Chapter 27
Return on CustomerSM

Just as managers seek to understand how much profit will result from each investment within a specified period of time, marketers must understand the added value derived from their customer investments. A sizable investment in time, money, and resources is usually necessary to gather enough useful details about customers to ensure that the ensuing marketing programs are properly designed and directed to the most appropriate audience.

To complete the analysis, marketers must evaluate the potential return on these customer investments. Calculating Return on CustomerSM (ROCSM) enables marketers to more confidently demonstrate that their customer investments are paying off.

According to Don Peppers and Martha Rogers of Peppers and Rogers Group, a leading consulting firm focused on improving business performance through a customer-centric focus, ROCSM is another way of measuring shareholder value. The ROCSM formula is:

Where

πi = cash flow from customers during period i

ΔCEi = change in customer equity during period i

CEi –1 = customer equity at beginning of period i

Peppers and Rogers illustrate this with two useful examples. The first example (see Table 27.1) shows a steady customer response rate over time to a marketing program.

Table 27.1: Steady Customer Response Rate

The second example (see Table 27.2) assumes a declining response rate over time. A number of factors can contribute to a decreasing response rate including consumer weariness from repeated messages or uninspiring offers. As Pepper and Rogers argue, companies risk destroying customer equity, even as they appear to be making a profit.

Table 27.2: A Declining Response Rate over Time

The objectives of marketing programs and campaigns must be clearly enumerated from multiple perspectives. Depending on the business need, a marketer may be tempted to boost short-term revenues using promotional offers. This may improve sales (and perhaps profits), but the cost may be the loss of loyal customers, the destruction of customer equity, or both. The implications of declining customer equity are the marketer’s responsibility so marketing managers should plan alternative marketing communication scenarios before selecting and launching them. A promotional campaign with an attractive price offer may increase sales, but it may also dilute any brand premium.