customer capital by peter fisk
DESCRIPTION
The value of customers = the value of business ... Email: [email protected] Website: www.thegeniusworks.comTRANSCRIPT
Customer Capital. How customers drive business results.
An introduction to Customer Capital by Peter Fisk
The Marketing Society’s FMCG Business LeadersEvent chaired by Andrew MarsdenSponsored by Cap Gemini22 June 2005
“Business requires marketers to be more accountable, collaborative and commercial
… and develop a coherent framework for measurement and reporting:
• Develop “customer capital” as a suite of customer-based metrics
• Use the changes to reporting and OFRs to promote marketing to all company directors
• Engage investors in a better understanding of marketing and how it drives the business”
The Marketing Society’s “Manifesto for Marketing”
Customer Capital is an emerging concept developed in partnership by the marketing community for businesses and agencies.
Customers (consumers)are the key drivers of
business success
Customers are the scarcest resource in business today
• Attracting the best customers
• Capturing a premium for brands
• Gaining their loyalty and advocacy
1 2 3 4 5 6 71 2 3 4 5 6 71 2 3 4 5 6 71 2 3 4 5 6 7
Average length of customerrelationship (in years)
Tell others
Pay more
Cost less
Stay longer
Buy more
Business performanceis ultimately about creating
“shareholder value”
97% of CEOs say that creating long-term shareholder value is their primary objective
• Long-term share growth and dividends
• Externally, the perceived future worth
• Internally, the sum of future cashflows
Future
£
Future
£
Today Future
EconomicProfit $
“Economic value” is the sumof likely future streams of
economic profits
+1 +2 +3 +4Future
£
Future
£
Today Future
EconomicProfit $
“Economic value” is the sumof likely future streams of
economic profits
+1 +2 +3 +4
What drives the market value of a business?
Shareholder valueis increasingly due to“intangible assets”
78% of the Fortune 500, and 72% of FTSE 350, and 35% of all listed companies worldwide are intangible
• FMCG 58% (USA 88%, UK 81%, Japan 38%, Germany 71%)
• Other consumables 26% (USA 47%, UK 48%, Japan 15%, Germany 21%)
• Communications 58% (US 81%, UK 69%, Japan 41%, Germany 71%)
• Utilities 16% (US 67%, UK 52%, Japan 15%, Germany 42%)
Tangible assets
Intangible assets
Market value
Book value
Source : Brand Finance “Invisible Business” Report 2005
Customers are thescarcest resource andmost valuable asset
Intangible assets range from patents and trademarks, talent and relationships. Edvinsson/Sveiby define 3 categories:
• Customer Capital
• Human Capital
• Structural Capital
New international accounting standards have provide new categories for the reporting of intangible assets, and new categories for post-purchase allocation.
Tangible assets
Goodwill
Technology assets
Contract assets
Marketing assets
Customer assets
Intangible assets
Source : iasb.org
How do we measure successful marketing performance?
Few companiesconnect customers
with shareholder value
Most marketing performance is not articulated in either the language of customer or shareholder
• Technical jargon
• Communications-biased
• Short term, tactical measures
• Spend matters more than results
AverageTSR
STRONG BRANDS
WEAK BRANDS
9.5 pptsdifferenceTSR
0%
+ 2.6%
- 6.9%
STRONG BRANDS
WEAK BRANDS
9.5 pptsdifferenceTSR
0%
+ 2.6%
- 6.9%
This results in adislocation between
marketing and business
Customers and brands, marketing and innovation should be top of the boardroom agenda, driving direction and focus
• Investment rather than cost
• Long-term rather than short-term
• Whole business rather than functional
Aligning customer passion with business results
Aligning customer strategy with business results
Aligning customer performance with business results
We need a simple,inclusive language tofocus on what matters
We need to better articulate the importance and impact of marketing investments, and customer activities
• Connecting customers and shareholders
• Balancing short-term and long-term
• Focusing on what matters most
Sales revenue
Customerawareness/reach
Customerpreference
Price andshare of wallet
Sales growth
Customerretention/loyalty
Innovatingnew products
Buildingthe brand
Reduced costof capital
Operationalefficiencies
Operatingprofits
Futurecashflows
Shareholdervalue
Plus other factors
Plus other factors
Plus other factors
CustomerCapital
1. Customer Metrics
A basket of customer-based measures relevant to your business, expressed in clear simple terms
2. Customer “Equity”
A weighted index of selected customer-based measures, similar to brand equity
3. Customer “Valuation”
The customer portion of likely future cashflows to the business, similar to brand value.
Customer ReachWe currently reach 90% of the UK population.This is more than our nearest competitor at 79%
Customer Preference45% of our customers say they prefer us.60% of existing customers intend to use us next time
Customer Satisfaction27% of our customers say that they are very satisfied.45% say they are satisfied to some extent.
Customer VolumeWe currently have 12.2m customers.This has grown by 12% over the last year.
Customer ShareWe currently have 33% of the UK market.
Customer YieldWe generate £365 per customersThis is 45% higher than the market average
Customer Contracts40% of customers are on long-term contracts of > 2 years
Customer Retention67% of our customers have stayed for over one yearWe seek to increase this retention rate to 80% in the next 3 years
Customer Loyalty60% of existing customers intend to use us next time12% of customers say they would recommend us
Customer GrowthWe expect to grow customer numbers by 15% for next 3 years. The UK market will grow at 7% for next 3 years
Customer Innovation26% of our revenues come for services released in last year. We expect 12% of next years revenues to come from new products
Tactical marketing costsWe spent £120m on sales promotions and discounts
RevenuesWe generated £2.1b in revenuesThis is 12% increase on the previous year
Operating Profit We generated £254m operating profitThis is 45% increase on the previous year.
Strategic marketing investmentsWe spent £180m on marketing costs relating to brand and relationships
Intangible AssetsWe calculate that its brand, consumer and distributive relationships are worth £4.2bn
Business ValueWe project that profits will grow at 12-15% each year over the next five years (producing an intrinsic value of £xbn)
1. Customer Metrics.A basket of measures
relevant to your business
Selecting the most important metrics.Articulating them in customer terms.
Custom
er Preference
Cus
tom
er A
dvoc
acy
Cus
tom
er R
eten
tion
Customer Satisfaction
Cus
tom
er V
olum
es
2. Customer Equity.A weighted index of thekey customer metrics
Customeradvocacy
CustomerPrice premium
Customersatisfaction
Customer reach
Customerpreference
Customerequity
Selecting the most important metrics.Weighting them as an index
3. Customer Valuation. The “customer” portion of
future cashflows
Businessvalue
Customer“value”
2006 2007 2008 2009 2010 Future
Calculating customer contribution to futurecashflows, discounted to present value
“A compelling place to work, shop and invest”
A simpler and morestrategic focus for
business performance
Customer Capital focuses the business on how it creates rather than just counts its future cashflows
• Customer orientation – making customer focus matter to commercial success, enabling better delivering of promises into reality.
• Forwards orientation – lead indicator of business results, articulating the value of a long-term investment in brands, relationships and innovation
• Investor orientation – the foundation of your new OFR (the Operating and Financial Review within your annual report) and investor relations
Source : frc.org.uk
A more compellingand collaborative
language for marketing
Customer Capital articulates the significant but often unrecognised value of marketing in the more engaging and indisputable language of customers
• Engages directors – its hard to argue with a customer-based logic
• Engages business – operational areas can all share in customer goals
• Engages people – a more positive reason to come to work everyday
Connecting customers and shareholders, passion and profits
Where do you startin your business?
What should you do to embrace the ideas of “Customer Capital” in your business?
How will it help you make a better case for strategic investment, engage people more, and deliver better short and long-term results?
• Improve what you do now.
How could they be better articulated in customer-based language, or adjusted to reflect customer drivers of business results?
• Focus on your value drivers.
Evaluate which activities have most impact on your long-term business value (a complex but fairly quick task), and refocus activities and metrics on the prioritised value drivers.
• Start making it real.
Embrace the appropriate customer-based metrics in your marketing scorecards, boardroom reports, budget submissions, investor relations and as the focus of your directors’ next OFR.
How can we worktogether to do it?
How do we together move the “Customer Capital” concept forwards?
What should we do next as a marketing community, to further develop, test and apply the ideas practically for companies and agencies?
• Find “test” partners.
Would you be interested in working with us to pilot the concept in your company, and further develop it?
• Share best practices.
Investigate the best examples of customer-based metrics and management currently being used practically inside companies
• Promote the concept.
The IPA and Marketing Society will continue to promote awareness of the concept in the business and marketing communities, development and practical adoption.
For more information contact Janet Hull at [email protected]
customercapital.org
Peter Fisk is a highly experienced marketer. He spent many years working for the likes of British Airways and American Express, Coca Cola and Microsoft. He was the CEO of the world’s largest professional marketing organisation, the Chartered Institute of Marketing, and for almost 10 years led the global marketing practice of PA Consulting. He is currently Managing Director of Brand Finance, the brand strategy and valuation firm.
Peter’s new book Marketing Genius will be published in September 2005, and describes why, in today’s complex markets, a more intelligent and more creative approach to marketing can deliver extraordinary results. He recently co-authored The Marketing Society’s Manifesto for Marketing, and led the development of Customer Capital in response to the new OFR business reporting requirements.