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Treat customers as a financial asset
By: Lou Lasday
Most business and professional service organizations will list real estate, equipment, accounts receivables and cash as assets. When the business is eventually sold, however, it is the "future growth pattern" that often will end up as the category for which the buyer will usually pay the most. It's a less tangible asset in that it's more difficult to value. But certainly it's a most exciting valuation, that by itself can make any company especially enticing to a prospective buyer.
This may be especially true if your Gulf Coast enterprise is a professional services organization.
'Goodwill' financials
Goodwill in marketing terms is simply the value of the customer or client base, past, present and future.
The hottest topic currently being evaluated at Columbia University Graduate Business School is the projected total economic value of a customer base. This lifetime value concept is a way of quantifying the linkage of customer and firm value. If we can estimate the value of current and future customers, then we have a proxy for this critical part of the firm's worth.
You'll maximize this evaluation if you aggressively see each single customer not as a one-time transaction but as a series of transactions over time. Not as an on-off switch, but as a volume dial where you generate a greater overall slice of the customer's "share of wallet."
Some customers or clients will stay with you for years. Others drop out at various intervals. Some drop out and then come back later. By building the lifetime value of your base in dollars and cents terms, you'll also be building up the key assets that are essential to growth.
The formulas
Let's see how you get started. Assume for moment you are a professional services organization - a law firm, financial, insurance, Realtor, accountant, architect or community bank.
If, for example, the average net value of a customer or client is $10,000 and your Gulf Coast enterprise can identify 100 customers, then your current base is valued at $1 million. If we project growth of an additional 50 customers, at today's value level, then the projected customer valuation is $1.5 million. If your base will remain without change for three years, then a lifetime value of your client base is conceptually $3.5 million.
Think about it. As evidence that this concept may be the new wave, Columbia University professors Sun Gupta and Donald Lehmann, authors of the upcoming text "Managing Customers As Investments," contend "this approach differs from the traditional financial accounting approach in key aspects. First, unlike traditional finance, the approach builds from the bottom up by analyzing the value of a customer. Second, it treats marketing expenditures differently than traditional approaches. If you believe that customers are indeed assets that generate profits over the long run, then marketing expenditures to acquire and retain these customers should be treated as investments, not expenses".
A new wave mind-set
This lifetime "value of a customer" is more than a concept. It is a "mind-set." Its implementation requires a cultural change within the organization and needs to be led, supported and "lived" by senior management. Additionally, it must be supported by incentive systems to maximize value.
Is this thinking radical or is it radically simple? Either way, let's be realistic about growth in today's terms and let's not complicate the opportunity. Try out this concept at your next senior management meeting.
Assuming the marketing stars are aligned in the heavens properly, chances are you'll come away with at least one strategic idea for profit. And always remember, a mind stretched by an original new idea will never return to its former proportion.
Lou Lasday, an independent marketing adviser residing on Longboat Key, creates action-oriented strategic marketing initiatives for Gulf Coast emerging companies. A career direct response executive, he has been a general partner of a major national marketing communications firm and regional president of the American Marketing Association. Lasday can be reached at [email protected]
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