The Value of Customers and The Impact on A Business’s Financial Status

The Value of Customers and The Impact on A Business’s Financial Status

Think about it. If you didn’t have any customers, would you have a business? Where does the value of a business actually come from? If a business’s purpose is to create products, services, and experiences for customers and you don’t have any customers, do you have a business? Simple logic would tell you no. However, how a business is evaluated on Wall Street or with investors often has little to do with the very people (customers) who provide the cash flow to run and sustain a business. Simply put, no customers, no business.

So that brings me to another question, “Are companies basing their worth on the wrong things?” Peter Drucker said, “The true purpose of a business is to create and keep customers.” If this is true then why are company strategies often opposed to being customer-centric? Oftentimes businesses do understand the value of their customers but at the same time the pressure to produce quick Wall Street or investor profits by compromising product quality or not delivering high-quality service experiences ends up short-changing their customers.

The root of short-changing customers stems back to the 1890s and the beginnings of the modern financial accounting system and the issues were heightened when Milton Friedman, in the 1970s brought forth the idea of maximizing shareholder value at all costs, even if it was at odds with how customers were treated.

Roger Martin, the author of When More is Not Better: Overcoming America’s Obsession with Economic Efficiency, about ten years ago, came up with a new “age of customer capitalism” where companies would put customers first to create greater value for their shareholders[i]. His premise was that the blind pursuit of shareholder value would erode the customer lifetime value and companies were too focused on managing investor earning expectations.

However, worried that prioritizing customers would threaten short-term earnings and send investors packing, few leaders (even though they may have agreed with Martin’s idea) acted on truly driving toward measuring and reporting on a customer-centric company strategy. The technologies, operational capabilities, and performance measurement systems are nascent and can make a customer-centric strategy seem somewhat of a risky Wall Street or investor strategy.

In August of 2019, the Business Roundtable, which represents many of the largest U.S. firms, issued a statement on the purpose of the corporation and said it was to deliver value to customers, along with other goals and customer value was on equal ground with creating shareholder value.

In the article, “Are You Undervaluing Your Customers?” by Rob Markey, co-author of The Ultimate Question 2.0, has come up with four broad strategies that leaders who are focused on customer loyalty and customer lifetime value rely on for superior corporate performance[ii]:

  • Managing for customer value
  • Combining design-thinking with loyalty-earning technologies
  • Organizing around customer needs and
  • Leading for loyalty.

He believes the time is right for leaders to create systems for measuring customer value and invest in enabling technology, use design-thinking (putting yourself in your customer’s shoes so to speak) to design the business operations around customer needs and engage the whole organization, from customer-facing operations to back-office employees, board members as well as investors in the transformation of how shareholder value is created.

If more companies were organized around these type of customer-facing principles, companies could increase value by acquiring more customers, earning more business from them, retaining them longer, and increasing customer lifetime value, while making it simpler and less expensive to serve customers by using new technologies that listen for a customer’s intent when they are reaching out to a business, understand and predict what the customer needs and then taking action. In addition, by aggregating all the experiences, and learning what works and what doesn’t, businesses can use AI to analyze for patterns to improve the customer experience and make lasting improvements.

Markey recommends, given the importance of customer value, even though there are no customer-value reporting standards or requirements, business leaders should begin tracking it in the same way they track other key assets like buildings, inventory, equipment, and marketable securities because it will perhaps become part of the norm.

Part of the issue for investors is that most companies don’t measure customer value or if they do it’s not standardized so it’s difficult to determine how a company compares to its peers. Most investors continue to reply on old accounting principles that focus on physical and financial assets.  And while customers are key, a company’s income statements or balance sheets don’t provide much visibility into the value of a company’s customers.

We can’t enter the age of customer capitalism or build customer-centric businesses until our financial accounting standards include reliable, auditable customer relationship metrics. Without a standard, consistent, and widely accepted system to measure and report customer value, investors have an incomplete picture. And until we transform how we account for the value of customers, leaders will be tempted to continue to run, measure, and report on their business using old standards that don’t measure this new customer-centric mindset that is crucial in a world where customer expectations are rapidly changing and drive loyalty to brands that do put the customer first.

When would now be the right time to become customer-centric in everything a business does?

[i] The Age of Customer Capitalism by Roger Martin, HBR, 2010:

[ii] Are You Undervaluing Your Customers? By Rob Markey, HBR, 2020