Goodwill increases value over time

In the world of finance, everyone knows that early investing is important.

Let’s look at 4 different people (from J.P. Morgan via BusinessInsider):

  • Chloe invests for her entire working life, from 25 to 65.
  • Lyla starts 10 years later, investing from 35 to 65.
  • Quincy puts money away for only 10 years at the start of his career, from ages 25 to 35.
  • Noah saves from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments he simply holds cash at a 2.25% annual return.

At a 6.5% annual rate of return, Quincy, the 10-year investor will have slightly more money after 40 years than the Lyla, 30-year investor who started late.

Chloe, who invested for the entire 40 year period will end up with just the same as both of them – combined!

And poor Noah is left with just more than half of what Quincy and Lyla have, and about a quarter of what Chloe has.

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The financial importance of both early and continued investment with a decent rate of return is obvious.

Get your money goodwill to work for you

For some reason, while these ideas are obvious when talking about money, they are not obvious at all when talking about the relationships that businesses have with their customers.

Noah’s Business

Most businesses invest in their customer relationships like Noah. They put little effort into delighting their customers, and end up with a low goodwill “rate of return”. As a result, these businesses end up with basically no goodwill in the bank. When something goes wrong, customers will quickly move to a competitor with a similar offering.

We can see this play out pretty clearly today with the whole United Airlines saga. They’re a company who are focused on the bottom line, and they’re going to have a ton of work to do to try make up for the bad situation they created.

Lyla’s Business

Others start their business without investing in their customer relationships, because at the beginning they have to focus on the bottom line and getting the company off the ground. In the beginning it’s all about the bottom line, but once they get their business profitable, they start focusing more on their customers.

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These companies are basically like Lyla. It takes a long time with a lot of investment to catch up with companies who started focusing on their customers from day 1.

An example of a company that did this successfully is Zappos.

From How I Did It: Zappos’s CEO on Going to Extremes for Customers:

Zappos was then nearly five years old…. the company had survived the dot-com crash, and our gross merchandise sales were growing—up from zero in 1999 to $70 million in 2003. But for most of those years we had been short of cash and struggling to cope with growth.

Our biggest problem was customer service—specifically, finding the right employees to staff our call center. We decided we needed to move our entire headquarters from San Francisco to wherever we built the call center, whose staff we had recently named the Customer Loyalty Team, or CLT.

By 2008 we had hit $1 billion in gross merchandise sales.

Looking back, I attribute most of our growth over the past few years to the fact that we invested time, money, and resources in three key areas: customer service, company culture, and employee training and development.

Quincy’s Business

It’s hard to find companies that fit into the “Quincy business mode”, because once companies realize the value in focusing on their customers, they rarely stop. But as a thought exercise, let’s see what a company like this would look like.

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These businesses are fortunate, as they can reap the rewards of having had an excellent customer focus when they started. Their customers think highly of them, and they have a lot more goodwill built up from the beginning to make sure that their customers keep coming back and are tolerant when they make a mistake.

But as the investment in their customers drops, so does their long-term goodwill. If these companies don’t keep their customer focus, their overall goodwill will end up less than half of what it could have been.

Chloe’s Business

And saving the best for last, we have the businesses that keep their customer focus from day 1. These are the companies that constantly strive to be customer focused and make sure that their customers know that they care about them.

Amazon.com is one company that typifies this approach in investing in their customers. Take a look at these letters the Jeff Bezos wrote to Amazon shareholders in 1997 and 2016 (pdf).

He describes how for Amazon, there’s no such thing as “Day 2”. Everything is “Day 1”. And what does it mean to stay in Day 1 mode for Amazon?

“I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.”

Start today

It’s time for companies to realize how important it is for them to focus on their customer appreciation from the beginning, and to do everything they can to keep it up.

Afterall, it’s called customer “appreciation” for a reason!

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