Even former proponents such as Jack Welch, the former head of GE, have declared shareholder value the “dumbest idea in the world”—an idea with disappointing consequences even for the shareholders themselves. But old habits die hard: most corporations continue to privilege short-term profits over the interests of their customers.
Does this mean that the C-suite has to abandon its own self-interest to please its customers? The answer is a resounding—if surprising—“no.” Thanks to new developments in technology, organizations can now connect what used to be two separate goals.
Today’s corporate ground is littered with the corpses of huge entities (such as Blockbuster, Circuit City and RadioShack) that could see customers vanishing and shareholder value plummeting but lacked any systematic, meaningful strategy to connect the two phenomena. By ignoring the pulse of the customer, these firms hung on to the false sense of being able to grow shareholder value sustainably, until they cut themselves to the bone and it was too late to recover.
Using big data analytics, today’s companies can manage customer delight to produce a direct impact on shareholder value, as we shall now see.
Making the connection between CLV and SV
Businesses are traditionally rated based on the value they generate for their shareholders (SV), a figure that’s calculated based on estimated discounted free cash flow. Shareholder value is essentially how much cash will be left at the end of the day to distribute to shareholders.
But there’s a weak link in the traditional SV formula—it doesn’t pinpoint the true source of value or identify the origin of the free cash flow. The formula allows companies to maximize shareholder value by managing major value drivers such as profit margin, tax rate, cost of capital, etc., but it doesn’t help them recognize or grow the true source of value, or accurately project future value.
Of all the ways to increase shareholder value as an outcome, the most effective is to identify and grow the true origin of the free cash flow. But what is this origin? The identity of the free cash flow is so simple that you may be surprised: it’s nothing other than the value of all your customer relationships projected through time.
Most CEOs intuitively recognize that there must be some relationship between SV and Customer Lifetime Value (CLV), but because they don’t have any way to pinpoint or manipulate this connection, they ignore it. Customer lifetime value is the business of marketers, they say; our business is to grow SV.
But it’s essential to recognize and utilize the relationship between SV and CLV if one wants to grow SV in the most efficient way. The customers are the ones who buy your goods and services; their actions lead directly to revenue and, consequently, to free cash flow; and free cash flow is the basis for calculating shareholder value.
If shareholder value is the sum of all the future free cash flows a company generates, then the best way to calculate, predict and improve shareholder value is to take a sharply focused customer-centric strategy that will have an immediate and direct impact on SV.
If you want to make the most of the relationship between CLV and SV, your first priority is to understand how your company currently calculates CLV, and research how you can track, analyze and improve it. Simply mining that data is not enough, however. Your company must have a targeted strategy—specifically an analytics strategy—for turning that data into actionable insights that you can use to systematically grow CLV in a way that will have a quantifiable impact on SV.
By placing your customer squarely at the center of your company’s picture, you can maximize shareholder value for the long-haul.
Should businesses maximize short-term profits or “delight” their customers? The answer is, smart companies—like Amazon—do both. Amazon is perennially tracking the customer and always seems to invest in areas where the customer is “likely to go” rather than limiting themselves to areas where the customer is “right now.” The result? Amazon has always been at the top of the customer experience ratings and Jeff Bezos is now ranked No. 1 among the “The Best Performing CEOs in the World” by Harvard Business Review for delivering top results in the long run.
By leveraging the power of sophisticated data analytics, you can grow your greatest asset—your relationships with your customers. When you monetize and extend those relationships through time, you will increase your customer lifetime value—and this will have an immediate and quantifiable impact on your shareholder value.
Don’t be a CEO who overlooks this emerging truth because it’s hidden by a new thought strategy. The point is not to abandon existing approaches to SV, but to augment them with a powerful and accurate method that targets the connection between CLV and SV. By using predictive data analytics to gain actionable insights into your relationship with your customers, you can shape the best future for your shareholders, your customers, and your company alike.