Member blog: Why it pays off for an Investor to understand Customer Value?
October 21, 2021
Your primary interest as an investor is to get a maximum return on your investment within your investment strategy. In addition to highly functional teams, brilliant ideas with convincing products and services, different business models, and technological solutions, you should look closely at customers and learn to understand the concept of customer value, writes FiBAN member Pia Rautakorpi.
There are strong indicators that a product-led growth that many have praised and believe in is not enough. In this blog, I’ll bring up three aspects, why every investor should take a deep dive into customer value and value-led growth.
ROI – Value for Your Investment
The change toward valuing strong customer relationships has taken place hidden beneath the surface for some time now. It makes sense since strong customer relationships increase the probability of future cash flows that investors value.
Data from the Markables database looked at the value of brands and customer relationships as revealed by M&A data covering over 6,000 mergers and acquisitions worldwide between 2003 and 2013. Over a decade, brand valuations declined by nearly half (falling from 18% to 10%) while customer relationship values doubled (climbing from 9% to 18%). All other categories of intangibles remained stable.
M&As reveal the valuations of all assets at the time of the acquisition. The percentages come from fair value assessments done by purchase price allocation experts according to established accounting standards.
Markable’s have recently (8/2021) studied also the intangible asset valuation in food delivery. The brand names are valued at royalty rates from 3% to 5% on revenue. Customer margins are not only much higher, from 20% to 30%, but customer relationships expect to live 15 years — much longer than brand names expect to replace after seven years.
Competitive Advantage – Stronger Cash Flow
A company that holds a competitive advantage in the market can turn the edge into cash flow in 3 ways: creating longer relationships with customers, ensuring larger purchases, or higher prices. If you can manage to do all three, it’s even better.
In order to build up strategic competitive advantage, any company needs to be aware of the customer value drivers and be able to measure the advantage they have or don’t have. Most companies are not able to measure the real competitive advantage. They proceed with assumptions which means they can neither measure the return on investment nor assess how strong their customer balance sheet is.
This is good news for companies and investors who measure how customers assess their competitive advantage in the market and should be your concern as an investor.
Value-Based Pricing – Profitability
Competitive advantage and value-based pricing go hand in hand. A company that finds itself often in the middle of price competition is either in a market where no one holds a strong competitive advantage or doesn’t have one itself. You can also choose to disrupt the market with the lowest prices, but you should make that decision based on the customer data.
Price is always a message and never an absolute value. Customers consider your price within all the other elements of your offering. Only by understanding the customer value drivers and your competitive advantages will you have access to open the door for value-based pricing.
For an investor, the most important question is to understand the relations between competitive advantage and customer value drivers in order to ensure strong and long-lasting customer relationships that lead to a higher return on investment.
Customer Value Innovator, Board Member, Enterprise Designer
FiBAN Member blog is a forum for FiBAN members to share their knowledge and best practices for the network. If you have a topic in your mind that you would like to share with your angel investor colleagues, ping our Communications Strategist Tuuli Saukkonen, firstname.lastname@example.org.