“The purpose of business is to create and keep a customer.”
Businesses have a tendency to put functional priorities ahead of customer needs. More often than not, leadership vision is blurred by organizational pressures, budgets, and the bottom line.
However, the value of off-sheet metrics such as loyalty can be of just as much significance as drier metrics like sales revenue and gross margin.
What is “customer value?”
Customer value refers to the satisfaction the customer experiences, or expects to experience, by taking a given action relative to the cost of that action.
According to the Harvard Business Review, “loyalty leaders grow revenues roughly 2.5 times as fast as their industry peers.”
“Some public companies, such as Costco, AMC Entertainment Holdings, Humana, and American Express, increasingly report various types of customer value metrics. Most telecommunications companies—including Verizon, AT&T, and T-Mobile—do as well” -(Harvard Business Review)
Given the significance of customer value, this metric should be tracked, reported, and disclosed just as rigorously as others.
Most traditional financial-valuation methods require quarterly financial projections, most notably of revenue. Once you recognize that every dollar of revenue comes from a customer who makes a purchase, it becomes clear just how vital it is to examine how individual customer behavior drives the top line.
According to the Harvard Business Review, a customer-based corporate valuation (CBCV) which relies on customer metrics, can be used to assess a firm’s underlying value.
Executives and investors alike can use CBCV to understand and measure the value of a firm, as well as identify drivers.
How can we determine CBCV?
The HBR claims that in addition to the usual financial statement data, coming to a CBCV requires two additional things: a model for customer behavior (what we call the customer-base model), and customer data that is fed into it. The model consists of four interlocking submodels governing how each customer of a firm will behave. They are:
1. The customer acquisition model, which forecasts the inflow of new customers
2. The customer retention model, which forecasts how long customers will remain active
3. The purchase model, which forecasts how frequently customers will transact with a firm
4. The basket-size model, which forecasts how much customers spend per purchase
Bringing these models together enables us to understand the critical behaviors of every customer at a firm—who will be acquired when, how much they’ll spend over time, and so on. Summing up all the projected spends across customers gives us our quarterly revenue forecasts. Together, these models can produce much more precise estimates of future revenues streams—and from that, one can make much better estimates of what a company is really worth.
Adopting customer-value management processes and tools
The richness of the insights that can be derived from CBCV depend on how much access the person performing the analysis has to internal company data.
A corporate executive typically has full visibility of all customer data. A private equity investor assessing an acquisition target would typically have access to transactional and CRM data. According to the HBR, access to behavioral data, demographics, marketing touchpoints, service interactions, and the like would further enrich the CBCV analysis.
Different roles and departments have different sets of information, which makes centralization the key to understanding figures. Instead of manually compiling information from different systems, software like Sage Intacct, DataRails, and Netsuite help you automate consolidation.
Sage Intacct accounting software delivers incredible value and deep functionality that automates complex processes and delivers rich financial and operational insights to help companies grow. Intacct also offers an easy path to extend your cloud ERP solution by seamlessly connecting with other best-in-class applications that businesses rely on like SalesForce, ADP, and so many others.
DataRails automatically integrates your transactional systems and allows you to examine your numbers regardless of your technical capacities. It transforms Microsoft Excel into an enterprise-grade FP&A solution — automating your tedious processes and centralizing your data so everyone works with the same, reliable numbers.
NetSuite brings together the organization’s information that spans from accounts payable to billables. They’re all accessible in one organized, centralized system. This makes retrieving information easy, as well as saves implementation costs of various systems since you can find everything you need in one place.
The loyalty metric matters.
Better managing the value of a firm starts from understanding it. The CBCV approach makes room for metrics that were not previously measured or given much significance. But with all the data we have within arm’s length today, looking into these metrics and acknowledging them means recognizing that, in addition to drier metrics like revenue and gross margin, they matter.