The Customer is Always Right

Cliché

You've seen the sign. It hangs behind the counter in dusty convenience stores, jewelers, boutiques, bowling alleys etc. It probably pops up in movies more than IRL. But it's there: the customer is always right. It's a cliché.

On its face, it's a gentle reminder to employees to mind the moods of customers. Some customers — maybe named Karen — take it as a signal to bully whatever unfortunate sales associate happens to be at the register. Your author also takes it as a signal to lower his expectations for customer service or maybe that the shop's other customers self-select for unpolite behavior.

Customers say a lot of things. Talk is cheap. When looking at a business, Lamplighter's less concerned about what the Karens say and more concerned about what a business's customers actually do. Do they put their money where their mouth is?

Oh, behave

Dan McCarthy has been evangelizing applying techniques that do pretty well for marketing and putting them to work solving investment questions. One's that answer questions like "is more new business actually profitable?" He walks through how to take the type of information published by public companies — which isn't much — and get a decent idea of the value of each customer to a business and how many customers a business might have in the future. The Dan method does this by looking at what companies spend on customers and how customers behave in response to that.

Lamplighter's spent some space discussing the value that Dutch payments company Adyen delivers to its customers. This was the big idea behind its argument for the value of Adyen. But, delivering value to customers doesn't mean much unless they pay for it. So, how do Adyen's customers respond to its attentiveness? Can you get an idea of how valuable Adyen's customers are to the business?

Customer snapshot

Adyen doesn't disclose too much detail about any of this. You can't quite apply Dan's rigorous framework to Adyen. But you can cobble together some of the pieces.

The first piece of information is how much Adyen spends on bringing in new customers. This, like R&D and other expenses, is better considered an investment rather than an expense. That spending will pay off at some point in the future.

The company doesn't tell us specifically what it spends on winning new business. All it offers is "sales and marketing" spending. It’s not perfect, but it’ll have to do.

The second piece of information is how much new customers spend with Adyen. This is also tricky. Adyen sort of provided a picture of this in a chart, but neglected to provide the numbers behind the chart. It’s a literal picture. So, Lamplighter took a shot in the dark and eyeballed the rough numbers — very scientific.

Putting those two pieces of information together, Adyen spent about €1.80 on each Euro of new revenue in 2020. By 2022 it only spent about €0.90. It doubled the bang-for-its-buck. This means that Adyen makes its investment back in something under two years.

To boot, customers spend more each year after becoming customers. They spend more in their second year as customers than their first. They spend more in their third year than their second, etc. In their fourth year, customers are still growing their spending to Adyen at 35%.

The final piece of the customer picture is that less than 1% of Adyen’s customers turnover in a year. Loosing so few customers really helps juice the value of winning additional customers. Other businesses might have to replace 10-15% of their business each year just to stay in place.

Going Dutch

Adyen's customers behave pretty well in response to the effort and investments it makes into its business. They're eager to pay for it. Adyen isn't the cheapest payments solution on the market, but when you ask its customers what they think, they return rave reviews — that is, if you know how to listen. Adyen’s customer behavior hints that, yeah, the value they get from Adyen is a lot more than they're spending. And the customer is always right.

Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.