I’ve been a long time champion of Don Peppers’ work and so it was especially fun to conduct this CMO 2.0 Influencer Conversation with him. Don is the co-author of eight books, his latest one being Rules to Break and Laws to Follow, and he is also the co-founder of Peppers and Rogers.
We started off by having Don give an overview of his latest book, which came out last year. At a high level, the book deals with the evolving landscape of business competition and the changes that are caused by the rise of social media – with customers increasingly talking with one another.
In it, Don and his co-author Martha Rogers argue that while businesses operate under a set of assumptions that sound logical, they are, in fact, fundamentally flawed. And, as the title of their book advocates for, it’s these rules that need to be broken.
The first one is that the best measure of success for your company is current sales and profits. They think that this is a false assumption because customers don’t just buy things from you today. When they do buy things they also have an experience that changes their impression of you or their affection for you, which in turn changes the likely amount of business you’re going to get (or not get) from that customer in the future. So, the customer lifetime value goes up or down based on current buying experiences, and that is the metric companies should track – not current sales and profits.
The second rule to break, or false assumption that companies operate on, is that with the right sales and marketing efforts you can always get more customers. In reality, they argue, we have a surplus of products and services, and a shortage of customers – customers are the new scarcity and should be thought of as a productive resource the same way we think of capital or labor as productive resources. You cannot just get more customers with more marketing – there is a limit. Note that Don and Martha are not attacking the whole notion of customer acquisition, they just don’t think that it’s the only way to create value. The other side of this coin is that capital is an infinite resource – you can always get more capital.
The third rule to break, also widely accepted as truth by most businesses, is that company value can be created by offering differentiated products and services. Products and services don’t create value – customers do when they buy those products and services. Customers create value in two ways. Short term, by buying products from you now. Long term, by buying more from you later and by creating additional business for you through their referrals. So you should think of customers as productive assets.
Don then talked about a new customer-based metric that companies can use to measure the efficiency with which they are using customers to create value – Return on Customer. Return on Customer is very analogous to Return on Investment. If I have a customer who has a lifetime value of $100 and I make $5 in profit on that customer by selling him stuff during the year, and by the end of the year I’ve been able to increase his lifetime value to $110, then my Return on Customer is 15%.
We also talked about customer acquisition strategies and how you need to evaluate the total customer lifetime value when you prioritize which customers to attract. The least valuable customers come in for the most valuable offers – so having a customer acquisition strategy focused on discounts is not exactly the smartest thing to do. Research that we found as part of research for our own book, about which I will blog about separately, showed that customers who are acquired through word of mouth have not only a higher lifetime value than those acquired through traditional marketing programs, they also bring in more new business through their referrals. So, when you calculate customer lifetime value you need to include the business that will come to you because of a customer’s positive word of mouth. That is especially true in light of other research that Don mentioned, which shows that your highest spenders are not always your highest referrers.
We then talked about another important topic in all of Don’s writing – trust. Customers make most of their buying decisions based on trust, and they think that you are creating the most value for them when they trust you. So if you want to maximize the value your customers create, you need to focus on earning and keeping their trust. And you cannot have a trustworthy business unless you trust your employees.
We closed our conversation with a discussion around the evolution of CRM, and how CRM systems will have to start incorporating people’s social profile, not just their buying history with the company. Don also warned that if companies think of their CRM system as a tool to sell more things, they will fail. CRM systems should be put in place to create more value for the customers – create better offers, better delivery, or whatever will increase value for the customer.
Don had an interesting parting piece of advice for marketers:
…in the era of social media you should always step back from whatever marketing policy you’re considering, whatever kind of new idea you have and ask yourself, ‘Gee, if this became public, would it be an embarrassment to us? Would we be proud of it? Would some of our customers hold it against us?’
Because, you know what? It’s a really good chance it will become public in today’s age and if you want to protect yourself then you really have to have clean hands, not just a good alibi.
Other things we discussed include:
- How trust is a combination of intent and competence
- The impact of technology on corporate hierarchies and processes
- How successful companies of the future will have a high degree of self-organization
- The importance of culture in successful companies
- How the most influential customers don’t want to be sold to
As usual, you can listen to the podcast on the CMO 2.0 site.