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It is the customer!

The typical answer from managers to the question “What is the purpose of your business?” is: “to make money”. Well, that is to some point right but the money comes from customers and therefore the purpose of a business is to find profitable customers. And financing your sales to your customers is only sustainable when you see the cash in your pockets in the end. That basic purpose got lost over the last years of shareholder value thinking.

I gave last week a workshop on business model innovation for a large Swiss technology firm. The firm is well entrenched with its customers, you can almost call the firm a purveyor to the court for some customers. But times are changing and therefore did the new management arrange a workshop on customer centric business model innovations.

The first question I asked was the classical Peter Drucker question: What is the purpose of your business? And I got the typical answer from the senior managers: “To make money or to make a profit.”

That is of course right but: Where is the money coming from? How can you earn money for your shareholders without somebody who pays you? Where is your salary coming from? Is it really the company or where is the cash coming from?

It’s the customer, stupid!

Happy Customers Are Our Friends

It is amazing how few say it is to create and keep profitable customers.

It is simple, it is a hard fact:

“It is the customer where all the money comes from.”

It is the customer who helps you to pay your salary. It is the customer who finally pays the dividends to your shareholders. Without a customer you can not have the top line (revenue) in your profit & loss statement to pay for all other items that come under the revenue line.

It is not financial engineering

But even a great top line can hide problems with your cash flow from your customers. Most people assume that revenue equals cash flow from customers to the company. Well, that is true in a world where you have to pay in cash.

But in the last decade we have seen a new revenue model that backfires in the current recession. Companies became more and more banks for their customers. Customers did not buy the product outright but got a loan from the company that they had to repay over time of use.

That business model worked well in good times. Consumption soared, revenues soared. But did the operating cash flow from customers soared?

Well, no. It was expected that would happen later when the customers had to repay their loans plus an attractive interest.

But that did not happen. Companies that relied on this revenue model face now two problems.

1.       Customers cannot afford the monthly payments anymore and therefore hand the used product back. So the companies do not have just a problem with selling its current production but also have an overstock of used products that clog up the market for new products. That is bad news where already the drop in demand for new products hurts.

2.       Financial engineering that was great in good times back fires as well. The overbloated and inflated account receivables have to be written down. Fortunately, no cash is spent on these write-downs but remember also no cash flow was generated some years ago when the products where sold against a loan to its customers.

Revenue model innovation is bad?

I am not saying that this revenue model is per se bad. I think it can be in some industry a great business model innovation as General Electric has shown with GE Capital. At the beginning the idea was to finance e.g. big power plants that generate a strong cash flow to its owners. With that the owners could repay their loans to General Electric. General Electric might not have had the best power plants of its time but it solved one of the biggest problems of some of its customers, the multi-million or billion financing of a company. That was a big customer issue particularly in countries that was building up its utility industry that could not draw on cash-flow from current operations.

The point I want to make is that you have to find customers that can pay their bills. Inflated revenues do not help companies to survive in the long run when they are financed by the company itself. It is cash flow from customers that create value. Therefore the purpose of a company is to create and find these customers.

We must come back to this basic. No financial engieering, no leverage, no financial wizardry can be a long term strategy. They can create only value in the short term. A business is all about the customer and therefore your business model must be customer centric in the end.

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  1. Hi Patrick,
    Great post. I am an economist by training and here’s the way I was trained to think about a business: An organization that can more efficiently create something of value for a group of customers than the customers could otherwise create (on their own or with another business). The profit rests in this efficiency. Implication: Win on lowest price or offer hard to copy benefits that matter. There is no other way to generate a true profit absent a natural or government granted monopoly or some type of informal price-signaling between competitors.

  2. Hi Kay
    Thanks for your comment. The topic you mentioned is very interesting.

    Where is the über or excess return coming from?

    In my Ph.D. thesis I wrote one chapter about this topic. And I will write a posting about this, when I find time to do it. Unfortunately, my thesis is in German, otherwise I would have posted the text already.
    Looking forward to see more post from you on your blog or comments on my blog!

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