In the past few issues, we have discussed a new concept called Return on Customer. We have explained the philosophical side of ROC, which is that companies need to align operations and processes around generating organic growth. Rather than simply squeezing money from their customers to meet this quarter's profit, they need to think clearly about preserving and increasing their customers' long-term value as well. ROC represents a new "lens" through which to view a firm's success. With the ROC metric, you can measure the rate at which your firm creates or destroys customer value overall, including changes in lifetime value, too. We've even pitched Wall Street analysts to adopt this point of view.

But let's look at the Return On Customer lens in a little more detail.

ROC allows a company to calculate different rates of value creation for different groups of customers, or even for individual customers. Understanding which groups or categories of customers can produce the most value will allow you to be more efficient in prioritizing not just your marketing and sales, but also your research and development, production, distribution, hiring, training and other key activities.

Maximum value creation requires a firm to engage its customers in customer-specific actions—relationships. It's simple to see why. Start by visualizing the firm as a portfolio of customers, with each customer producing value in its own way at its own pace. It ought to be obvious that to maximize a company's overall Return On Customer you need to treat different customers differently. You would do this for the same reason that you can maximize your overall ROI on a portfolio of securities by treating different securities differently—you know, bulking up on the utilities, easing off on the high-tech, adjusting your fixed incomes, and so forth. In the same way, your firm maximizes its overall ROC when each individual customer produces the maximum ROC.

But treating different customers differently requires a firm to manage individual customer relationships. In fact, treating different customers differently is probably the most direct and economical way to define customer relationship management.

You can use the ROC lens to zoom in on effective customer strategy, or you can use it to examine them more closely. Let's also keep in mind that this is not just a numbers game. The solid, long-term customer strategy espoused within ROC can provide a competitive advantage that can easily translate not only into higher earnings, but into a higher price/earnings ratio for a company's stock.

Return on customer groups
A recent Fortune article pointed out that customer-centric firms such as Dell, Royal Bank of Canada and Best Buy concentrate on raising their "returns on specific customer segments." According to Fortune, this results in a "re-rating" of a company's P/E ratio, as Wall Street "decides that the company can sustain [its] profit growth for years into the future." The Fortune piece on July 12 of this year says of Dell, RBOC and Best Buy: "They've all been knockout performers for shareholders for the same reason: Each has truly put customers at the center of its business. And we mean truly—not in the golly-aren't-customers-great way that most companies have hyped for years, but rather in a way that transforms the entire business."

Best Buy's approach is exemplary. The company trained its store-level employees to recognize and think about the different needs of five types of highly valuable customers, encouraging them to proactively satisfy them. The five groups were: affluent professionals; focused, active, younger males; family men; busy suburban moms; and small business customers. After a successful pilot project involving 32 stores, the company is rolling its customer-centricity initiative out to an additional 110 stores, and this summer, Best Buy forecasted a 15-percent to 20-percent earnings increase for 2005.

Will such an intensive and cutting-edge strategy get Wall Street's attention? A UBS analyst's report praising Best Buy's initiative suggests that it should provide the firm with "stronger financial results" as the company refines its program, and "less cyclical results" as stable relationships with high-value customers counteract shifts in demand for consumer electronics.

Increasing a customer's overall value (remember: current profit and LTV) requires you to take the customer's point of view. While we do think it serves a company's financial self-interest to treat customers with respect, and to reward managers who think of them as long-term assets, there is still a great deal a company can do even if it is not measuring the right financial quantities and not calculating its Return on Customer.

Increasing the value of your own enterprise, and acting in the interest of customers to increase the amount of value they get from you—that is your mission. ROC is just a useful quantitative lens for viewing the results of your mission accurately, and for managing and reporting it responsibly and effectively. Return On Customer can drive that mission home to your own organization, teaching everyone how to make daily decisions that not only serve customers well, but also create genuine, long-term value for the business.