What Level Of Return Are You Providing To Your Customers On Their Emotional Investment?
Happy customers are a goal for businesses. Customer satisfaction, customer trust, customer loyalty – these are all assets that corporations and brands work hard to build. They’re emotional assets. When a customer is satisfied with their purchase and with the experience that results from it, that’s a feeling, not a number. When a customer comes to trust a vendor or supplier or brand, that’s a perception or intuition rather than a cold, reason-based assessment. When that trust translates to loyalty, it may be expressed in behavior (such as repeat purchasing) but it’s nevertheless based on sentiment as much as analysis.
Seen from the perspective of business, happy customers represent purpose. The purpose of a business is to create and maintain happy customers. The business methods and tools for achieving this purpose are not found in the numbers of finance and accounting, and they’re not in the bureaucratic processes of business administration. They’re not in the footnotes of the Annual Reports and 10K’s that the SEC demands that companies spend fortunes on to produce and file.
The business tools that produce happy customers are emotion-based. The most important is empathy: the ability to understand the customer’s mental model – see things from their perspective and with their perception and emotion – and to operate within that mental model when designing products and services for them. One definition of value creation and innovation is the solving of problems that have meaning for others. To even get started on this track requires an understanding of what’s meaningful for customers, an understanding that can only be gained from their perspective.
Think of any successful service, product or business. Why are its customers happy? How do they feel and why? What feelings motivate them? What are their values and how does the business or brand complement those feelings? To take just one example, why are Tesla owners willing to pay as much as they do for their EV? Do they find personal meaning in contributing in some way to the climate crisis (which, itself, is highly bounded by feelings)? Or do they take pride in the green credentials they can display to their neighbors, peers and friends? Does the simplicity and austerity of the car’s design complement and embody these feelings? Elon Musk and his team are able to do this analysis. They have a highly developed feel for their customers.
This is not to imply that business is all “touchy-feely”. In fact, this feeling that the customers have for brands, products and services becomes capital on the business’s balance sheet, as well as becoming revenue and profit on the P&L. The customer’s feelings that a brand will make them happy and result in a feeling of satisfaction becomes revenue through the mechanism of willingness-to-pay. After assessing the potential value and utility of any brand offering or any value proposition, the customer decides (based on emotional, subjective valuation) whether or not to buy. Are they willing to pay to find out whether their experience of the brand will be as good or better than they expect? If they are a repeat buyer, they’ll be more confident. If they’re a new buyer, they’ve developed some tentative trust. If they’re feeling affluent and they’ve already met their more basis needs they may feel a little more relaxed and uninhibited about their willingness to pay. In any of these cases, they’ll assess again after their experience to weigh whether it met their expectations or not, and on this basis, develop their future evaluation for the next opportunity to buy.
These customers are making an emotional investment in the business’s offering. They’re expending their own emotional energy in thinking through their internal problem to solve. They’re trying to anticipate their own future emotions that will arise after the purchase. They are taking a value risk – it might not work out. This is a considerable emotional investment. There are only so many times they’ll be willing to repeat the investment, whether for this product or for the category from which they choose it. A disappointing Tesla can be traded in at some point. A disappointing fashion choice can be discarded and never repeated.
The customer seeks a return on their emotional investment – ideally a high one. When they choose between two different ways to spend their money – to exercise their willingness to pay – they’re weighing two potential returns and they’ll select the higher one.
The customer’s emotional investment becomes the company’s capital. When they buy, revenue flows back to the company. What we know as capital value on a company’s balance sheet is the flow of revenue back to the company, minus the cost of generating that flow, expressed as a single dollar value. If customers are happier, or more customers are happy, more revenue flows, quite possibly at a higher profit since the willingness to pay might be higher, and the company’s capital value increases. This is what becomes stock market value – a stock price can be expressed as a Price / Earnings ratio. The earnings in this equation are those flows coming back from customers. It’s really a Price / Happy Customers ratio. Similarly, in financial analysis, Economic Value Added (EVA) is a similar calculation: the flow of revenues from customers minus the costs of generating them.
Economic calculation for a business requires both numbers and feelings, quantitative analysis and qualitative analysis. It’s necessary to empathize with and assess the emotions of customers, and to translate these into projected revenue flows. It’s equally necessary to identify their willingness to pay as a number (i.e. pricing) and then to choose costs of production that are both consistent with their emotional needs and consonant with the accounting analysis of profitability.
In a book called After Steve: How Apple Became A Trillion Dollar Company And Lost Its Soul, Tripp Mickle contrasts the mindset and approaches of Apple’s Chief Design Officer Jony Ive and CEO Tim Cook. Ive was the design aficionado who sought flawless perfection in Apple’s products as the way to earn the love and loyalty of customers, always surprising them with what was possible and with the degree of elegance and beauty that was achievable. Tim Cook was more of the numbers-based efficiency aficionado, seeking cost discipline to achieve profits at price points the customers indicated they were willing to pay.
Both are necessary, of course. But even costs must be emotionally and subjectively judged as supportive of customer happiness. What, for example, is the cost of Apple’s beautiful packaging which evokes such pride of ownership and delight at the unpacking experience? It would be easy to choose lower priced packaging. But what would be the cost in diminished customer delight? What would be the capital cost of reduced revenue flows from a diminishing army of Apple fans?
All-in-all, it’ a feel for business that’s more important than excellence in business administration, and it’s this feel for business that reveals more of the secrets of the success of great entrepreneurs, great brands, and great corporations. Business schools won’t tell you that, and won’t help you develop that feel. Trust emotions, practice empathy and exercise judgment.