Your most valuable asset

The business world is overrun with left-brain thinkers who analyze, quantify, and measure the “numbers.” This is not necessarily bad, because a lot of good research and information has helped business owners to improve their business. The problem is that this myopic view of business can leave people nearsighted and miss the big picture of what is truly important to keep one’s eye on in business. When a business owner focuses too closely on the bottom line, they can miss what should be on the top of mind.

An accountant will examine the assets and liabilities of a business to help determine its net worth or net assets. Assets are economic resources owned by a business, and expected to benefit future operations, such as creating revenue. Assets can include cash, inventory, equipment, land, buildings, or patents. Nowhere on any balance sheet, though, will you see an accountant list the most important asset of a business.

To let you know what we feel that asset is, we’ll share a quote of Peter Drucker’s from his book, Management: “There is only one valid definition of business purpose: to create a customer.” Creating customers is not only the purpose of a business; customers are also the most important assets of a business because they are typically an organization’s primary source of revenue.

You’ve probably heard the saying: “Customers are the lifeblood of a business.” Without customers, a business becomes a hobby and will soon cease to exist. Business owners know too well that too many slow days will dry up that “lifeblood” and cause a business seizure and eventual death.

A new Chinese restaurant opened in Guam’s Marine Drive recently, and when a couple of people were questioned about their visit to the place, they talked about slow service and poor food quality. When asked if they would go back again, both responded, “Never!” It will be interesting to see how long the restaurant survives if they make no changes in their service or food quality.

It is more important than ever for organizations to objectively assess the value of their customers. As a business adds more value to the customer and looks at them as an investment, then the customer will add more value to the company to help it realize a greater return on investment. The Chinese restaurant not only lost some customers, they lost valuable assets. If you believe that customers are assets that generate sales over the long run, then marketing and customer service expenditures to acquire and retain customers should be looked at as an investment that will create a return, rather than an expense.

A shift from product profitability to customer profitability may require a shift to customer-based accounting to keep track of revenues and costs for each individual customer. Don Peppers and Martha Rogers in their book, Return on Customer, believe that common financial metrics learned in business school do not adequately adapt to account for the value companies generate from their customers.

To make better managerial decisions that take into account the value of a customer, a new metric is needed. One measure used to calculate the worth of customers is called customer lifetime value, which is the present value of all future profits generated from a customer.

There are several different methods to calculate customer lifetime value—some quite complicated. A simple method is to determine the average purchase amount your customers make with each visit. Multiply it by their average number of visits in a given period, such as a year. This will give the average yearly value of the customer. When this is multiplied by the average number of years a customer continues to purchase from your business, the total will equal the average customer’s lifetime value.

For example, if the average customer purchases $20 and makes 25 visits per year, their yearly value is $500. If the customer continues purchasing for 20 years, the lifetime value would be $10,000. This simple equation does not take into account many factors and the multiplier effect of ongoing referrals from delighted customers. However, it helps illustrate the point that each customer the Chinese restaurant loses represents a lost potential revenue stream of thousands of dollars.

View each customer, not in terms of one sale, but as an ongoing source of revenue. Like the goose that lays the golden egg, the longer you are able to keep and nurture your customers, the more valuable they will become to your organization.

(Rik is a business instructor at NMC and Janel is the owner of Positively Outrageous Results. They can be contacted at: biz_results@yahoo.com)