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What Customers Are Worth

Allison Hartsoe’s book — The Age of Customer Equity — looks at customer-based strategy. She highlights examples of firms successfully using customer centric strategy. The examples are interesting and there is much to learn from the discussions. I should note that this is not an academic book. The concepts are much looser than I would hope from an academic. Customer equity seemed to be related to current customers at one point (just after Figure I-1), but appears more inclusive at other points. (See my various grumpy comments about customer lifetime value (CLV) here and customer equity here). To her credit Hartsoe did note that you can’t subtract acquisition costs from CLV if you want to use it for a (too crude) upper bound on acquisition spend. Despite the conceptual looseness, her central point is a good one though. Listening to what managers say about what customers are worth is useful. There certainly are many neat comments to hear in her book.

What Customers Are Worth In The Financial Accounts

So what are customers worth in the financial accounts? Often not much at all. Financial accountants will tell you that the financial accounts don’t try and show what a firm is worth. That is completely true. Still, one challenge is that a lot of people don’t seem to have got that memo. So financial markets may pay a bit more attention to financial statements than perhaps they should. (Admittedly with little other reliable information available sometimes it is understandable that markets focus on whatever they can get, however imperfect).

Allison Hartsoe highlights a great example where the value of customers was not properly recognized. When Caesar’s, a casino formerly the darling of data analytics folks, went into bankruptcy it held major value in its customer lists.

The creditors found the value to be over $1 billion dollars. The value of Caesars’ customer data was higher than the value of anything else, including Caesars’ real estate holdings, or even its brand.

Harstoe, 2021

The point is that this value needs to be recognized. I’m not making any claims about how this would impact bankruptcy. I’m just saying that if markets rely on financial statements that undervalue customers they will undervalue firms with a lot of customers.

Real-World Challenges And Advice

Hartsoe highlights the problem that brand and customer perspectives often seem to fight each other for attention. This is a shame. Both views have uses. Indeed, sometimes both perspectives can be used in a single firm. (Although please do be very careful of double-counting the value created by marketing).

I was really interested in the interview with Peggy Winton. A key recommendation I would highlight is the idea that you should explain the full P&L (profit and loss statement) to all employees in the organization. I am amazed at how many people work in organizations where the numbers seem to be secret. The numbers should relate to your strategy. Is that secret too? In many organizations, the answer to that seems to be ‘yes the strategy everyone is working towards is secret’. No one really knows what the strategy is. Winton’s idea of involving all in the P&L (or I&E if you are in an organization that doesn’t use the term profit) is surely the right way to focus strategy. It should also likely motivate employees.

Strategy And The P&L

Demographic Versus Behavioral Data

Traditionally firms used demographic data, e.g., male, white, 50s. This is a bit crude for most uses. One interviewee, Greg Banbury, gave his thoughts which seemed to hit the nail on the head.

You’ve got to look at all this behavioral data. If you’ve got it, and if you don’t have it, then you need to find a way to get it because it really is the key…

Greg Banbury, quoted in Harstoe, 2021

Finding out what customers are worth is much easier if you focus on their behaviors that create value.

Read: Allison Hartsoe (2021) The Age of Customer Equity: Data-Driven Strategies to Build a Sustainable Company, Dataforge Press 

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