neil woodcock’s marketing blog

It’s more than just customer numbers, churn rates and satisfaction

Following on from my previous blog about ‘The case for Customer Management has never been stronger’, I’ve been asked to provide details on the comment I made about headline customer metrics being misleading. Here goes: Suppose you were going to invest $100,000 in a company. Would you be more likely to choose a company that this year made an excellent profit or one that has made a more modest profit? Of course, you can’t tell from that information. If you had information on customer numbers, customer satisfaction, and customer churn rates – would that help? Only marginally, because our evidence shows that a focus on:

• Customer numbers normally results in a strategy to “acquire at any cost” and the acquisition of a large volume of unprofitable or even loss-making customers
• Customer satisfaction, as normally measured, gives misleading results, as you are asking some customers who rarely transact with you, and spend little with you, what they think of you. Their views will dilute the views of your heavy users and loyalists
• Customer churn is misleading because (1) it is rarely measured, “received wisdom” is commonplace and therefore fictitious figures are given to analysts and (2) the really interesting figures will be the churn of heavy users and loyalists.

If you had a deeper knowledge of both companies, you might realise that the very profitable company has cut costs in advertising and marketing, training, product development, customer service staff numbers and IT investment. It is alienating and losing its best customers, is acquiring risky or loss making ones and is upsetting its people, the best of whom will probably leave.

The question therefore is, despite this year’s impressive P&L, does this company represent a good long-term investment? You would be even clearer about where your hard earned money should be invested if you knew:

• The company knew its customers well
• Had high commitment levels from the top 20% of customers
• Understood why they stayed and why they left
• Developed, delivered and measured a winning proposition to them
• Invested in people and system competencies to service customers excellently and efficiently,

Even if that company produced lower levels of profitability you would have confidence that this business would develop and grow.

Leading analysts are beginning to agree that a company that can show competence in managing customers in these terms, versus its peers, should receive higher valuations. The independent Customer Management Assessment Tool (CMAT™) score may be one way of doing this. Most CEOs are driven by more tangible and higher level drivers such as market capitalisation, return on capital employed (ROCE) and do not yet focus on customer management as a significant intangible driver of shareholder value. If they did, there would be more companies achieving higher CMAT scores. Yet what business lever can increase revenues by 50%, reduce cost by 35% and increase profit as customer management can do?