The full title of this book by Larry Selden and Geoffrey Colvin is
Angel Customers & Demon Customers: Discover Which Is Which, and Turbo-Charge Your Stock
In my review posted on Amazon.co.uk, I gave it 2 Stars.
Here is my review.
For big companies only
I had high hopes of finding a kindred spirit with this book.
While the author writes about angel customers and demon customers, I’ve talked about dream and nightmare customers to recognise that not all customers are good news.
The authors make the point that the increase in value of a business comes from building a portfolio of profitable customers and the ability to renew that portfolio. I agree and think this is a good way of looking at the business. There has been too much pro customer / anti shareholder value talk when a well managed company knows that it has to do both.
While business owners can benefit from thinking through policies that increase business value, this book is focused at companies that publicly trade their shares so there is an easy-to-find valuation. This is where the danger of finding the right balance between customers and shareholders is at its highest as these companies come under pressure for short term results. It also brings with it the problem that the valuation derived from share prices may not be sensible as popular share buying theories are based on identifying undervalued companies or riding increases in momentum, regardless of the underlying value.
The authors argue that all costs must be attributed to customers rather than just variable product costs and direct customer costs that would generate an incremental profit but probably suggest that most, if not all, customers are profitable. The inevitable problem with allocation all costs is that the allocation methods are controversial and the analysis runs the risk of being precisely wrong (because accountants are great at generating costs to n decimal places) rather than approximately right. I think there’s a more persuasive argument to say that you have to do both, depending on the decisions to be made. The authors then say that you should allocate the cost of capital to customers so that an economic profit can be generated.
It’s important to think through customer profitability issues because it has ramifications on marketing (best aimed at angel or dream customer types), pricing and customer service issues as well as actions taken by the sales force. Some customers generate great profit while others are more trouble than they are worth. Many are in the middle where profitability can be improved. If you’re going to turn your back on many customers, you’d better be sure that the chosen customers are secure from competitive threats and sudden changes in customer needs.
In the end I felt that the book was too biased towards the finance perspective and didn’t take adequate notice of the strategic and marketing perspectives. I suspect admirers will be finance based but some times, it’s good to step into the other camp. I found I was defending my views as I read the book rather than adding new ideas into my coaching approach.
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