Accounting for customers
This post originally appeared on LinkedIn.
Lucy Y., an accountant, responded to my recent post about “bad profits” with the comment that her profession is sometimes lured by the numbers into seeing “just a part of the story.”
I think that’s true. Everybody knows that customers are the ultimate source of a company’s value, the font of its future earnings. But accounting standards are far more developed for valuing other assets like factories and equipment. By contrast, customer relationships are considered an “intangible asset.” And they’re typically not a standard line item in quarterly earnings announcements.
As a result, very few companies have developed a rigorous gauge for assessing the worth of individual customers.
And yet, unlike property, plant and equipment values, the value of your customers can change rapidly in today’s social media world. Customers tweet and retweet about their experiences, and firestorms of online criticism or negative reviews can overwhelm carefully crafted advertising or public-relations efforts.
If a hard asset somehow becomes impaired, a company is typically required to reflect the asset’s lower value on its books. If a lot of customers suddenly decide they hate doing business with you, they too are an impaired asset, but by the time that shows up on your financial statements (in the form of falling revenue), it may be too late.
In The Ultimate Question 2.0, my colleague Rob Markey and I cited a number of companies that track customer attitudes and actions with the same care they devote to financial measures. Using the Net Promoter system, those companies rigorously link customer feedback to business outcomes. As a result, they came up with new criteria for investment decisions.
Charles “Chuck” Schwab put then-CFO Chris Dodds in charge of Schwab’s Net Promoter effort to make sure that the analytics were rigorous enough to be reported to shareholders. Lanham Napier, the CEO and former CFO of Rackspace, reads customer survey data every day. And a growing number of companies regularly report customer loyalty figures to their investors.
Of course, many CFOs and Wall Street analysts still focus on easily quantifiable numbers, such as the cost to acquire a customer. Yet those measurements drive behavior: Bring in lots of new customers on the cheap, and you’ll likely end up with higher churn and higher costs to service those customers.
That’s why I’m so glad my post made an impression on an accountant. In the hunt for incremental revenue, the temptation to resort to bad profits—actions that hurt customer relationships for the sake of short-term gain—often becomes overwhelming. But CFOs and accountants who have quantified and understand the economic impact of creating promoters (or detractors) are in the best position to avoid bad profits and defend long-term investments in the company’s most important asset—loyal customers.