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What's your return on customer? An interview with Martha Rogers 

October 24, 2007

Need a revolutionary approach to maximizing customer profitability and value? There's no better person to ask than Martha Rogers, Ph.D.

Along with Don Peppers, Dr. Rogers has co-authored seven best-selling books, includingThe One to One Future, Enterprise One to One, and Managing Customer Relationships.

She is a founding partner of Peppers & Rogers Group, the world's leading customer-focused management consulting firm.

Business 2.0 magazine listed her among the 19 most important business gurus of the past century, and the World Technology Network called her the “innovator most likely to create visionary ripple effects.”

In their latest book, Return on Customer, Peppers and Rogers offer a completely new way to measure how a company earns profit. They also redefine the very concept of what it means to be profitable as a business.

Here, Dr. Rogers shares her views with Kelsey Howarth, Senior Writer for Cognos, an IBM company.

"A lot of people thought we were out of our minds"

KH: The One To One Future, written in 1993, was a book that Inc. Magazine editor George Gendron called “one of the two or three most important business books ever written.” Since that time, it's become an acknowledged bible on the customer strategy revolution. What revolution did you start?

MR: "When we first wrote the book, a lot of people thought we were out of our minds.

"We were suggesting that we would see a dramatic change in the way businesses related to their customers due to the capability to build strong, large and powerful databases and use mass customization technologies.

"We were trying to tell people that since we're no longer in the industrial or mass marketing age, we have to listen to and capture what our customers are telling us.

"Since databases have better memories than humans, they can remember customers' messages and use that information to serve them in ways that their competition doesn't have the information to do.

"We were trying to tell them that they would have to make radical changes to their business – their compensation structures, their processes, and the way they viewed customers."

Accountability to customers

KH: How has your thinking evolved since then?

Book Chapter

Performance management in customer service

MR: "When the book was published in 1993 we weren't talking about the Web at all because it didn't exist yet. We revised the book in 1997 to reflect that.

"Once customers could talk to each other online, companies had even more reason to ensure that they were having a great experience with them, rather than merely responding to a great slogan or a great brand.

"We also expanded our thinking around marketing's accountability to customers. It's not enough that spending on campaigns shows good return to the CFO. You have to get a return on the customers themselves."

Customers are your only revenue source

KH: In your latest book, Return on Customer, you show companies how to maximize the value of their scarcest resource – their customer base. Wouldn't most companies of a certain size view their customers as plentiful rather than scarce?

MR: "This is a key problem. Customers are scarce. For most businesses they are the scarcest resource we have.

"There are only so many human beings – customers are really scarce and we can't make more of them. We can't go to the bank to borrow more.

"If I can prove to a bank that I've got a great idea, that I've got customers to buy into it, and I've got a competitive advantage, I can get money.

"Customers are really the only source of revenue for a company. So even if you have great employees, terrific products and services, and a great brand, those things do not pay us money. Only customers bring us revenue.

"Most companies want to make the most of their monetary investments. But companies that realize that customers are scarce want to make the most of each of their current customers that they have and will have in the future.

Doing the math

"To illustrate the point, let's analyze two distinct marketing programs:

	Cost per customer	Profit per customer	ROI
Program A	$10	$10	100%
Program B	$15	$20	75%

"Which marketing program do you think most companies would opt for?"

KH: I'm guessing A, but there may be some flawed thinking there.

MR: "Exactly! Most CFOs would opt for A under the assumption that if it costs less, they can run the program twice and get $20 profit.

"The flaw in that argument is 100 years old: the assumption that we can always get two customers instead of one. If I can only get one customer, would I rather go home with $10 profit in my pocket or $15 profit in my pocket? Should the answer be different if I have a million customers?

"Again we need to realize the scarcity of customers – they are the one thing that we can't clone, borrow from a bank, or pay back at any level of interest.

"Once you accept that approach to your business then several things automatically happen: You don't assume you can always go get another customer, you treat the customers you have with the respect, affection, love, and trust that they deserve."

A few examples

KH: In Return on Customer you give several examples of companies like Best Buy that have done a great job of maximizing return on customer by employing a customer-centric approach: the trust that you talk about in the book. Can you provide another example of a company that consistently puts customers first?

MR: "One that always sticks out in my mind is Johnson & Johnson's response to the 1982 Tylenol bottle tampering incident.

"The company could have claimed the tampering was the fault of the drug stores. Instead, it made an executive decision that cost millions of dollars: it pulled every bottle of Tylenol off the shelves.

"They did it because it was the only right thing to do. They did it because they treat customers as a valuable asset. They did it because they knew the one thing they would never be able to buy back was customer trust.

"Their stock value dropped, but six months later it went up again. Six months later, it passed previous figures.

"They made the decision that they would do the right thing by customers."

How customers create value

KH: In Return on Customer you also state that the lessons you learned in business school won't help you here. You go on to state that financial analysts are often blind when looking at profitability. How so?

MR: "Customers create value for companies in two ways. Most companies are good at one, and lousy at the other.

"Business schools train us to measure and drive customer value in the short term. They pay us money today, or they don't. They recommend us to their friends today, or they don't.

"But customers also create or erode value by becoming become more or less likely to do business with us in the future.

"Most companies are really good at knowing exactly how much revenue they made from customer transactions today, but they are lousy at knowing whether or not the equity in their customer base went up or down today."

Short-term goals vs. long-term relationships

KH: So these short-term financial goals often get in the way of the long-term customer relationship?

MR: "Companies must come to grips with whether they're going to focus entirely on making money today or balance today's money with tomorrow's money.

"It's hard, and it requires leadership. But we're going to see some companies that are really good at making money today fall by the wayside."

Four key measures

KH: In Return on Customer, you present an equation for companies to use to maximize customer profitability. Can you explain it?

MR: "We offer some measures for understanding return on customer and holding employees accountable for it.

"The return on customer measure is based on four families of measures: customer satisfaction, behavioral measures, customer life stage, and customer measures – things like retention and attrition rates.

"A firm grasp on these measures gives you a firm grasp on customer worth, today and in the future.

"We believe that eventually, for most companies, this measure will actually be a more accurate measure of financial success than the traditional ones."

KH: Do most companies have this kind of information today?

MR: "Most companies don't have the historical data to bring forward and validate our formula. In the absence of that, they have to start now and go forward."

Learning from farmers?

KH: In the book you share what executives can learn from farmers. What principles do successful farmers employ that companies often ignore?

MR: "For farmers, land is their scarce resource.

"Good farmers practice good husbandry by rotating crops, letting land lie fallow, and irrigating. In the long run, these investments help their farms stay productive for generations.

"Other farmers buy up land, plant every square inch with this year's biggest cash crop, skip irrigation and fertilizer, and abandon crop rotation. At first, they have bigger yields than their neighbor, but in later years they burn out the land.

"Farmers, like companies, have bad years, but good farmers don't resort to bad farming practices – it disrespects their scarcest resource.

"If you've ever been to a fourth quarter meeting you might see some companies turn into bad farmers – they'll do anything to make their numbers. These are the companies that opt for programs that allow telemarketers to call you at dinnertime.

"They might be wiser to bite the bullet this quarter, have a higher ROC, but a lower ROI, and make sure that in the future they've set up a company.

"Don't get me wrong, quarterly numbers are important, especially if you are struggling to make payroll or facing bankruptcy. But companies have more luxury to focus on return on customer than they think."

What role performance management?

KH: What role do you see technologies, like the ones Cognos offers, playing in helping companies understand their return on customer a little bit better?

MR: "Before the 1990s, companies did not calculate activity-based costing. They did not calculate economic value-add. They didn't know the true cost of capital, only what the banks told them.

"Technology today lets us keep data, combine it in useful ways, analyze it, and make better decisions than we could 20 years ago. While we cannot base customer relationships on technology, it lets us relate to one customer at a time, times a million.

"Analytics technologies are driving a new competitive era. Smart companies will use these technologies to get to know customers who trust them, to look out for their interests, and to give them the greatest possible individual value.

"The information and insight they possess will let them do things for their customers that their competition is powerless to do." 

Find Out More Become a performance manager in customer service Listen to Dr. Rogers on Radio Cognos Download the Customer Service chapter of The Performance Manager

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