A surplus of capital around the world has sharpened the need for companies to concentrate on the scarcest productive resource they have -- not capital, but customers. Companies in every developed country today are awash in funds that go unused, adding to what incoming Fed Chairman Ben Bernanke called the "global saving glut."

According to a December study by management consultants A.T. Kearney, U.S. companies have reported accumulations in the last four years of more than $1 trillion in cash, and a cautious investor outlook could mean continued cash stockpiling. Global executives cite the need to improve their balance sheets, lingering fears of another economic downturn, shareholder pressures, and new interdependent business risks as leading reasons for having accumulated record stores of cash.

The simple fact is that while they may be awash in surplus capital, most companies face a much more problematic shortage of customers. It takes both capital and customers for an operating company to create genuine shareholder value. Investors measure their returns in terms of the efficiency with which money can be used to create value (return on investment), but the real metric that should guide corporate investment would be one that measures the efficiency with which customers can be used to create value.

Return on Customer^sm is that metric, and it produces different -- and more efficient -- decisions when it is employed by a company seeking to maximize shareholder value. Suppose you have two different marketing initiatives available to you and you want to decide which to pursue. The first initiative requires an investment of $10 per customer and generates $10 in net new value, for an overall ROI of 100 percent. The second costs $20 per customer, and generates $15 in net new value, so the ROI is only 75 percent. The ROI-maximizing company would choose the first initiative every time, because it has a higher ROI. But what if your company only had one customer? If this were the case, then the second initiative would generate $15 in value, while the first initiative would generate only $10, right? Now, would the answer be any different if you "only" had a thousand customers? Or 10 million?

This is in fact the situation that most businesses find themselves in today. They are cash rich and customer poor. What we mean by "cash rich" is not that they have a lot of cash on hand, or even that they generate a lot of cash in their business. All we are saying is that businesses today all have access to whatever cash they need to make good investments. There is a free and open market for obtaining extra capital and there is a lot of capital available, which has led to a saving glut. Any reasonably sound business with an opportunity to earn a 75 percent ROI on a marketing initiative could easily borrow money or sell stock to fund it, at a cost far below the expected ROI of the initiative.

However, there is no free and open market for extra customers. You can't go to the bank and simply withdraw the customers you need in order to create more shareholder value. You have to create whatever value you can from the customers and prospective customers available to you. Even if your market consists of a million, or a hundred million, customers and prospects -- it is still a finite number.

ROI vs ROC
What would a company do differently if it were measuring and maximizing its Return on Customer rather than its return on invested capital? For one thing, it would think more explicitly about the type of value its customers actually create. Readers of this newsletter know that customers create value in two ways: by buying things currently, and by changing currently their intention or likelihood of buying in the future. The economic effect of a change in the likelihood of future business can be thought of as a change in the customer's previously expected lifetime value, and such changes represent value gained or lost currently, even if the actual cash effects are not felt until later. The Return on Customer metric is designed to take account of both these types of value creation.

The problem most businesses have, and a key reason why businesses so often have an excessive and counter-productive concern for producing short-term results, is that they in general make little or no effort to measure the lifetime value changes that result from their actions. Very few businesspeople would disagree with the notion that customers should be thought of as financial assets for a business, but the logical extension of that argument is that when the value of such a financial asset changes, this change in value represents an income event. How you treat a customer today has a measurable effect on the value of that customer, as a financial asset.

Verizon Wireless
In some industries, the benefits of such forward thinking practices are immediately quantifiable, even without doing much sophisticated statistical modeling. During the period from 2002 through 2004, Verizon Wireless (a joint venture between Verizon and Vodafone) reported $13.7 billion in operating earnings. But it also reduced its monthly customer attrition rate from 2.6 percent to 1.3 percent, substantially increasing the lifetime values of its customers, and generating an additional $8 billion in customer equity.

In effect, the firm created a great deal more value for shareholders than was actually reflected in its financial statements. (To reduce customer churn, Verizon doubtless had to make some tradeoffs by investing in services and programs that cost money in the short run, while retaining more customers in the long run.) Overall, counting new customer acquisition as well as this increase in customer retention, Verizon Wireless generated an average annual ROC of roughly 70 percent during this period. To put this into perspective, this means that the company generated shareholder value every year roughly equal to two thirds of its actual value as an operating business at the beginning of that year.

Verizon Wireless's three-year surge in value creation was probably a one-time event for the company, because the more customer churn is reduced, the harder it becomes to reduce it further. But other wireless firms throughout the world face opportunities as rich as this and for the most part they have failed to take advantage of them. In fact, if anything, there is strong evidence that many mobile telecom companies are running in the opposite direction, chipping away at their customer equity as they compete fiercely to acquire new customers at any cost -- even when it means acquiring customers with lower lifetime values.

If you want your firm to be able to exploit the global saving glut, then start thinking more clearly about how to maximize the value created by your current and prospective customers. As the only source of revenue, customers and prospects represent the only genuine opportunity for any business to create more shareholder value, so be sure to make the most of this scarcest productive resource.