I love equations that explain seemingly complicated ideas in simple ways. Here’s one I stumbled upon a few years ago in Return on Customer, by Don Peppers and Martha Rogers, that has crystallized the way I think about customer relationships (and non-profits’ relationships with their philanthropic supporters). It’s ingenious because it balances the priority of maximizing current-year cash flows with the priority of replenishing customer equity for the future.
Return on Customer/Donor Relationship = [(Cash Flow in Year 1) + (Change in Customer’s Lifetime Value in Year 1)] divided by (Customer’s Lifetime Value at Start of Year 1)
The concept here that is too often ignored is “Lifetime Value.” A customer or donor is more than just a person who provides revenues during the current year. He/she also goes up and down in lifetime value to the organization.
As Peppers and Rogers write, “When a customer has a good (or bad) experience with a company and decides on the basis of that experience to give more future business to it (or less), the firm has gained (or lost) value at that very instant, with the customer’s change of mind. It doesn’t matter that the extra business a customer might give a company won’t happen for a few months or even a few years – the customer’s intent has changed already, and so the customer’s lifetime value went up (or down) immediately, in the same way a share price would go up imnmediately if the company were suddenly expecting better profits sometime in the future.”
Imagine how companies and non-profits would behave differently if they knew the future value to the organization they were destroying through some of their aggressive strategies for short-term revenue! And imagine how staff would behave differently if they were measured on their performance in maximizing “Return on Customer Relationship” for their organization’s most high-potential customers!
(I’ll be presenting on this topic this Sunday, at the annual CASE/NAIS Conference in Philadelphia. Where it is currently very cold. Why couldn’t they have held this conference in Florida?)