The Emperor Now Has Clothes

Introducing a New Measure of Customer Loyalty and Organic Growth for Retailers:  Comp Customers

For too long, America’s leading retailers and the investment analysts who track them have held “Comp Sales” as a sacrosanct measurement of performance.  The number is expressed as the percentage change in revenue on a store-for-store, or comparable basis and certainly an indicator of retailer health. 

As if to call the emperor naked, over the last year or so, more and more retailers have elected to either not report these numbers or report them less frequently.  They cite that the number is either over-rated as an indicator or too short-term in nature.  While it might be both, the real shortcoming is that it presents a shallow perspective on how the business is doing.

So, Home Depot pushed back.  So did Starbucks and Bebe Stores, Charming Shoppes, Dress Barn, Guess, Gymboree, New York & Company and Talbots.  Yet despite what these retailers are refusing to report publicly, comp sales are the key number that these companies look at internally on a daily basis!  The emperor is still in the buff.

So much for Sarbanes-Oxley and company transparency.

There’s nothing inherently wrong with the “Comp Sales” metric.  So what’s wrong?  If Home Depot and Starbucks are right and “comp sales” is not the key metric, what is?  Even Eddie Lampert, the hedge fund manager controlling what is left of legendary Sears, thinks there is a better metric

Yet no one is reporting one.

Consistent with the way so many companies in the US and around the world manage their business, the traditional comp sales metric is missing the point.  If you think about what drives store-level (and ultimately all) sales, it’s very simple:  Customers. 

Perhaps the most important measure of a company’s organic growth and customer loyalty is not (just) comparable store sales, but comparable Customer sales, or Comp CustomersTM.  It’s Comp Customers a metric we use when measuring customer loyalty and assessing the opportunity for loyalty marketing for a given business.

Consider that a company’s customers are its true revenue-producing assets and thus just like stocks in a portfolio.  If those customers spend more, they appreciate in value and the portfolio goes up in value, the same way as if individual stocks increase in value. The other way to grow the portfolio, of course, is to add capital, or in this illustration, acquire new customers.

Just as any mutual fund or hedge fund is judged by the returns its investors receive, companies are ultimately rewarded the same way.  The better they are able to grow the value of their customers, the more the company will grow, with or without acquisition.  This organic growth is what commands a premium from investors.

Without growing existing customers, new customer acquisition is simply replacing lost revenue, rather than being true organic growth.  When existing customers are growing, acquisition drives even higher rates of growth.  When you consider how much more expensive it is to acquire rather than retain an existing customer, you understand the true importance of a metric like Comp Customers.

A few weeks ago Starbucks’ Chairman and CEO Howard Schultz declared that the company would no longer report comp sales, rationalizing that the company had been too focused on improving same-store sales rather than the customer experience.  According to reports, Starbucks plans to introduce new quantitative metrics beginning in Q2.  It will be interesting to see what these metrics will be.

This concept does not just apply to retailers.  Measuring Comp Customers is really appropriate to any business with customers (and what businesses don’t have customers?!?). Maybe we’ll see hotel companies report REVPC (revenue per customer) instead of REVPAR (revenue per room)? 

While there are definite challenges in developing Comp Customer reporting, the value from these data and information is more than worth the effort.

It is our expectation that as more companies realize the value of identifying and engaging customers in order to build those relationships, there will be some leading companies willing to go out to the public and report Comp Customers, the same way they report other key business performance metrics, like store comps.