Excerpt from "The Customer Based Audit"
The First Step on the Journey to Customer Centricity
Something a little different this week. Peter Fader, who I podcast with (semi)weekly now, has co-written a new book with Bruce Hardie and Michael Ross called The Customer Based Audit: The First Step on the Journey to Customer Centricity (available at the link). Below is an excerpt from the first chapter. We will be discussing the book more on next podcast. You can also comment on the post if you have any questions for Peter.
What Do You Really Know About Your Customer Base?
Peter Fader, Bruce Hardie, and Michael Ross
As a leader in your organization, you will be very familiar with your organization’s key financial statements and monthly management reports. But what do you really know the people who pull out their wallets and pay for your products and services? In The Customer-Base Audit: The First Step on the Journey to Customer Centricity, experts Peter Fader, Bruce Hardie, and Michael Ross start you on the path toward really getting to understand your customers’ buying behavior as well as the health of your overall customer base. In this excerpt from their book, the authors ask you some challenging questions, and make the argument that to answer them, you will need to conduct your own customer-base audit.
As a senior executive, you have spent countless hours discussing budgets and expenditures. Focusing on the top line of the income statement, you will probably have looked at sales by product line and geography. You quite possibly have looked at product profitability as part of a product line rationalization exercise.
But how much time have you spent reflecting on the fact that these revenues are generated by customers pulling out their wallets and paying for your products and services? What do you really know about this primary source of your organization’s (inward) operating cash flow?
Consider the following questions:
· How many customers does your firm have? How many customers do you really have?
· How do these customers differ in terms of their value to the firm? For example, how many one-time buyers did you have last year? How many customers accounted for half of your revenue last year?
· How many customers who bought your products last year can be expected to buy from you this year?
· What proportion of your sales this past year came from new versus existing customers?
· On average, what proportion of your new customers have made a second purchase within three months of their first-ever purchase? Within six months? A year?
· Which of your products are most appealing to your most valuable customers?
If you are struggling to answer these questions, you are in good company. In our experience, most senior executives are unable to do so, regardless of whether their organization is primarily B2B or B2C, sells products or services, or is a for-profit or nonprofit.
Why is this the case? It reflects a fundamental failing in the reporting systems and structures of most organizations. It reflects a failure to have a true customer-centric mindset, even by many firms that claim to be customer centric.
We expect that some people, lurking in various parts of your organization, are conducting the analyses that can provide the answers to some of these questions. But it is rare to find them being pulled together in one place, let alone making their way to senior management. Yet without such a basic understanding of the foundations of the behavior of the firm’s primary source of (inward) operating cash flow, how can you be expected to ask the right questions and make informed decisions?
Enter the Customer-Base Audit
We believe that there is a set of fundamental analyses that are foundational for any executive wanting to gain an understanding of the health of their organization’s revenue and profit streams and the feasibility of their growth plans.
We call this the customer-base audit.
A customer-base audit is a systematic review of the buying behavior of a firm’s customers using data captured by its transaction systems. The objective is to provide an understanding of how customers differ in their buying behavior and how their buying behavior evolves over time.
It is important to note that we are not talking about “knowing the customer” through the lens of traditional market research. We are not interested in the demographic profile of our customers. We are not interested in their attitudes. We are interested in understanding their actual buying behavior.
Who would want to look at the results of such an audit?
· Senior management teams and boards that recognize that to really understand the top line, they need to examine it through the lens of the customer.
· A CEO who wishes to embark on a journey of making the firm truly customer centric.
· Groups undertaking a due-diligence exercise as part of an M&A or investment decision that recognize the importance of understanding the health of the firm’s customer base.
· A CMO wanting to get their team to start taking a more data-based approach to their planning and decision making.
A nonprofit supported by charitable donations may want to perform the associated analyses for both its financial supporters and the people it serves through its charitable activities. The same applies to two-sided markets such as Airbnb that often view both their constituencies (hosts and guests) as different kinds of customers.
We agree with the definition of analytics as “the discipline that applies logic and mathematics to data to provide insights for making better decisions.” It is common to talk of four types of analytics capabilities: descriptive (“what is currently happening or has happened?”), diagnostic (“why did it happen?”), predictive (“what will happen?”), and prescriptive (“what should we do?”).
The general view among business leaders is that firms progress from simple (descriptive) to sophisticated (prescriptive) analytics engagement, with the derived value increasing as the firm adopts more sophisticated tools. We disagree with this view. At a time when everyone is caught up in the hype surrounding machine learning and artificial intelligence and believing that “sophisticated equals better,” the customer-base audit is unashamedly descriptive (and, to a much lesser extent, diagnostic) in its approach. Time and again, we have seen how the insights derived from these descriptive analyses can have a profound impact on a firm’s operations.
A customer-base audit is all about gaining a fundamental understanding of the behavior of the firm’s customers. It involves a serious engagement with the fact that revenue is generated by customers pulling out their wallets and paying for a firm’s products and services, and that any attempt to think about a firm’s revenue streams must start with a good understanding of how customers differ and how their behavior evolves over time.
Why are firms not undertaking the types of analyses that would answer these questions on a more systematic basis? There are several reasons. First, most managers have not been exposed to such analyses. If you have never been exposed to the idea of thinking about the customer as the unit of analysis when analyzing your firm’s revenues and profits, how can you be expected to ask such questions in the first place?
Another reason for failing to undertake these types of analyses is technological barriers, be they real or imagined: “We don’t have the data,” or “It’s too difficult to get the data.” That may have been true 20 years ago, but now it is a rather hollow excuse. (If you are working in a digitally native company, you have no excuse!)
Excerpted from The Customer-Base Audit: The First Step on the Journey to Customer Centricity, by Peter Fader, Bruce Hardie, and Michael Ross, copyright 2022. Reprinted by permission of Wharton School Press.