Smart cookies: Look beyond the numbers

Smart cookies: Look beyond the numbers - In the absence of earnings, dot.coms are valued on revenue and number of customers - but customer quality will count for more than quantity

by ANDREW WILEMAN
Last Updated: 31 Aug 2010

In the absence of earnings, dot.coms are valued on revenue and number of customers - but customer quality will count for more than quantity

Why worry about this now?

The e-business world seems to have just discovered the concept of a customer - and to be totally obsessed with it. Given that dot.coms are currently judged on revenue and on customer base, the key analyst metrics for Yahoo!, AOL, Vodafone et al are: How much did the customer base grow this quarter?

How much is the market cap per customer?

But just as quality-of-earnings is a big deal in the 'old economy', so in the 'new economy' we should be looking for quality of customer rather than absolute number of customers.

What makes a good customer relationship?

A relationship that is material, profitable, long-term, and defensible against competitors.

There are differences in how this works between business-to-consumer (B2C) and business-to-business (B2B) e-commerce - although the basic principles are similar.

Take B2C first - what's a concrete example of a weak customer relationship?

AllAdvantage dot.com is a fast-growing US internet start-up, with more than three million signed-up customers ('members'). Its proposition is simple: 'Get paid to surf the web'. The company pays you 50 cents an hour for monitored browsing, up to dollars 12.50 per month; in return you let them stream banner ads at you, and like Tupperware, you can recruit other members and earn 10 cents an hour on their surfing. The problem is that 60% of its registered members are outside the US, Canada and the UK - countries that account for over 70% of B2C e-commerce, and the only three markets that AllAdvantage can actually service. dollars 150 a year may be an attractive little earner in South Carolina, but it's a real killer proposition in Mexico or the Philippines, where average yearly incomes are below dollars 1,000. A surfer in the barrios of Tijuana may be even less attractive to advertisers than an under-employed trailer park citizen in the USA.

Does this invalidate the whole business proposition?

I'm not saying that the core proposition of AllAdvantage's business is flaky, but as an investor you would tear apart the quality-of-customer issue when looking at that number of three million-plus registered customers. It's not clear that many of these customer relationships will ever be material, profitable or defensible against competitors.

Many B2C business models raise similar concerns. Recognising the power of customer numbers in supporting high market caps, e-businesses are making it very easy and financially attractive to become a 'registered member/customer/subscriber'. That's better than the old days of having to fill in a 10-page form before you could access a site - but investors should give those customer numbers some scrutiny, and management should know the difference between a strong and a weak customer relationship.

Now let's look at an example of a positive customer relationship. Make it B2B.

Take providers of e-commerce platforms and infrastructure, such as Broadvision, Ariba or Exodus. Their customers are making a commitment to a long-term relationship - they are 'buying a company', rather than buying a product. The initial purchase or contract generates a significant stream of future revenues, from upgrades, maintenance and support. Stickiness, or switching cost, is high - clients become dependent on their vendors, re-engineering their systems and databases around them. Supply is generally exclusive - no enterprise wants to deal with a multiplicity of platforms or network managers. And the relationships are potentially highly profitable.

For all these reasons, this kind of customer relationship is expensive to acquire. B2B vendors invest heavily in upfront sales and marketing, and in 'consulting sell' diagnostics and implementation support. They can discount initial pricing in the solid expectation of locked-in future profits.

Sounds like B2B might rate higher on quality-of-customer than B2C. Is that generally true?

It's a big generalisation, but on balance, yes. B2B is harder and slower to build, but once built, the customer base really means something. VCs and investors are starting to agree with this - B2B has been the hot sector in e-commerce over the past six months, while B2C stocks have been shaky.

In the (dim and distant) future, quality-of-earnings will matter in e-commerce; right now, keep an eye on quality-of-customer.

Andrew Wileman is a strategy and organisation consultant; e-mail: wilemanae@aol.com.

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