Special Report: Don Peppers on 'ROC'

2nd Mar 2005

Companies should be focusing more on return on customers (ROC) rather than return on investment (ROI) when putting together their customer management strategies.

That's the thinking from management guru Don Peppers, co-founder of the Peppers and Roger consultancy. Speaking at a Real Time marketing seminar hosted by SPSS in London this week, Peppers had a stark warning for delegates in the audience.

"Customers are your scarcest resources," he said. "You need to focus on the value created by each customer. The problem is that in a mature economy the customers are not as hungry as they once were because they already have everything. At the same time, companies are all the more hungry to sell to them. But products are increasingly commoditised and harder to differentiate.

"We've also seen a period of unprecedented productivity over the past ten years. We've seen costs go down, but this also means that margins have gone down as well. Prices are under pressure ut marketing costs are going up. The marketing department is spending more ut you're liking what's being done less."

Customer values change, he noted, over the lifetime of their contact with a company. "They generate current sales, but their buying intentions also change over time," he said. "In other words, their lifetime values go up and down. If a customer phones up a company to complain about something and hangs up the phone unsatisfied, then his or her lifetime value has diminished. You might as well have gone to the bank, taken out the money and thrown it away because your company value went down at that moment."

There is a need for a new metric for marketing, return on customer. "Companies don't attempt to report on how the value of customers went up or down during a particular period," he said. "ROC measures the true value of your scarcest resource. At maximum ROC, you are creating the most value from a particular customer. ROC is a spedometer for organic growth, the old fashioned way of growing, by adding customers. That's growth by acquiring profitable customers and keeping them, cross-selling to them, eliminating unprofitable customers."

But there are complications. "Any action you take is going t have a trade-off," warned Peppers. "You can acquire more customers through a promotional campaign, but you can end up spending more on acquiring a customer than the customer is actually worth. A carefully targeted campaign will increase the response rate, but the more you target the smaller the population will be in terms of a potential response. Maximising ROC is an optimisation problem. You need to balance increased profits against potential decreases in the lifetime value of the customers."

To illustrate his point, Peppers cites the example of two farmers. "Farming is an optimisation problem," he said. "A good farmer practices conservation. He invests in fertiliser, he rotates his crops and so his land remains productive for many years. A bad farmer plants his most profitable cash crop in the same place every year on all of his land. His early harvest are initially profitable, but the land burns out quickly. In farming, land is the scarce resource; in business it's the customer.

"In any given year a good farmer could make more money by imitating the bad one, but no good farmer would be so stupid, he knows he would be destroying his major asset. But how many people have been in the meeting during the fourth quarter when they realise they're not going to make the fourth quarter numbers, so they stop the call centre upgrade, or cancel the marketing campaign. They ditch current costs and put aside activities that don't generate current income. Companies drive up their economic value to meet Wall Street expectations."

Communication is the key. "The more you communicate with customers, the stronger the relationship gets," explained Peppers. "But beyond a certain point, that relationship gets weaker. A goldfish swimming around in a bowl never gets bored because it has no memory. A lot of companies operate to the goldfish principle: they focus on transactions and have no customer memory."

Peppers recalled the example of a colleague who checked into a hotel and called down for an early morning call. He was offered a free newspaper that he was told was an offer for special customers. He asked for a different paper instead. He was offered coffee, but asked for tea. All was delivered in the morning. The next night he called down again and had the same conversation with the same hotel person. There was no customer memory. "Maximising ROC means treating different customers differently," he noted.

Peppers concluded on what he called his heretical thought. "Customers don't want choice," he declared. "They want what they want. They will choose if they have to but they really don't want to. If you want a new couch to go with the rest of your decor, do you really want to go to a warehouse with thousands of sofas in it and have to choose? Wouldn't it be better if someone came to your home and offered you four or five choices that matched your other furniture. Customers want you to know what it is that they want and to offer it to them. If you can anticipate the customers wants, then you can reduce the customer's time and effort.

"That strengthens the relationship with the company. If you have three Lego customers, you might have one who is role player, one who is a constructor who sticks to the plans, and one who wouldn't dream of following the instructions. If you know this, you can sell them different things. That solves part of the differentiation problem."

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By AnonymousUser
09th Mar 2005 08:40

What Don Peppers has to say makes a lot of a point.

Good customers are a scarce resource, in that there is a finite supply of them and plenty of competitors trying to supply them with pretty much the same things that you are.

They are also people, which means that they do not generally make decisions based upon carefully thought through economic optimisation, but rather on 'feelings' about your company, its products and what the customer experience will be like.

And many companies are somewhat short-sighted in their handling of people, sorry, I mean customers, preferring to market what the companies want to sell, to all of them, right now, rather than offer the right product, to the right customers, at the right time.

All this is (un)common sense.

But where I have the gravest doubts is in his suggestion that companies have the knowledge, skills and experience to be able to OPTIMISE customer value. And to manage that in any meaningful way.

As we all recognise, customer valuation is as much art as science. The number-crunching science is the easy bit. The art comes in knowing enough about customer motivations, competitor activities and market trends to be able to look far enough into the future to calculate a useful customer valuation. This requires much more than just the transactional data that the majority of companies have at their disposal.

And in knowing how you can use your existing customer-management capabilities most effectively to gain access to this value, for example, by offering a better customer experience.

Optimisation hardly comes into it when there are so many unanswered questions about your customers' behaviour and your company's capabilities to influence that behaviour. Unless you are Capital One, you are probably much better off concentrating on what LBS professor Patrick Barwise calls being 'simply better' at doing customer-management basics. At remembering the customer information you already know, for example, as Don Peppers quite rightly points out.

Return on Customer. Hmmh. Nice idea, but I don't think so, at least, not yet.

Graham Hill
Independent CRM Consultant
CRMGuru Customer Value Management Guru

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By vdimitroff
14th Jul 2005 15:38

The trend, the positive direction is becoming quite clear, and optimisation (always a prime business objective) will have even more meaning in the near future.

I agree with Graham Hill that not all companies have equal capabilities in that area, and very few have the 'right' capabilities. It is a journey and the voyagers are scattered on the route: some closer to destination, some far behind. The statistically minded will probably see a bell-curve, others probably a Pareto effect...

Why should one expect everyone to be in the final sprint or crossing the finish line simultaneously? The fact that many are 'not there' yet does not, in any way, invalidate the ROC concept. Even those in much earlier stages, the companies trying to be 'simply better' in the basics, can benefit from understanding the concept. They are, in fact, optimising - at their appropriate level of maturity - the value flow to- and from the customer.

Then there are the few leaders, who continue to build advanced capabilities, who understand customer value in complex and predictive ways, who have put in place mechanisms to capture or acquire that elusive data that would allow them to understand the fuzzier, softer siders of customer behaviour beyond transactions.

I believe their success should be highlighted as best practice to follow, rather than sowing doubts and discouraging customer-centric business ambitions.

Or is it doubt for the sake of doubt? To 'out-guru' the guru? In such case, I've done my bit - someone else's turn now, to trump yours truly.

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