I saw an article the other day with the headline “Shareholders vs. Customers: Who Comes First?” That got me thinking. What was the answer to this question posed by the author of the article? My conclusion: You don’t have to choose.
If you want to create long-term shareholder value in any business, you must meet your customer’s need. That means delivering a product or service with the best mix of price, convenience, quality, and service. Look, there’s a reason both Wal-Mart and Macy’s can exist. Or why both BMW and Hyundai can be successful. These companies have found the right mix of those ingredients above to attract a loyal customer base.
If I’m a Wal-Mart shareholder, I don’t demand that it maximize the markup on each product they sell because the company model is maximizing volume based on low prices. I think we could all agree that Wal-Mart has been reasonably successful employing this model. On the other hand, Macy’s may have a higher markup on the goods they sell. Why? Because it’s necessary if they want to provide the level of service and shopping environment for which they have come to be known. Different business model, but also successful.
So one business “puts the customer first” by keeping prices low, and its business model has rewarded shareholders quite handsomely. The second business “puts the customer first” by providing a high-service shopping experience in an attractive environment. It too has created value for its shareholders. Does either company put its shareholders ahead of its customers? Does either company put its customers ahead of shareholders? How could you tell?
That’s the thing. If a company serves its customers well, it also serves its shareholders well. By asking the “Shareholders or customers, who comes first?” question, you make the assumption that these two things are mutually exclusive. I mean, you can’t have two things that are first — unless we’re talking about Pee Wee soccer where everyone is a winner and every game ends in a tie. But that’s another issue.
What if by putting customers first, you are putting shareholders first? Let’s face it, no business exists without customers. If you don’t fulfill a need for your customers, your business will cease to exist and you won’t provide a return for your shareholders. It seems to me that the two are pretty well aligned.
Well, “what about the car salesman who is so effective that he can negotiate top dollar from his customer for every car he sells?” you ask. He’s not putting the customer first if he’s not giving him the best price possible. He’s not even treating all customers the same because he gets better prices from some than others. He is, however, maximizing the return for the shareholders, at least in the short-term.
My response is that one of two things will happen. Either that salesman will develop a reputation of selling an identical car to his competitor for higher prices and his customers will begin to go elsewhere, thus harming long-term shareholder value. Or, he provides such great service around his sales that his customers are willing to pay more to purchase a car from him. If the latter is the case, he’ll be great at providing shareholder value while also pleasing his customer.
The famous economist Milton Friedman believed that the sole purpose of a business is to provide shareholder value. He said, “There is one and only one social responsibility of business –- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Many people take issue with this because they believe that Friedman is putting the shareholder ahead of the customer. Nowhere in this statement does he say that the “activities designed to increase its profits” must be at the customer’s expense. Meeting the market’s needs better than the competition is what creates profits. And if meeting the needs of the market is being referred to as “putting the customer first,” then my guess is Friedman would be all for it since it allows a business to meet the objective that he says is its sole purpose.
Jack Taylor, the founder of Enterprise car rental company, said, “Take care of your customers and employees first, and profit will take care of itself.” If Mr. Taylor is right — I tend to think he is — then when you put your customers first, you are putting your shareholders first also.
So if anyone ever asks you, “Who comes first in your business, your customers or your shareholders?” my hope is that you can say they both come first.