There are three areas that determine the strength of a business. Yet widely accepted measures have only been developed for two of them.
The overall health of a business depends on three factors:
- The quality of its products and services
- The cost/price structure
- The strength of customer relationships
The third area is often overlooked, but shouldn’t be. Peter Drucker distilled the issue into a fundamental truth when he said that “the purpose of business is to create and keep a customer.” It’s the strength of the customer relationship that makes people automatically ascribe higher levels of design and performance to Apple products. It’s the lack of a customer relationship that feeds the high churn rates in wireless carriers. This is what CEO’s mean when they use the word “brand,” as opposed to what CMO’s often mean when they use the word brand. The CEO describes it in terms of a competitive advantage, and the CMO too often in terms of imagery and recall.
As vital as this relationship is to both the short and long-term health of the business, the measurements around it are not well-developed. There are rigorous measures and standards around quality, as evidenced by approaches like Six Sigma and third-party evaluators like J.D. Power. There are even more rigorous measures in place over the financial health of the firm, enough to employ an army of accountants at any large firm. But measures of the customer relationship are underdeveloped. The net promoter score attempts to measure the customer relationship by likelihood to recommend to friend. It is the closest thing we have to a standard measure of customer relationships. As such, it has been a useful tool for many companies looking to develop a stronger customer-centered culture. Still, its critics are as numerous as its supporters because it lacks the objectivity that is standard in measurements of quality and financial performance. For example, people may be less likely to recommend something they perceive as a vice, even if they are very satisfied (e.g. high fat ice cream). Many companies have their own loyalty measures that are more sophisticated than the net promoter score. But the fact that they are proprietary means that it’s difficult to compare their measures to other competitive companies.
The day will come when savvy investors will analyze customer relationships as closely as they analyze EBITDA. That will be a good day for enlightened marketers because it will establish the best of them as mission-critical drivers of business growth.
The Ryan Report 