What's the difference between ROI and ROC?
But customers are, quite literally, scarcer than money. If you have a customer you can almost always get the capital you need to serve him. On the other hand, even when you have money, you can¹t always get customers. There are only a limited number of customers, and a business needs to create the most value possible from each one. ROI measures the efficiency with which a business creates value from the capital available, while ROC measures the efficiency with which it creates value from the customers available.
To take a simple example, suppose a company is considering two treatments for its customers, to improve their LTV. Treatment A is a voucher that improves LTV and also returns a profit to the business. That is, every time a customer accepts this offer, the firm not only increases that customer¹s LTV, but also earns more money than the voucher cost. It is a self-liquidating promotion. Treatment B generates a higher LTV increase, but incurs a cost on execution. The decision-maker who treats capital as the scarce resource thinks Treatment A is better because it is completely self-liquidating. He reasons that all he needs to do to create more value with A than with B is to run A over and over and over again creating value every time, at no cost to the firm. But the manager who recognizes that customers are the scarce resource knows it is impossible to run any treatment ³over and over² again, because customers are limited in number.
His task is to create the most value with the customers available. He will probably choose Treatment B. Return on Customer is not a magic formula; it is simply a calculation based on the premise that customers are your scarcest value-creating resource. Acknowledging this fact will allow you to balance your actions so as to create a more solid and robust business‹one that not only returns current earnings, but is more likely to continue as a valuable enterprise long into the future.
posted by 1to1 Gurus at 5:51 PM
9 Comments:
//But customers are, quite literally, scarcer than money//
Very true indeed. The art & science of retaining customers and providing continuous value to customers is the most scary thing for any marketer. It's indeed a herculian task to generate a value constantly for the customer, so the customer is coming back to us. As a reader, i am having an eye on your books continuously. Good to see that now, you had a look at "Return on Customers". Do you have a indian edition of this book available?
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Hi. I want to mention 3 things.
First, I find it very true the saying "customers are scarce". Nevertheless, I read an article at http://www.exhibitoronline.com/corpevent/article.asp?ID=839 where Mrs. Rogers says that a company risks "using up" customers. Mrs. Rogers gives a nice example about making 6 campaigns in a year to the same customers. She shows there how could we "use up" the scare ressource, that is, our customers. Nevertheless, I have this question. In CRM literature, it is widely mentioned that one should try to cross-sell, or in other words, try to sell and sell to the same customers. Does this objective of cross-selling preached by CRM go against Mrs. Rogers' idea that companies should not "use up" customers?
Second, what is LTV? The example at this article looks nice but without knowing exactly what is LTV, it's difficult to understand. I searched for its definition, but all I found was stuff about houses, loans, etc and I couldn't match LTV to the example.
Finally, I haven't been able to understand who writes this blog. Is it Mrs. Rogers? Is it Mr. Peppers? Is it someone that works for both of them? Is it someone that works for 1to1?
Thanks,
Rafael Olarte
Bogota, Colombia
Oops, I just figured out that LTV is lifetime value.
Rafael Olarte
The suggestion that there are only a limited number of customers is a fallacy, similar to the "lump of labour" fallacy that suggests there is only so much work.
The reality is that a company's actions and that of its competitors will change the number of customers in the market and their willingness to spend money on the company's products, services and experiences.
Customers are not a zero sum game.
Graham Hill
Independent CRM Consultant
Graham:
Thanks for sharing your very insightful ideas with us.
In economics, the "lump of labour fallacy" is based on the idea that the amount of work to be distributed is limited. If you subscribe to this idea, you believe there is only a fixed "lump" of labour to be distributed among workers. If this were true -- if there really were only this single, unchangeable amount of labor -- then to give work to one person we would have to take it from another. But the argument is not true. If a government passed a law to cut everyone's work week by 10 percent, for example, it would not result in lower unemployment rates. It would not improve the economic conditions of a society at all. Among other things, it would fuel inflation, cause economic disruption, and probably reduce individual productivity rates as well. Therefore, there is not a fixed lump of labor to be distributed at all. That's why they call it a fallacy.
However, "lump of labour" is an interesting analogy for some of the arguments we make with the ROC idea. We would use it in precisely the reverse way. We would say that while the number of customers is limited (as is the number of laborers), the amount of business any single customer or prospective customer is likely to yield is not fixed at all. Therefore, for the same reason that a labour economist would want to maximize productivity, which is the efficiency with which any single worker creates output, a business should want to maximize ROC, which is the efficiency with which any single customer creates value for the business.
It is true, we agree, that the actions of a firm and its competitors do change the number of customers in a market along with their willingness to spend. But ultimately, even in a large market, there will only be so many customers, maximum. There are a finite number of households with identifiable addresses within driving distance of any retail operation. There are only so many people who can afford an S-class Mercedes. There are only so many companies on the entire planet that need to use diamond-based drill bits. There are lots of mouths to feed, but many of those mouths just will not drink a beer, eat tomatoes, or use anything except real maple syrup, no matter what. To compete intelligently companies will focus on the customers, or households, or clients who are ready, willing, and able to exchange value with us. Is it difficult to figure out what that finite number -- that scarcity -- is? Sure. But not impossible, for nearly every industry. And the fact that it's difficult to know the real limitations of the market doesn't mean that the market is unlimited.
Now, at the enterprise level it would be meaningless to try to measure and maximize ROC unless it was applied to the entire current and future customer base. Our book has several sections dedicated to thinking through how a prospective customer could actually be valued, today -- even before any business has been done with that customer (see pp. 68-69 and 232-233 in the US edition, or pp. 78-80 and 249-250 in the UK edition). When a business takes an action that successfully moves a non-customer to become a customer, the firm's customer equity increases, and if the cost of the action is less than the amount of new customer equity it generates, then it will have a positive ROC.
May be in books, bu in rl, that treatment fails because of the simple facts:
- your year end targets are high an you need to profit immediately.
- customer behavious changes rapidly, especially in emerging markets. Your seeds may rot in long run.
- no manager (if now personally owning the company) will simply choose to invest in long run because no one can guarantee that he will be in that company for x years. (let x be > 3). instead, if he chooses B, the new lucky ..astard will benefit from all, after he is being replaced because of the profit he couldnt make.
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