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What's the difference between ROI and ROC?

If we measure return on investment accurately, isn¹t that just as good as Return on Customer? In a word: no. ROI is based on the premise that money is your scarcest resource.

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.

How do I balance short and long term?

Some executives tell us that while ROC is a nice concept, how does it help a firm make a profit, today? It¹s important to remember that the Return on Customer argument does not imply that increases in lifetime values are any more important than cash. Far from it. LTV, by its very nature, is already a diminished version of cash, because it is based on discounted future cash flows. Nevertheless, short-term results are more important to some businesses than others. The right way to quantify the intensity of your company¹s preference for the short term is simply to raise your discount rate. The more important the short term is, or the more risky it is to wait for long-term results, the higher discount rate you should use. Our problem is that because they completely ignore long-term value creation (i.e., changes in LTV), most businesses are in effect using an unnaturally high discount rate some even use a rate greater than 100 percent.

How can I predict changes in customer lifetime value?

This is of course the crux of the ROC idea. To calculate the long-term customer value created by its actions, a firm must be capable of somehow predicting today that a customer lifetime value will increase or decrease. We¹ve identified four types of ³leading indicators² of changes in lifetime value-variables that can be measured today and indicate a likely change in the future behavior of a customer or customer group. Lifestyle changes include events like marriage, pregnancy, retirement, or divorce, which can obviously change a customer¹s future behavior. Then there are the drivers of a company¹s LTV equation itself‹customer-churn rate, repeat purchase frequency, and so forth. Third are behavioral cues. Customers who change their purchase patterns, frequency of contact, or their payment frequency are giving you a clue to their future behavior. The fourth leading indicator is attitude.
Attitudes precede behavior, so changes in customer satisfaction levels, willingness to recommend, or other such attitudes are all signals that communicate likely changes in the future behavior of customers.

Return On Customer

"Without Customers, You Don't Have a Business.
You Have a Hobby."

In their new book Return on Customer^sm, bestselling authors and renowned consultants Don Peppers and Martha Rogers, Ph.D. address today's most crucial business question: How do companies strike the right balance between maximizing current-period profits and building long-term enterprise value. The foundation of their findings is a customer-based value proposition that provides a practical and sound business metric to better manage your business – this quarter, this fiscal year, and for the foreseeable future.

Peppers and Rogers present a compelling case that long-term customer equity is an enterprise's single most valuable asset. In Return on Customer the authors provide a deceptively simple formula for measuring customer profitability and provide the tools for analyzing what the proper balance of customer attraction, retention, and in some cases loss, is for your company. Determining how best to create long-term customer value is central to any successful business strategy.

In addition to offering a unique growth strategy, Return on Customer can improve your company's everyday practices and provide a means to measure the results of those efforts. Peppers and Rogers offer insights from many of today's brightest business success stories to illustrate that understanding how individuals within your customer base differ in terms of needs and values, and that creating learning relationships along with other customer-focused efforts, has led Best Buy, Amazon.com, Southwest Airlines, and Costco to profitability.

Simply put: To maximize the value of what their customers do for them, these successful companies have placed maximum value on their customers. In turn, we can see that maximizing the value of the customer base is equal to maximizing the value of the enterprise.

Why Return on Customer^sm
After writing the successful and highly influential One to One book series, Don Peppers and Martha Rogers, Ph.D. had a somewhat radical idea. They started thinking about how customers can help businesses. They wanted to break away from previous theories and business strategies. In talking with many business leaders they realized that not everyone was thinking like they were. When they asked executives what the primary source of their revenue is, most answered that it is sales of their product. Too few realized that the ultimate source of their revenue is their customers—today and in the future. Don and Martha charged themselves with the mission to let executives know that every function across an enterprise, from hiring, training, accountability, etc. should revolve around their most valuable resource—customers.

Larry Kudlow, Host of CNBC's "Kudlow and Company," has offered highest praise for Return on Customer: "Finally! A business metric that can drive better management and a higher stock price. I predict soon you'll be hard pressed to find a company that isn't tracking ROC^sm."

Read more industry praise for Return on Customer^sm