If you're in business, be sure to learn the lesson Talbots & Netflix amazingly ignored and paid a huge price for.

You can make almost any mistake in business and recover--except for one:  Not taking care of the customer.  It almost seems like an old, tired bromide.  Nonetheless, it is breath-taking to witness the arrogance--or it might be just simple ineptitude--for failure to have remembered the most sacred rule in business.  

Two companies come to mind as perfect examples of firms which seem hell-bent on crash-landing instead of taking off by not doing the most elementary thing a business can:  care about the customer.  These would be Tablots and Netflix--for one it's almost all over except for the crying.

Talbots.  This summer Talbots [TLB] announced another first quarter loss, after a series of 14 out of 15 steady quarterly declines.  It's a long story of mismanagement--Talbots has had a cumulative loss of $763M over the past four years--but things got really bad after the decision in mid 2010 when Talbots decided to cast it's lot with new lines to thirtysomething women, rather than its historical focus on the thirtysomethings' mothers [See Talbots seems to have ignored the obvious.]  The previous, now-jilted, set of affluent women were understandably insulted and many vowed to never to back--with a fair number actually delivering on exactly that promise!

While the previous, spurned customers now going elsewhere for their apparel [I would guess mostly to Ann Taylor], and with the new attempt at an affair with younger women that has not gone well, things are now getting pretty dicey:  Talbots has had to shut-down about 20% of its 568 stores.  But it gets worse:  back in the summer of 2010, the day Talbots announced its plan to woo a new set of customers [and, in effect, let its old customers go], the firm's stock value was $16.47.  Today, Talbots' stock value--after a steady, unbroken decline line--is $1.50, less than 9% of it's previous high.  This all happened because the people at Talbots thought they "ran a company" instead of serving a set of valuable customers.  

 Netflix.  Look up the word "inept" in the dictionary and you'll find a brand symbol for Netflix.  It's stock has declined 77% in a mere four months after telling it's customers in an impersonal, early-in-the-morning eMail message that they were changing the way Netflix does business--as well as changing the plan and rates customers had grown to value and which had made the firm so popular in the first place [See It's sad when a great company acts shiftily].   

Remember, this is the company that cut it's teeth and built it's reputation, early-on, by always gauging the pulse of it's customers:  "Did you like the movie?" "How would you rate it?" "Would you recommend it others?" "When did you receive your DVD in the mail?"  "Please rate how viewing the streaming video was."  It even held a million-dollar contest to build a heuristic that best understood how it's customers "thought" about movies.

But when it came to managing the most critical part of the business--the actual relationship with it's paying customers and how its new plan might "set" with them, they decided to ignore the first business rule!  Today it is reported that Netflix [NFLX] has lost over 800,000 of it's customer base and it's stock value has plummeted--I know, I own it!  

A firm has no value outside of its customers.

There is nothing more valuable than a trusting, loyal customer.  The life-time value of each, the Talbots' patron on the one hand and the Nextflix customer on the other, is to be literally measured in thousands of dollars apiece; however, for these two firms, many customers are gone simply for the failure of management to remember the most basic of business principles.  

The price of forgetting the lesson.

It is a lesson that virtually all business students are taught [or, at least, ought to be taught]:  in the last analysis, no commercial entity--large or small--should really be measured in terms of it strategic plans, or by the physical, operational, or financial assets it holds.  Instead, it should be gauged solely in terms of the number and the quality of it's customers, for they are the only true "asset" that any firm has that keeps funneling it money.  Peter Drucker said it perfectly when he said that the only real purpose of business is to create a satisfied customer.  

Obviously [but unfortunately], the execs at Talbots and Netflix skipped class the day that lecture was given.  And it looks today that they are paying a very high price for that mistake [as are their employees and stockholders]!  

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Follow Keith's biz blog on Twitter for updates and see more of what he's reading about on his Facebook Page. If you are inclined, you can write him at kmurray@bryant.edu.