How much is each customer worth? And what impact does that have on the company value?
The generation of economic value has been a relentless search by organizations. And so it will remain, by definition. But that does not necessarily imply that the generation of economic value will always remain the highest priority at any time. And such logic has been especially experienced in the digital context, where a company’s value must not reflect, since always, a feasible stream of economic value in perpetuity, but rather, very often, the summation of the expected streams on the customer’s unit value.
In the perfect world, without information asymmetry, a company’s intrinsic value directly correlates to the company’s capacity to monetize the current customer base at the lowest possible servicing costs, with minimum operating expenses and minimum invested capital. Such perspective is still contemporary and completely relevant.
In an analog-mechanical context, a company’s valuation was intimately related to its actual net operating income and to the sum of its tangible assets. The rationale is very simple and straightforward: optimize the operating return on the invested capital already adjusted to the risk of the venture. It becomes relevant to minimize the invested capital, reduce the capital costs and, obviously, increase the operating return. Recognizing the operating return is fundamentally driven by increased revenues, increased gross margins and reduced operating expenses.
So, what changes in the digital context?
In one expression... network effects.
Indeed. In the digital perspective, the physical principles of tangible assets are abstracted in a plastic, fluid, infinite operating reality. The decisive factor to optimize the company value is reduced to maximizing the customer’s Life Time Value (LTV) substantially above their respective Client Acquisition Cost (CAC). The exponential format of this result trajectory becomes irrelevant both to the allocation of operating expenses and to the allocation of invested capital in itself. Following a traumatic start for commercial traction, in case the venture truly picks up, the exponentiality of the phenomenon results in practically infinite return on capital as the marginal costs converge to zero and the recurring gross margins become incomparable to the level of expenses and investments.
Network effects yield exponential returns as an increasingly larger number of recurring customers (number) start increasingly engaging with the value proposition (engagement) capable of monetizing such relationships (monetization). Such network effects are maximized by the combination of two complementary processes:
• The continuous learning of customers’ behaviors afforded by the growing data enrichment intensifies both the engagement and the monetization, thus increasing even more the customer’s value over time as the underlying value proposition becomes ever more appealing and customized.
• Millions and millions of monetized engaged customers strengthen the emergence of vibrant communities that become, in turn, part of the operating platform through which such individuals interact and lead their daily lives, in a support spiral conducive to engagement and monetization, thus securing the client base with minimum servicing costs and attracting new customers at reduced acquisition costs.
Vibrant communities and continuous learning are both organic vectors to lock in the customer base. There is no easy solution when so much historic personal data fortuitously turned into customized experiences is available, or when broad relationships with others in a given context are established.
Therefore, CCC (Customer-Centricity in Community) is the quintessential concept in the digital world. But what does that mean in practice?
Well... let us see at least five changes in paradigm:
The new CCC paradigm calls for a few critical shifts by companies:
1. Digitization of the value proposition from the customers’ viewpoint
2. Implementation of winning strategies to acquire customer base
3. Creation of a platform focused on engagement and monetization
4. Forming and nurturing vibrant communities
5. Ongoing customer data enrichment
Are you ready for this new world?
Daniel Augusto Motta é Managing Partner e CEO da BMI Blue Management Institute. Doutor em Economia pela USP, Mestre em Economia pela FGV-EAESP e Bacharel em Economia pela USP. É Alumni OPM Harvard Business School. Atua também como Managing Partner da corporate venture capital WhiteFox sediada em San Francisco (EUA) e como Senior Tupinambá Maverick na content tech Bossa.etc. Também atua como Diretor de Planejamento Estratégico da UNIBES e Membro do Conselho Deliberativo do MASP. Foi Membro-Fundador da Sociedade Brasileira de Finanças. Foi Professor nos MBAs da Fundação Dom Cabral, Insper, FGV, ESPM e PUC-SP. É autor de diversos artigos publicados por Valor Econômico, EXAME, VocêSA e Folha de São Paulo, e também tem três artigos publicados pela Harvard Business Review Brasil. É autor dos livros best-sellers A Liderança Essencial e Anthesis.