Customer Capital. How customers drive business results.

An introduction to Customer Capital by Peter Fisk

The Marketing Society’s FMCG Business LeadersEvent chaired by Andrew MarsdenSponsored by Cap Gemini22 June 2005

“Business requires marketers to be more accountable, collaborative and commercial

… and develop a coherent framework for measurement and reporting:

• Develop “customer capital” as a suite of customer-based metrics

• Use the changes to reporting and OFRs to promote marketing to all company directors

• Engage investors in a better understanding of marketing and how it drives the business”

The Marketing Society’s “Manifesto for Marketing”

Customer Capital is an emerging concept developed in partnership by the marketing community for businesses and agencies.

Customers (consumers)are the key drivers of

business success

Customers are the scarcest resource in business today

• Attracting the best customers

• Capturing a premium for brands

• Gaining their loyalty and advocacy

1 2 3 4 5 6 71 2 3 4 5 6 71 2 3 4 5 6 71 2 3 4 5 6 7

Average length of customerrelationship (in years)

Tell others

Pay more

Cost less

Stay longer

Buy more

Business performanceis ultimately about creating

“shareholder value”

97% of CEOs say that creating long-term shareholder value is their primary objective

• Long-term share growth and dividends

• Externally, the perceived future worth

• Internally, the sum of future cashflows

Future

£

Future

£

Today Future

EconomicProfit $

“Economic value” is the sumof likely future streams of

economic profits

+1 +2 +3 +4Future

£

Future

£

Today Future

EconomicProfit $

“Economic value” is the sumof likely future streams of

economic profits

+1 +2 +3 +4

What drives the market value of a business?

Shareholder valueis increasingly due to“intangible assets”

78% of the Fortune 500, and 72% of FTSE 350, and 35% of all listed companies worldwide are intangible

• FMCG 58% (USA 88%, UK 81%, Japan 38%, Germany 71%)

• Other consumables 26% (USA 47%, UK 48%, Japan 15%, Germany 21%)

• Communications 58% (US 81%, UK 69%, Japan 41%, Germany 71%)

• Utilities 16% (US 67%, UK 52%, Japan 15%, Germany 42%)

Tangible assets

Intangible assets

Market value

Book value

Source : Brand Finance “Invisible Business” Report 2005

Customers are thescarcest resource andmost valuable asset

Intangible assets range from patents and trademarks, talent and relationships. Edvinsson/Sveiby define 3 categories:

• Customer Capital

• Human Capital

• Structural Capital

New international accounting standards have provide new categories for the reporting of intangible assets, and new categories for post-purchase allocation.

Tangible assets

Goodwill

Technology assets

Contract assets

Marketing assets

Customer assets

Intangible assets

Source : iasb.org

How do we measure successful marketing performance?

Few companiesconnect customers

with shareholder value

Most marketing performance is not articulated in either the language of customer or shareholder

• Technical jargon

• Communications-biased

• Short term, tactical measures

• Spend matters more than results

AverageTSR

STRONG BRANDS

WEAK BRANDS

9.5 pptsdifferenceTSR

0%

+ 2.6%

- 6.9%

STRONG BRANDS

WEAK BRANDS

9.5 pptsdifferenceTSR

0%

+ 2.6%

- 6.9%

This results in adislocation between

marketing and business

Customers and brands, marketing and innovation should be top of the boardroom agenda, driving direction and focus

• Investment rather than cost

• Long-term rather than short-term

• Whole business rather than functional

Aligning customer passion with business results

Aligning customer strategy with business results

Aligning customer performance with business results

We need a simple,inclusive language tofocus on what matters

We need to better articulate the importance and impact of marketing investments, and customer activities

• Connecting customers and shareholders

• Balancing short-term and long-term

• Focusing on what matters most

Sales revenue

Customerawareness/reach

Customerpreference

Price andshare of wallet

Sales growth

Customerretention/loyalty

Innovatingnew products

Buildingthe brand

Reduced costof capital

Operationalefficiencies

Operatingprofits

Futurecashflows

Shareholdervalue

Plus other factors

Plus other factors

Plus other factors

CustomerCapital

1. Customer Metrics

A basket of customer-based measures relevant to your business, expressed in clear simple terms

2. Customer “Equity”

A weighted index of selected customer-based measures, similar to brand equity

3. Customer “Valuation”

The customer portion of likely future cashflows to the business, similar to brand value.

Customer ReachWe currently reach 90% of the UK population.This is more than our nearest competitor at 79%

Customer Preference45% of our customers say they prefer us.60% of existing customers intend to use us next time

Customer Satisfaction27% of our customers say that they are very satisfied.45% say they are satisfied to some extent.

Customer VolumeWe currently have 12.2m customers.This has grown by 12% over the last year.

Customer ShareWe currently have 33% of the UK market.

Customer YieldWe generate £365 per customersThis is 45% higher than the market average

Customer Contracts40% of customers are on long-term contracts of > 2 years

Customer Retention67% of our customers have stayed for over one yearWe seek to increase this retention rate to 80% in the next 3 years

Customer Loyalty60% of existing customers intend to use us next time12% of customers say they would recommend us

Customer GrowthWe expect to grow customer numbers by 15% for next 3 years. The UK market will grow at 7% for next 3 years

Customer Innovation26% of our revenues come for services released in last year. We expect 12% of next years revenues to come from new products

Tactical marketing costsWe spent £120m on sales promotions and discounts

RevenuesWe generated £2.1b in revenuesThis is 12% increase on the previous year

Operating Profit We generated £254m operating profitThis is 45% increase on the previous year.

Strategic marketing investmentsWe spent £180m on marketing costs relating to brand and relationships

Intangible AssetsWe calculate that its brand, consumer and distributive relationships are worth £4.2bn

Business ValueWe project that profits will grow at 12-15% each year over the next five years (producing an intrinsic value of £xbn)

1. Customer Metrics.A basket of measures

relevant to your business

Selecting the most important metrics.Articulating them in customer terms.

Custom

er Preference

Cus

tom

er A

dvoc

acy

Cus

tom

er R

eten

tion

Customer Satisfaction

Cus

tom

er V

olum

es

2. Customer Equity.A weighted index of thekey customer metrics

Customeradvocacy

CustomerPrice premium

Customersatisfaction

Customer reach

Customerpreference

Customerequity

Selecting the most important metrics.Weighting them as an index

3. Customer Valuation. The “customer” portion of

future cashflows

Businessvalue

Customer“value”

2006 2007 2008 2009 2010 Future

Calculating customer contribution to futurecashflows, discounted to present value

“A compelling place to work, shop and invest”

A simpler and morestrategic focus for

business performance

Customer Capital focuses the business on how it creates rather than just counts its future cashflows

• Customer orientation – making customer focus matter to commercial success, enabling better delivering of promises into reality.

• Forwards orientation – lead indicator of business results, articulating the value of a long-term investment in brands, relationships and innovation

• Investor orientation – the foundation of your new OFR (the Operating and Financial Review within your annual report) and investor relations

Source : frc.org.uk

A more compellingand collaborative

language for marketing

Customer Capital articulates the significant but often unrecognised value of marketing in the more engaging and indisputable language of customers

• Engages directors – its hard to argue with a customer-based logic

• Engages business – operational areas can all share in customer goals

• Engages people – a more positive reason to come to work everyday

Connecting customers and shareholders, passion and profits

Where do you startin your business?

What should you do to embrace the ideas of “Customer Capital” in your business?

How will it help you make a better case for strategic investment, engage people more, and deliver better short and long-term results?

• Improve what you do now.

How could they be better articulated in customer-based language, or adjusted to reflect customer drivers of business results?

• Focus on your value drivers.

Evaluate which activities have most impact on your long-term business value (a complex but fairly quick task), and refocus activities and metrics on the prioritised value drivers.

• Start making it real.

Embrace the appropriate customer-based metrics in your marketing scorecards, boardroom reports, budget submissions, investor relations and as the focus of your directors’ next OFR.

How can we worktogether to do it?

How do we together move the “Customer Capital” concept forwards?

What should we do next as a marketing community, to further develop, test and apply the ideas practically for companies and agencies?

• Find “test” partners.

Would you be interested in working with us to pilot the concept in your company, and further develop it?

• Share best practices.

Investigate the best examples of customer-based metrics and management currently being used practically inside companies

• Promote the concept.

The IPA and Marketing Society will continue to promote awareness of the concept in the business and marketing communities, development and practical adoption.

For more information contact Janet Hull at janet@ipa.co.uk

customercapital.org

Peter Fisk is a highly experienced marketer. He spent many years working for the likes of British Airways and American Express, Coca Cola and Microsoft. He was the CEO of the world’s largest professional marketing organisation, the Chartered Institute of Marketing, and for almost 10 years led the global marketing practice of PA Consulting. He is currently Managing Director of Brand Finance, the brand strategy and valuation firm.

Peter’s new book Marketing Genius will be published in September 2005, and describes why, in today’s complex markets, a more intelligent and more creative approach to marketing can deliver extraordinary results. He recently co-authored The Marketing Society’s Manifesto for Marketing, and led the development of Customer Capital in response to the new OFR business reporting requirements.

peterfisk@peterfisk.comwww.MarketingGeniusLIVE.com