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The Tangible Benefit of Customer Loyalty – Pt. 3

So far, we have explored how customer loyalty data can be connected statistically to financial performance at both an internal/micro level as well as an external/macro perspective. To summarize the key findings:

From an internal/micro perspective (i.e., at the customer/account level), we can use the linkage of loyalty and financial performance to:

·         Identify where revenue is at risk (and, conversely, more secure);

·         Evaluate to what extent customers act on their intentions;

·         Articulate the value of improving customer loyalty;

·         Build tailored customer-level strategies to build on existing loyalty or address the impediments to customer loyalty;

These tools are used in conjunction with strategic account planning to facilitate the growth and profit objectives of the firm.

At the external/macro perspective (i.e., at the market performance level), the literature to date suggests that customer satisfaction/loyalty metrics…

·         can be used as a leading indicator of future stock price trends,

·         can be used as a leading indicator of stock returns risk, and

·         have utility in financial markets and should be disclosed in the ongoing filings public companies are required to file with the SEC.

In other words, we have tangible evidence that intangibles such as customer loyalty can add to (or detract from) the value of a firm, and therefore have a place on the balance sheet.[1]

It is interesting to note that each approach, while different in its focus (external vs. internal), complements each other and creates a virtuous cycle of value creation. In other words, it makes sense that a firm that focuses on tailored customer-level strategies would have a more customer base, which means a more stable revenue base. A more stable revenue base means that there is likely less volatility in the firm’s earnings, which attracts investors. When a firm attracts more investors (and the current investors are more interested in holding the stock vs. selling it), the laws of supply and demand tell us that the stock price will appreciate. Strong stock returns attract attention (generally positive), which serves to create awareness and demand for the firm’s products and services. And so the cycle continues.

Collectively, these findings reinforce the strategic value of being a customer-focused organization, and the implications are broad-reaching; consider the following scenarios:

1)      A mutual fund manager is interested in investing in a given sector and has narrowed his focus to three firms – each has a strong balance sheet, a solid growth record, and reputable management. With all the basic criteria so evenly aligned, the “tie-breaker” is the customer loyalty metrics each firm publishes.

2)      A firm is interested in acquiring one of its competitors; in the due diligence phase, the acquiring firm decides to conduct an assessment of the customers of the target firm. The results suggest that the customer base is tenuous at best. The acquiring firm may determine to back out of the deal altogether (or, at a minimum, substantially reduce its offer price).

3)      A management team decides that it wants to “walk the talk” by making certain its managers and leaders are personally invested in the strategy of being a customer-focused organization. To do this, performance targets on customer loyalty levels are set; to further reinforce the level of “skin in the game” that managers and team leaders have, the incentive is stock-based.

4)      An account manager wants to ensure that she is allocating her time focusing on the customers with the greatest value to her organization. Rather than focus solely on total spend/revenue, she employs the Value Mapping discipline to evaluate which clients hold the greatest strategic value to the firm. Using the output from the Value Mapping process, she is able to construct tailored, specific action plans for each customer.

These are just a few ways in which customer loyalty can be leveraged to increase the value of the firm. What they all have in common is that they are focused on strategic business questions – in other words, tracking loyalty for the sake of scorekeeping holds absolutely no value to the firm. To create strategic value, the data have to be leveraged to address substantive, strategic business questions.

Mark Ratekin
Sr. Vice President, Consulting Services & Resource Management


[1] The notion of altering accounting rules to include these intangibles, while laudable as an aspirational goal, is fraught with issues (for example, what metric do we use? How do we value the metric? Is the valuation method uniform across all industries, or should we make allowances for differences in business models, etc.); consequently, it is unlikely that we will see this level of standardization and valuation any time soon.

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