The traditional P&L (Profit and Loss statement), has been taught as the standard for financial reporting for over 200 years. Think of business or product lines as our horizontal rows in the spreadsheet, and then it’s further broken down vertically by channel. This financial organization of the business ignores customer revenue and has created functional silos, because this is how budgets are managed and how people are incented.
If you have P&L responsibility for a product line, you’re going to push your product, regardless of what customers want or need. If you are responsible for channel such as retail stores, you’re going to maximize sales through stores. You might even be in competition with your own eCommerce website, and if you own the eCommerce website, vice versa. In all of that, we are missing the customer point of view. The traditional P&L doesn’t have any metrics around customer value. Thus, we are not working to optimize customer value.
Technology and the age of the customer have evolved the way we do business, but the way we measure business remains unchanged. We’re still trying to optimize our business through the P&L levers; “Push that product out the door”, “Go sell, sell, sell”. However, the power has gone to the consumer. The consumer gets to make choices that are best for them, which is why it’s so important to fix the broken customer experience and treat customers like customers. Let’s be more personal, more relevant. As the old marketing mantra says, let’s have the right offer for the right customer at the right time. How do we get there?
Customer Data and Segmentation
It all starts with data. A typical US-based omnichannel retailer in today’s world has data coming from ecommerce, physical stores, and direct mail. On the direct marketing side, where we’re talking directly to consumers, capturing names and addresses and shipping boxes to their doorstep, there is a lot of data. Over the last 10 years, we’ve made significant progress in capturing customer information at the in-store point-of-sale. Now, with our Perfect Pixel product, we are able to connect the dots between offline and online, and really create this single view of customer that we talked about.
Once we have that single view of the customer, we can break it down into revenue classes. Revenue comes from three sets of customers: Net new buyers, active repeat customers, and lapsed customers. All company revenues coming from those customers, and none of this classification is in the P&L. We must understand total revenue and customer counts for each class, as well as revenue per customer, which is a very important metric. It speaks to the contribution of revenue that we’re getting from each customer, to determine how valuable they are to the company.
Customer classes and metrics are not represented in the P&L; therefore, no one owns it within the organization. In 2018, we probably have someone responsible for Customer Relationship Management (CRM), but they’re fighting ineffectively against the inertia of the existing P&L. If all revenue comes from customers, shouldn’t we be working to optimize the value of this assets? How can we without the customer view point represented in the way we measure our business, including at the executive and board level? These organizational constrains also impacts our ability to actually execute against customer insight and to move the needle on customer value across the portfolio.
Supplement Your View
Let’s keep it simple: we’re not saying, “Turn your P&L and everything that you’re looking at upside down”, but how do we add to it? We’re currently looking at revenue and costs by product line and by channels. Let’s create an enhancement or a new tab to that existing view. let’s create a new lens that provides a revenue breakdown by those three classes of customers: net new buyers, active repeat customers, and lapsed customers.
This view would be even more sophisticated if you’re looking at the entire portfolio. Sure, there are a lot of non-buyers, and customers who are still lapsed, but if we’re just looking at the revenue like we often do with the P&L, let’s break it down by where the revenue is coming from and provide the typical things we do within a P&L. Let’s have the year-over-year comparisons. How are we trending? Are we growing our one-time buyers, repeat buyers, and converting more lapsed customers? How are we progressing on that? At one level, we need to have that view to say, “How are we doing with our portfolio of customers?” Within that breakdown, we’re still looking for the detailed metrics of total revenue, customer accounts, revenue per customer, and year-over-year trends.
If we had that as a supplement to our existing view, product owners could understand how various products are performing with net new buyers, how products are performing with repeat buyers, and what products are being effective with reactivating customers. As a product owner, I would have a new perspective as to what’s selling. The same is true for channels, we’re also driving cross-channel activity. It all comes back to looking at the revenue through not just the product lens and the channel lens, but further breaking it down to the customer lens.
To monitor business in the age of the customer, marketers need to see top-down view of their entire customer database and see where the revenue is coming from. There should be an enhanced drill down, a supplement to the existing P&L view that further breaks down revenue and behavior by those customer classifications. Marketers who include the customer in the financial report will be able to make decisions based on the business’ most important asset: their customer.
Augie discusses the broken customer experience and the P&L on CRM Radio; click here to listen to his podcasts.