Return on Customer and change in market capitalization


6 November 2005

Our long-suffering readership is presumably tired of hearing any more about our analysis of the UK mobile industry. We promise that this post is the last in the series unless we discover any new and truly remarkable insights.

Our review of Return on Customer, the new book by Peppers & Rogers, was silent on the proposed ROC (Return on Customer) measure. This was simply because we had not yet done any analysis or tried to use it.

As argued in our previous posts, the mobile industry publishes sufficient data on its operations that a calculation of enterprise level ROC is possible. Having made the key calculation of customer equity previously, we can now calculate ROC and plot it against observed changes in share price, here shown as the market capitalization of the company.

The inspiration for this plot comes from the first chapter of the book:

Return on Customer can be applied to a company’s entire customer base … [and] a firm is creating the most overall value possible from from that group of customers and prospects when ROC is at its maximum. In fact, for an operating business, Return on Customer is equivalent to Total Shareholder Return.

With that in mind, we have plotted the year-on-year change in market capitalization for three UK-listed mobile companies (Vodafone, O2, and Virgin Mobile) against the Return on Customer, measured across the respective companies’ key markets.

[Change in market capitalization versus Return on Customer]
The year-on-year change in market capitalization for UK-listed mobile companies against the Return on Customer measured across the key markets.

We welcome comments and suggestions from our readers. Intellectually, the arguments and reasonings in the book make sense. Use the comments below or the contact us form.