Customer Loyalty Expert Rob Markey on Redefining How Success is Measured

In 2005, two storied US retail giants merged in a $11 billion deal that observers thought would increase both brands’ competitiveness in a changing market, especially with e-commerce rising as a threat to brick-and-mortar retail empires. However, the two brands ended up struggling, and the parent firm filed for bankruptcy in 2018. Today, the brands both operate only a handful of stores, a far cry from once being household names in middle-class America.  

The downfall of this company according to many analysts was failing to serve its core customers well and not investing enough in customer relationships. Despite being faced with mounting evidence that they needed to address fundamental customer issues, the company focused on financial engineering and cost-cutting.  

Rob Markey, Founder of Bain & Company’s Customer Strategy & Marketing Practice and co-creator of the Net Promoter System of management, is on a mission to prevent situations like this.  

Markey says this short-sighted focus on the bottom line, as viewed through the lens of the income statement, to attract investors ends up hamstringing many companies and preventing them from achieving long-term viability and stability. The retailers that are thriving in the US today reinvest in their stores and their customer relationships. One such retailer is famous for holding the price of its rotisserie chicken stable since 2009, despite rampant inflation. It has resisted the advice and pressure from equity analysts to cut employee benefits or hourly wages. 

Several years ago LEGO had diversified from their core business into what they deemed as growth businesses, a strategy which nearly caused it to go bankrupt. In order to save the company, it divested many of those adjacent businesses and refocused on its core business of selling block sets to children and to the adult fans of the brand. Markey says the company’s investment in relationship building with their customers helped put it back on a growth and profit trajectory. 

To avoid these types of setbacks, businesses should redefine their primary metric of success, moving away from simple profit and loss. Instead they should measure their success in terms of their customer base. 

Markey says that retaining customers has an incredible impact on the value of a company which isn’t quite apparent from the numbers at first glance. For example, there are two companies in the same industry, with Company A retaining 95% of its customers, while Company B retains 94%. In order to maintain its size, Company A has to replace the 5% lost with an equal number of new customers each year, while Company B has to replace 6%. What looks like just a 1% difference, translates to a 20% difference in cost and effort. 

“These small percentage changes in the most important drivers of customer lifetime value actually have a massive impact on profitability,” Markey says. “Why? Because, in order to acquire 20% more new customers, you have to spend more than 20% more on new customer acquisition. The marginal sixth percent costs much more to acquire than the first.”  

Furthermore, he adds that new customers cost more to onboard and don’t spend as much as mature customers. As a result a company with lower customer loyalty needs to acquire even more new customers to make up for the lost revenue from customer attrition. 

Given how valuable customers are to a business, one would wonder why capable and well-educated executives would allow valuable customer relationships to erode. According to Markey, business leaders are under inexorable pressure to deliver quarterly P&L improvements. And, generally, the easiest and fastest way to do that is to cut costs, raise prices, or impose fees. If a business continues doing this instead of investing in creating better products and improving customer experiences, it will eventually run out of things that it can do without angering the customers. 

“The root cause of this quarter-to-quarter short-termism is the centuries-old practice of accounting that most businesses are designed around. It was developed in a time when what was most important were the assets of a company. The valuation of companies was originally built on their balance sheet. These days most valuations are based on discounted cash flow analysis. Most analysts use the quarterly P and L to adjust these forecasted cash flows.” 

Markey says that a company’s shareholders and investors should be able to see the value of retaining customers. “There’s just so much inertia and legacy technology to overcome, and companies are usually not asked to report on the drivers of customer value that would allow an investor to value a company on that basis,” he says. 

 Today, there are valuation techniques that take into account customer loyalty and relationship value. 

One of these is Customer-based Corporate Valuation (CBCV), which was developed by Pete Fader and Dan McCarthy. This concept recognizes that all of a business' cash flows are driven by the customer, and that the money comes from customer pockets. 

According to Markey, in traditional discounted cash flow valuation techniques, investors are unable to adjust forecasts based on customer flows, instead just relying on the lens of profit and loss. In CBCV, investors simply recognize that the forecasts of future revenue and margins are a function of customer behavior. He envisions a world in which investors demand disclosure of the most important indicators of that behavior.  

“ Management teams would quickly develop much more interest in earning their customers’ loyalty if they understood how important that loyalty was to the valuation of their company. In my ideal world every company would be wired to maximize the value of its customer relationships.”  says Markey 

Markey says he won’t rest until accounting rules require customer flow disclosures and management teams commonly measure and manage the value of their customer relationships.