Managing Customers as Investments: The Strategic Value of Customers in the Long Run

Ultimately a business is worth only as much as the value of its customers. Sunil Gupta, and Donald Lehman, both Columbia Business School Professors of Business, present a practical view of marketing that weaves both its financial and customer aspects. The concept of lifetime value of a customer is presented in a straightforward way. The information is useful to anyone charged with improving financial accountability and managing ROI. Although the concept of customer value is not new, the two professors argue it is better to be "vaguely right, than precisely wrong" when getting started. The book shows how to use publicly available information and a simple formula to estimate the lifetime value of a customer for a publicly traded firm. Unlike the internet age, the two professors show that for most firms, the lifetime value of a customer rarely exceeds 4.5 times his or her annual margin. By the time you finish this book you will think of customers as assets and be convinced that expenditures directly related to acquiring and maintaining them be treated accordingly.

Ever since The Loyalty Effect was published, some companies have been reorienting their focus to gain more loyal customers and to retain them longer. In many cases, this potentially valuable focus has been diluted by an overestimation of the value of a long-term customer. This temptation was magnified during the dot-com boom when spending money got you more money to spend. But in today's leaner times, marketing and acquisitions to add customers have to pay off. Managing Customers as Investments will provide common sense relief to miscalculations in many of these misdirected firms. In addition, those who have been daunted by calculation difficulties will welcome the rule of thumb suggestions in this book. Gupta and Lehmann look at how you can quantify a customer's value as an asset, what the present value of a customer is, how a customer-based strategy can help you avoid value-destroying customers and actions, how customer value contributes to enterprise value (stock and debt for the whole company), how to pursue customer-based plans and how the customer-based organization needs to be organized. I came away with four key lessons from this book: 1. It's a rare customer who is worth more than four times the annual contribution margin you earn; 2. Adding to prices and customer retention are much more valuable than other ways to add profits; 3. You need to avoid customers who cost you more than they are worth by doing enough work with customer-based costing to discover who they are; and 4. Optimizing customer profits requires a different organizational and data structure than most companies have now. The book has a number of quantitative examples in it which many readers will find to be valuable (as The Loyalty Effect was valuable for the same reason). The most revealing example is the work done at Harrah's to increase share of wallet among its gaming customers. For those who are quantitative, this book will be a snap (there's more advanced math in the back for those who want more). For the quantitatively challenged, give the book a try any way. You'll understand most of it.

The need for a company to be customer-oriented is today a widely accepted idea, not just by marketers but by all executives. By my count, in 2004 alone, there were at least 15 major books published on the importance of managing all organizations with customer focus. But that's easier said than done. Thankfully now, in 2005, a new book can help you close the gap between knowledge and results by using vocabulary, processes and metrics to drive a customer-centric strategy. It should be on the very top of your reading list. Managing Customers as Investments, by Columbia Business School marketing professors, Sunil Gupta and Donald Lehmann, and published by Wharton School Publishing, is practical and accessible. Rare among academics, the authors, who have published many papers in scholarly journals where complexity and precision are revered, have the ability and wisdom to make their subject simple, clear and useful to marketers in all industries. With examples and case studies, they make it easy to understand how to apply their models to your business. Read it and you will learn invaluable systems to demonstrate to your CEO and CFO that Marketing is the engine of the enterprise. Gupta and Lehmann argue that if customers are the primary source of cash flow for all organizations, Marketing must be managed in three dimensions: customer acquisition, customer profitability and customer retention. These are the three Cs of Marketing with financial consequences -- not to be confused with the three Cs of market analysis, including customer needs, company (core competencies) and competition, and very different from the traditional four Ps of marketing management, including product, price, promotion and place where the focus is purely on sales or market share. Indeed, customer acquisition, customer profitability and customer retention are significant parts of the CEO and CFO agenda because they are the dimensions that drive the entire business strategy. And, ultimately, managing Marketing with these three Cs as the focus will lead to a position of power in the executive suite. The authors show you how.

Understanding that a businesses customers are one of it's greatest assets is not a new or novel idea. After all these are the people that pay the bills. But how can you fairly asses what the true value of any one customer is? Is it all based on total revenue, profit margin or market share? Questions that are difficult to answer and not really a black and white issue. This book teaches the readers how to see the link between customer value and firm value. It also does a great job of showing you which aspects of customer management are the most critical. One of the rules they want you to look at is long term relationships and strategies and not just the short term fix. There were two great aspects of the book that made it one that can easily be used. First the authors made the decision to keep the approaches simple. You did not have to work through some multiple step process with NASU like calculations. The authors theory is that simple and intuitive concept can be implemented by almost all management thus insuring a better adoption rate. The second aspect I felt was valuable was that the book was full of real life examples. It was far easier to see how the process worked when you could relate to the examples provided. Overall I really enjoyed the book. It was informative, had great ideas and is one that can make a difference in any organization.