Why customer relationships are the King of intangible assets
If the game is repeat business, intangible assets are key for unlocking that golden possibility.
By Domini Stuart
In 2017, on an overbooked flight from Chicago to Louisville, United Airlines suddenly needed to fit a handful of its staff on the aircraft and asked for volunteers to give up their seats.
No one volunteered. So, the airline issued an $US800 incentive. Still no one gave up their seat. At that point, UA was forced to use a computer to randomly select four passengers to leave the plane.
One of those passengers was medical doctor David Dao.
Dao refused to leave, citing that he had urgent patients who depended on him to arrive at his intended destination on time. The standoff between Dao and the flight attendants escalated and as a final measure, police were called in to remove him forcibly from the aircraft, accidentally smacking his face against an armrest in the process. Fellow fliers filmed Dao being dragged away, covered in blood.
Predictably, the video went viral. Within days, UA’s market value had nosedived by $US770 million. The airline was eventually compelled to pay a settlement to Dao, rumoured to be about $140 million.
This scenario was a vivid example of the crucial link between customer relationships, a company’s bottom line and its overall reputation. Simply put, relationships have the power to make or break a company.
Good customer relationships help drive sales, encourage repeat business and are a bit like rocket fuel for generating word-of-mouth recommendations. Solid relationships with suppliers also ensure a company has a steady supply of raw materials to use, even in the hard times.
As a company’s reputation grows along with its success, it also gets easier to attract and retain quality employees and secure funding for new growth.
Finally, when the time comes to sell a business, a healthy customer reputation can attract a higher price tag. It’s been widely reported that, on average, customer relations account for 18% of total enterprise value – the total cost of acquiring a company.
With all that in mind, what’s the best way for your company to go about creating the valuable intangible asset of superb customer relationships?
Quality is king
Marketing does a lot of the heavy lifting to persuade people into trying something once. But to get them to buy a second time requires building good relationships. And that comes primarily from the quality of the product or service.
Remember the “cronut”? When a food blogger wrote favourably about the new doughnut mixed with a croissant, traffic to the New York bakery’s website rose by more than 300%. Suddenly there were queues around the block.
The blog post made people want to taste the cronut but it was the high quality of the product that kept them coming back for more. People could rely on the pastry being good enough to justify waiting in line sometimes for an hour. That’s a great customer relationship.
Open and honest communication
First impressions count. Whether it’s a conversation between a customer and a salesperson or the sterile ordering process on a website, people can infer a lot about a company from an initial engagement – especially if things go wrong.
One of the more surprising aspects of the September 2022 cyberattack on the major Australian telco Optus was that poor customer relations after the breach did more to push customers away than the loss of their personal data.
About 10% of Optus’ mobile customers took their business elsewhere after the breach while 56% said they were on the threshold of doing the same, according to the 2022 EFTM Mobile Phone Survey.
In situations like this, customers aren’t looking for an opportunity to attack a company. People understand it can be hard to share bad news, take responsibility and apologise. Because of this, they can be remarkably forgiving when companies are honest about a problem.
A survey by global review platform Trustpilot said 95% of Australian consumers will consider honesty in their purchasing decisions.
But if a company isn’t being honest about what led to a mistake, then customers can feel rightfully aggrieved. The risk is always that there are many more options out there to which customers can switch if they smell indiscretion from a preferred business. Forgiveness is only likely if the company has built a good relationship with a customer – but it’s not guaranteed.
Ethical behaviour
in the same Trustpilot survey in the above section, more than half of respondents said they consider a company’s position on social, political and environmental issues when buying products.
Displaying genuinely ethical behaviour can do a lot to attract new customers and is a great way for a company to develop strong relationships. But it does need to be genuine. Customers are much savvier about sustainability and can be quick to notice and punish “greenwashing,” which is when companies use hollow credentials to attract the environmentally conscious to their brand.
A well-known example of customers rejecting a company for greenwashing was the 2015 Volkswagen “Dieselgate” emissions scandal.
By cheating on emissions testing, the carmaker sneakily marketed its vehicles in the US as “low-emission” when they were really emitting up to 40x the permitted limit for certain pollutants. The initial findings were discovered by a non-profit organisation called the International Council on Clean Transportation (ICCT). Researchers noticed discrepancies between the emissions levels measured during laboratory tests and those observed during on-road testing.
Once the illegal software fudging was revealed, customers and regulators were furious at the deception. In the US alone, Volkswagen agreed to pay over $US25b in fines, penalties and compensation to affected customers. The total cost of the scandal, including legal fees, vehicle repairs and other expenses, is estimated to have exceeded $US30b.
The scandal severely damaged Volkswagen's reputation, which had been built on the perception of quality, reliability and environmental responsibility. The company faced a significant loss of trust and credibility among consumers, investors and the general public. The incident tarnished the brand and negatively impacted global sales.
Yet breaking the law is only one of the ways that could hurt a company’s reputation. Even when acting within the law, customers may still deem a company unethical. The story about United Airlines at the beginning of this article is a great example.
UA was within its legal rights to remove Dao from its aircraft and, strictly speaking, its staff followed company protocol. While the company’s behaviour may have slid by in a court of law, it didn’t stand a chance in the court of public opinion.
Supplier relationships
However well a company treats its customers, all that goodwill can be undone by a few unreliable suppliers that make it difficult for a company to fulfil its promises.
Nurturing a good relationship with dependable suppliers is critical to delivering quality products and services on time. It also minimises business risk, particularly during times of crisis.
This lesson was learned the hard way during the Covid-19 pandemic that disrupted global supply chains for the better part of 2020.
When inventories in companies across the world dropped to dire levels, many suppliers prioritised the customers they trusted the most – the ones with the best relationships. All that trust built over years between partners was reciprocated just when they needed it the most.
Untrustworthy or invoice-shy partners were pushed lower on the suppliers’ priority lists which meant their shelves stayed empty for longer. For many of those retailers and manufacturers, this was a painful lesson in the importance of maintaining relationships in the good times just in case the bad times roll along – which they almost certainly will.
Another example of this dynamic was the partnership between Walmart and Procter & Gamble (P&G) during the global financial crisis in 2008.
During the economic downturn, Walmart faced challenges in managing inventory and ensuring consistent supply for its stores. However, due to its long-standing partnership with P&G, a multinational consumer goods company, Walmart was able to navigate the economic slump more effectively.
P&G recognised the value of its relationship with Walmart. It worked closely with Walmart to optimise the retailer’s supply chain, increase efficiencies and ensure that Walmart stores had access to essential products.
The partnership was characterised by open communication, collaboration and a shared focus on customer satisfaction. By maintaining a relationship of trust, transparency and mutual benefits, Walmart secured priority in terms of product availability and allocation from P&G.
This meant that even during the economic slump, Walmart stores had a consistent supply of P&G products, which helped drive customer loyalty and maintain their competitive advantage.
How to keep suppliers happy
· Focus on open and honest communication with suppliers. Regular feedback builds mutual trust and gives suppliers the information they need to provide a better service;
· Make transactions as simple as possible by following their processes, using their preferred format for paperwork and promptly providing any supporting information they need;
· Pay bills on time. If there is no choice but to delay, let the supplier know as soon as possible and be clear about when the invoice might be paid;
· Take the time to understand how suppliers operate and the challenges they face;
· Always treat suppliers with respect.
Calculating the value of good relationships
Every company has a set of customer-related assets such as accounts with supporting documentation, usually presented as customer lists. This information is valuable in a practical sense for a company, but the lists represent relationships that also carry a lot of financial value.
A specialist analyst can value these intangible assets in different ways. Keep in mind that it's essential to consider and analyse a mix of the below methods to get a comprehensive understanding of the value of customer relationships.
Customer Lifetime Value (CLTV): This method calculates the total value a customer is expected to bring to a business over the “lifetime” of their interactions with it. CLTV considers factors such as the average purchase amount, purchase frequency, customer retention rate and the estimated duration of a customer's relationship with a business.
Net Promoter Score (NPS): The NPS measures customer loyalty and satisfaction by asking them how likely they are to recommend a business to others. An NPS is calculated by subtracting the percentage of detractors (customers who would not recommend) from the percentage of promoters (customers who would recommend). A higher NPS score indicates higher customer loyalty and higher customer lifetime value.
Customer Acquisition Cost (CAC): This calculates the average cost of acquiring a new customer. It includes advertising costs, sales commissions and other marketing-related costs. By comparing CAC with CLTV, a business can find the value of a customer relationship by understanding how much it costs to acquire a customer compared to the expected value that customer will bring.
Repeat Purchase Rate (RPR): RPR is calculated by dividing the number of customers who make repeat purchases by the total number of customers. A higher RPR indicates higher customer loyalty and potentially higher customer lifetime value.
Customer Satisfaction Score (CSAT): CSAT is used to measure customer satisfaction with a specific interaction or transaction with a business. It is usually measured through surveys or feedback forms. A higher CSAT indicates higher customer satisfaction, which can lead to increased customer loyalty and revenue.
Churn Rate: Also known as customer churn rate or customer attrition rate, this is a measure of the percentage of customers who stop doing business with a company over a period. It is often used as an indicator of customer retention and loyalty, with a lower churn rate indicating higher customer retention and vice versa.
Social Media Metrics: Social media metrics such as customer engagement, social media followers, and social media mentions can also be used to gauge the value of customer relationships. Higher engagement and a larger following can indicate a stronger customer relationship and potential for higher customer lifetime value.
It's important to note that businesses may use different methods or a combination of methods depending on their industry, customer base and specific goals. Consider also the limitations and assumptions associated with each method and use them as guides rather than absolute values.
How customer relationships turn into $$
When intangible assets first appeared on company balance sheets in the late 1800s, they appeared only as “goodwill.” Critics dismissed this newfangled line item as a stock watering device that was “not merely immaterial, but also imaginary.”
Back then, the value created by good relationships was considered almost incidental since most of a company’s worth was in tangible assets such as property, plant and equipment (PP&E).
Today, the situation is reversed.
Intangible assets now account for most of a modern company’s wealth which means good customer relationships are crucial for not only generating revenue but also for enticing buyers back onto the car yard.
After all, the whole game of commerce since the dawn of time is repeat business. Intangible assets are key for unlocking that golden possibility.