Rob Markey at Bain has had an interesting career. He clearly has done a lot right. He is an advocate for the importance of marketing in the c-suite. As such it is welcome when he weighs in to support important ideas. In a 2020 piece in the Harvard Business Review he laid out a plan for stopping undervaluing customers through measurement.
Good But Not Great
Markey is probably best known for working with Fred Reichheld on NPS (the Net Promoter System/Score). This was a great example of a good basic idea that can be valuable. Still it was let down, at least a little, by over-hyping and lack of attention to detail. (See here for more on NPS). Maybe it is just because I basically agree with him but Markey’s ideas on customer value I don’t think are as overhyped. (There is no claim that this is the one number you need to know). Still there could be more attention to detail in an ideal world. (Honestly, I appreciate that when you are trying to popularize things you may always be accused of over simplifying. As such, readers may reasonably disagree with my concerns).
Markey’s basic point is the idea that customer value drives firm value. How then can we work out the value of a firm from its customers’ details?
One thing that can, and should, be done is companies sharing more details on their customer metrics. Already we can see information is being shared.
My team at Bain examined the SEC S-1 registrations filing of 309 companies that were preparing for public stock offerings in 2018. Nearly one-quarter of them included non-GAAP metrics such as active customer count, new customer acquired, purchases per customer, and revenue per new-customer cohort.Markey, 2020, page 45
Good news. This is very welcome and someone like Markey, with Bain behind him, is just the sort of person to push for more. Markey tells us that firms should disclose customer value, the total lifetime value of a company’s customer base.
[Companies] should disclose [customer value] in their quarterly and annual earnings releases in consistent formats so that investors can make informed judgments about company performance and how it compares with that of industry peers.Markey, 2020, page 45
Where can I sign up to support Markey?
Getting To the Challenges
Of course, stopping undervaluing customers through measurement requires technical challenges to be overcome. This is where, I worry, we need a bit more. Markey clearly includes the value expected to come from future customers in customer value. Basically, we have to estimate the CLV of customers who are not yet customers. You can see why an investor would want such a number but it is, to say the least, hard to provide. I think we should focus more on projecting current customers at least when we are reporting on ‘customers’. This might make the ask a bit more manageable/less controversial. I have nothing against adding extra separate detail on prospects. Clearly, investors can do their own projections too as they see fit. That said, I’d be happy to be wrong if Markey had a simple procedure. Yet I’m not sure he does.
He suggests ‘three new, auditable metrics would suffice in most instances’. (Markey, 2020, page 46) Basically gross and net new customers acquired, existing active customers and revenue from these groups. That really isn’t enough for the current base to my mind (but one can argue about that). It certainly isn’t enough to project future customers as he wants to do.
Future customers matter a lot to many firms. If so, and this seems likely, is Markey simply understating the problems in delivering what he aims to? Should we just get the simpler reporting task of focusing just on current customers done first? (I think so).
Stopping Undervaluing Customers Through Measurement: Customer Value Calculation
The key part of the piece is a schematic on how to calculate customer value. It is well laid out but it is quite confusing for something that is supposed to simplify. The challenge is that clearly discounting is implied, we are told that we see the ‘present value of existing customers’ and the ‘present value of future customers’. Still at no point is it obvious where discounting actually happens. Bain has an interactive version, here, which adds a little more detail. Still discounting is important to understanding customer valuation and you could easily miss that using Markey’s model.
I accept I may be being overly academic. Maybe the benefits of a simple piece outweigh the problems. Still, I worry that it is critical that we develop more discipline when we speak of customer valuation. We want accounting and finance people to think marketers are disciplined and have a clear view of customer value.
Stopping Undervaluing Customers Through Measurement: More Reporting
All that said, I don’t want to lose the main point. Customers are valuable. If we can gain more reporting I believe that will be good for customers, marketers, and firms so best wishes to Markey in this venture.
For more on CLV see here.
Read: Rob Markey (2020) Are You Undervaluing Your Customers? It’s time to start measuring and managing their worth, Harvard Business Review, January/February, 98 (1), pages 43-50