To change the way the business world defines and measures success, we need additional courageous leaders to join the movement. We must build a stronger and broader community across all stakeholders to hasten the transition from financial to customer capitalism. We need six things:
1. Investors And CFOs To Embrace Earned Growth Economics. Financial accounting—and the financial planning and analysis that accompanies it—must incorporate customer-based accounting, which reliably measures the health of the firm’s customer relationships (the most valuable asset in most businesses). Customer-based accounting must track, among other things, the number of active customers and when they came aboard, increases and decreases in their purchases each period, defections by segment and tenure cohort, revenues per customer by tenure cohort, volume of new customers, cost of acquisition, split of new customers between earned (referral, recommendation, word-of-mouth, etc.)—in other words, all the key elements needed to estimate customer lifetime value for each customer.
2. Customer Rating Sites And E-commerce Platforms To Make Ratings Reliable. Customer ratings sites must innovate solutions to provide ratings that are both honest and relevant and therefore more useful. As a frame of reference, Fakespot estimates that as of 2020, 42 percent of Amazon reviews are fake. I predict that in many industries individual customer tastes will vary so much that for ratings to be relevant, they will have to be curated and organized to highlight the most relevant raters for each customer.
3. Investors To Challenge Self-Reported (Uncertified) Net Promoter Scores. Many companies report un-audited customer feedback scores. Investors who want to understand the value of a company’s customer assets need to understand how these metrics are derived and demand consistent and reliable methodologies.
4. Boards To Become True Customer Advocates. Boards of directors must assume responsibility for ensuring that their organization’s policies and practices treat customers right—a higher standard than simply not breaking the law. Boards should consider establishing a customer committee to serve along with existing nominating/governance, audit, and compensation committees. This oversight will become even more important as companies embrace the promise (and risk) of interactions with customers that are driven by artificial intelligence (AI). Companies must go beyond ethical AI and regulatory requirements and raise the bar to the Golden Rule standard of customer love. For this committee to have real accountability and clout, it will need reliable NPS data. This data will be available from third parties, such as Bain’s NPS Prism, for some companies and from trusted internal processes for other companies. But for many firms, this will only happen when we have robust customer-based accounting that enables reporting metrics, such as earned growth, that gauge customers’ love and are audit-worthy and therefore most appreciative for public reporting and for driving executive bonuses.
5. Boards To Reward Executives That Play The Long Game. Executives must be shielded from the distractions of short-term speculators if they are to make decisions in favor of treating customers right. Since the highest total shareholder return (TSR) accrues to firms with the highest NPS ratings, long-term investor interests are best served by encouraging leadership teams to love customers. Executive compensation plans should evolve so that generous bonuses accrue to leaders who deliver true value to long-term shareholders—that is, TSR exceeding the hurdle of average stock market returns. In addition to TSR, customer and employee outcomes should become part of compensation plans.
6. Employees To Be More Selective And Insist That Employers Help Them Live The Right Life. Employees are already demanding purposeful work, particularly as the workforce transitions to the Millennial and Gen Z generations. The best employees—from call center agents in Phoenix, Arizona, to user experience designers in Shanghai to meal-delivery providers in Madrid—have a choice about where they will work. The work community they select will deeply affect their ability to live the right life, so they should make this choice wisely, which means, in part, using the right data.
I realize that the path I have just outlined requires much work. Perhaps your humility is kicking in and you’re wondering if this effort might exceed your capabilities. My response is that it’s worth the effort. Why? Making the effort to hasten the transition from financial to customer capitalism will provide the most rewarding path for you and your team and will help you win.
Contributed to Branding Strategy Insider by: Fred Reichheld. Reprinted by permission of Harvard Business Review Press. Adapted/Excerpted from Winning On Purpose:The Unbeatable Strategy of Loving Customers by Fred Reichheld with Darci Darnell and Maureen Burns. Copyright 2021 by Fred Reichheld and Bain & Company Inc. All rights reserved.
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