Too often, we see companies focusing their investments on quick payback periods – implementing projects and initiatives that in the short term may yield a quick ROI by saving the company money or driving short-term sales – but in the long run, yield strategic issues. ROC is a specific measure to help companies overcome two issues we have seen often with CRM business cases:
- Focus CRM initiatives and the entire company on what counts most – the customer – versus saving
money or optimizing resources.
- Balance short-term gains versus longer-term impacts of CRM programs by getting the organization to think not about the quarter-by-quarter financials, but instead about the long term. With this mindset, would companies have rigid return policies – such as the miserable penalties that existed at Blockbuster and forced me out as a customer?
Most CRM ROI-oriented business cases focus too much on the near term, counting only direct "hard" benefits and ignoring the more important "soft" benefits that relate to customer satisfaction, retention and lifetime value optimization.
Peppers and Rogers say it best in that, "Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, or engage in any business activity. Without customers, you don't have a business."
Therefore, the CRM business case should be focused much more on the softer benefits, especially maximizing customer lifetime value, and the ROC measure is one way to help the team balance the short term and long term investments and impacts around this initiative.
ROC is calculated as the firm's current-period cash flow from its customers, plus any changes in the underlying customer equity, divided by the total customer equity at the beginning of the period. Customer equity is the net present value of all the cash flows a company expects its customers to generate over their lifetimes. The formula takes into account the short term sales from customers, as well as factoring in changes to lifetime expectations. Even though sales may be good today, if a customer decides to not purchase in the future because of something that damages the relationship with the customer, whether a market brand issue or a competitive trump, the formula takes this into account by lowering the return on customer.
The hard part in working with the ROC formula; however, is that the expected lifetime customer value is often hard to estimate, and therefore the equation has risk in its accuracy, and folks tend to be uncomfortable with these estimates. This is especially true when the team is asking for large hard-dollar investments to be made today, with a prediction of some future value.
With ROC the value of using the equation outweighs these risks. Using ROC as an important element in the CRM decision process can help the team maintain customer focus and better balance investments for long-term value achievement.
This was first published in June 2006