Customers as Economic Assets

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May 26, 2017
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May 19, 2017

Customers as Economic Assets

Adapted from Dr. Claes Fornell's book | May 24, 2017
The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference

Why is customer service becoming more difficult to deliver? One reason is that the emphasis on self-service may have unintended consequences. If high-quality online solutions address easier questions for your customers, agents are left to handle the more difficult problems.

Satisfied customers represent a real, albeit intangible, economic asset. An economic asset generates future income streams for the owner of that asset. If it doesn't do this, it has no value and it's not an asset.

Peter Drucker said it best many years ago: "The purpose of business is to create a satisfied customer."

This is one of the most fundamental principles upon which a free market depends: Sellers compete for buyers. It is what makes the economy grow, what makes things better. It is the satisfaction of its customers that brings financial rewards to the firm—from customers and investors alike.

Likewise, dissatisfied customers punish sellers by taking their business elsewhere. In a service economy with growing consumer power, the traditional assets of supply don't tell us much about the future. It is much more common for a buyer to reject an invitation to buy than it is for a seller to decline to sell; yet most measures about our economy and about companies continue to be supply oriented rather than demand focused.

The business imperative for creating a satisfied customer is as old as business itself. But so is the practice of taking the customer for granted with little regard for quality and service. How it comes out depends on who can dictate terms and who can walk away. It's about power. When buyers have it, sellers try to please them.

In a free market, there is a mutually beneficial proposition from increasing customer satisfaction: Sellers make more profit and buyers are better off. Sellers maximize profits and buyers maximize utility. If sellers don't benefit by satisfying the customer, something is amiss—the market is not working as it is supposed to. If sellers make profits without satisfying the customer, the conclusion is the same. The market is not working properly.

The extent to which buyers financially reward sellers that satisfy them and punish those that don't and the degree to which the movement of capital reinforces the power of the consumer are fundamental to how free markets operate. A well-functioning market allocates resources, including capital, to create the greatest possible consumer satisfaction as efficiently as possible. The discontented buyer will not remain a customer unless there is nowhere else to go, or it is too expensive to go elsewhere.

In a competitive marketplace that offers meaningful consumer choice, firms that do well by their customers are rewarded by repeat business, lower price elasticity, higher reservation prices, more cross-selling opportunities, greater marketing efficiency, and a host of other things that usually lead to earnings growth.

Economic growth is about producing more and better goods and services and about buyers and sellers engaging in more economic transactions. It is not too hard to find someone with something to sell, but how does one encourage consumers to engage in additional transactions?

One way is to increase their satisfaction with the outcome of the transactions.

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