing your customer initiatives. Whether your executives read the book or not, the message that there’s a tangible financial “return on customers” to your cash flow, to your bottom line and in the eyes of your investors, is one that executives are (finally) ready to hear.

Frankly, my heart sank when I received my advance copy of this book--graciously sent to me at my home along with a cover note from Martha and Don. I realized right away that Don and Martha had managed to crystallize and brand a set of concepts that I had promulgated too early--before the market was ready--and that they had done so with a memorable title--one that would make this book a required pass-along read among business execs.

Then I realized that in this well-researched and well-footnoted book, there wasn’t even a nod to my earlier book, The Customer Revolution, in which I had introduced the concepts of the Customer Economy, customer capital, customer momentum, customer franchise, and the Customer Value Index.

Yet, Peppers and Rogers captured all of those ideas in a single, catchy, easy-to-remember concept: “Return on Customer.” They may have published four-and-a-half years later, but now executives are more willing to hear this message (in the post Sarbanes-Oxley era). And Peppers and Rogers devoted an entire book to the concept, not a single chapter. In short, they did a much better job than I did.

Why do I think this is the right way to think about your business? When I published The Customer Revolution in 2001, I was already convinced that companies needed to begin calculating and reporting their customer lifetime value--their customer capital--as well as making explicit the calculations they used to project future cash flow and earnings based on projected income from future customers. After all, I reasoned, since all operating profits and cash flow come from the money your customers spend with you, shouldn’t investors know what the basis for your projections are? Among the things I didn’t do was to offer specific formulas for calculating customer lifetime value. Peppers and Rogers do offer several examples of hypothetical LTV formulas throughout their book.

I’m glad that this book will garner attention and galvanize discussion. It’s worth investing the time to read it. There’s good advice here. Don and Martha wrestle a number of difficult concepts to the ground.

What’s the Main Message of Return on Customer?

ROC Defined. Peppers and Rogers offer a Return on Customer equation (see Illustration 1 in PDF). “ROC equals a firm’s current-period cash flow from its customers plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period.”

Whether or not you can turn this ROC equation into something you can actually track is still a bit questionable. I would have preferred a somewhat simpler barometer--something that all companies could do easily and all investors could agree on as a useful basis on which to project future earnings or future cash flow.

How is customer equity defined? Peppers and Rogers define it as “all the lifetime values of a firm’s current and future customers.” How do they define customer lifetime value? As “the net present value of the future stream of cash flows a company expects to generate from the customer.” (They then go on to say that whether you use earnings from customers or cash flow from customers is essentially irrelevant; they discuss the pros and cons of the two approaches in an appendix.)

I agree with Peppers’ and Rogers’ definition of customer equity. It’s the same concept I described as “the value of your customer franchise: the discounted net present value of the earnings from your current and future customers.”

Why Does ROC Matter to Your Business? The main message of Peppers and Rogers’ book is this...