Here ROC is Return On Customer. Answer needed in around 350 to 400 words. Are yo
ID: 2780436 • Letter: H
Question
Here ROC is Return On Customer.
Answer needed in around 350 to 400 words.
Are you creating, Harvesting or Destroying Customer Value(CE)? Company Company Company Company Company 4 $1,000 $1,020 $20 S30 $50 5% $1,000 $1,000 $900 $1,000 $1,000 I $1,200 $1,200 200 S50 | $250 $150 15% at the begimning of year E at the end of year Change in CE during the year Profit during the year Total Customer value created $950I 50 S50 SO 0% 200 50 100 Long tern $50 Short tern -$50 -5% ROC 25% Cost of Capital : 10% Value Destrover Cost of Capital : 10 Cost of Capital : 10% alue Creators Value Harvesters-L - Cost of Capital : 10% Question to class If you are an investor, what company would you invest? Do you think this is useful information for investors? Why don't we have this information in our annual report?Explanation / Answer
ROC i.e. Return on Customer is an important tool used by companies to evaluate their position whether they will be able to sustain on their financial requirements by continuing to do business with their existing partners. Cost of Equity for any customer can be found by finding the net present value of expected cash flows from that particular customer over the firm expected life. And Cost of Capital for firm can be usually found in financial reports, it is the value for the enterprise as a whole i.e considering all cash flows from all customers. As a general rule, if any specific customer's Cost of Equity is less than the cost of capital, it is reducing value in the business and is thus a value harvester or destroyer. On the other hand, an investor will look for Positive Value creating companies i.e. the companies whose customers add value in the business. It is possible if their customers return on equity is more than the cost of capital. By investing in Value Creating companies, the wealth of investor is expected to increase over time.
Yes, this information is very crucial to the investors. But it is usually not published in the reports because the investors usually do not deal in day to day operations of the business. It is the managers of the firm who have to evaluate their customer mix and customer portfolio from time to time and see whether their customers are generating or eroding value for the firm. Sometimes actions are taken only to realise short term gains for the business such as driving festive sales by offering huge discounts etc. but long term view has to be taken and given more weightage to find value for investors. The customers which are consistently not adding value should be gradually dropped and rather business should be increased over time with the customers which are resulting in value generation. This will also help in securing future finances for the firm and help it to continue its operations to perpetuity.
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