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Break The Short-terms Earnings Trap.

 How to invest in Customer Value by breaking the short-term earnings trap

 

Too often short-term earnings can be more of a priority to businesses, the use of the word short being purely subjective. This is true mainly for these reasons:  businesses need to fund their operating expenses, secondly, investors might not be ready for longer-term returns and regulators might be iffy about the quarterly reports of a business.  And in a highly competitive market, any slip or slack to responding to the market’s behavior due to fiscal constraints can cause high causalities in the loss of huge chunks of market share, and thus this short-termism. Notoriously though, short-term earnings only have the capacity to repay creditors, pay dividends, and other operating expenses. It is especially in such where there’s a lot of uncertainty and economic policies might be influenced by novel issues such as climate change that this survivalist behavior is exhibited. This behavior though has the tendency to put businesses in precarious positions when it comes to growth fiscally and general expansion of market share. This, of course, is a discussion directed to private companies with no advantages that companies listed on stock exchanges have. Generally, listed companies have huge market-to-book ratios that allow them to have a huge pool of spending money to fund long-term investments like assets and open credit lines for expansion and scaling up of production.

So here are some tried and tested methods of increasing customer value and they all will be discussed in brief.

  1. Service/Product Personalization
  2. Reinvesting in product / Product Redesign / Innovation
  3. Product Diversification
  4. Customer Satisfaction / Service Delivery
  5. Cash flow Stabilization
  6. Asset maintenance
  7. Refocusing perspectives

 

  1. Service/Product Personalization

This is especially important for companies with high-value products with long operation life spans. Such products tend to have sentimental value for the owners. The personalization of the product to the customers creates an emotional bond with just not the product itself but the company also, causing a form of loyalty to the company. Future sales may be made on such sentimentalism-based marketing tools.

  1. Innovation

Short-term earnings can be driven by-products at the beginning of their product life cycle. The perception that new products offer better results or value plays a big role in this. Hence some companies/brands may solely depend on the age of the product since its introduction to the market. For instance, personal hygiene and house-cleaning products have a very high rate of products being introduced to the market due to this. Investment into innovation may insure the longer-term survival of a brand. Innovation not just in the product itself but in the design and concept is crucial. Perception is reality, therefore improving a design or concept may maintain the product for a longer period before its decline in the product life cycle. Reinvesting in the restructuring of value-chains may help in adding value to the product with no increase in the cost of production. For instance, some products may become cheaper to produce but package with additional products to the main product might be sold instead to create the illusion of higher value.

  1. Product Diversification

Customers have a higher affinity to brands or goods with a familiar name; hence brands with products in ranges tend to perform better in the long term due to the trust dynamic that they play. Diversification of a product might not be across the different products in the same sector but also across different target populations, categorically, different ages, and income brackets thereby increasing customer lifetime value. Product diversification can change products with a seasonal sales peak to one with a generally healthy demand on all occasions or with peaks that perch above a healthy baseline through which a scale up to meet demand with not significantly affect the production costs. Diversification into other products, new markets can also be a long-term strategy.

  1. Customer Satisfaction

This discussion point needs no introduction, long-term growth and solid baseline earnings can usually be achieved through a loyal customer who is both security and indirect marketing. Customers who have received satisfactory products/services generally increase trust in the brand and in turn market share increments. This is what creates companies with a high market-to-book ratio that funds the expansion. Service delivery improves the general health of the company in case of an IPO.

  1. Cash-flow stabilization

This is the most obvious way of increasing long-term fiscal stability for a business. Offering credit facilities to customers helps provide a healthy baseline on which to build pools of capital for investment for longer-term returns. And generally making credit options available to customers increases sales revenues.

  1. Asset Maintenance

This is all in line with preaching the mantra of company health. Besides the obvious aesthetic effects, it is paramount to increasing long-term growth capabilities when the market expands or demand grows. Talent retention also as important as maintaining the companies physical assets, this is especially true for companies in quaternary industries.

  1. Refocusing Perspectives

The general perception by company leaders and boards is that when coming up with short-term fiscal goals they have to comprise of high turnovers on a quarterly basis. This perspective on company health is mostly erroneous. With the right policies and risk management companies should strive to make policies that embrace the right balance of short-term goals that maintain good fiscal health but also maintaining a grip on long-term effects and giving investors high returns on capital. Due to the dot.com  bust and in the wake of climate change impending policy changes, long-term profitability has been proven to be the major reason being share price, so even though this is a discussion mainly for non-exchange companies, this could come in handy in case of an IPO.

 

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