Adjusting Your Aim: Forecast Better to Invest Better

This is part two of a two-part conversation with Michael Mauboussin. Listen to part one here.

In pursuit of revenue growth, many companies take big swings.

My friend and colleague Chris Zook summarizes it well with a tennis metaphor: The truly great tennis professionals have the best footwork. Making small last-second adjustments, they time and balance their shots effectively. Amateurs tend to lunge as they try to hit the ball, taking big swings that often miss. Like skilled tennis players, companies that triangulate data, models, and research to adjust their understanding of their market’s needs and opportunities will make the strongest shots and generate long-term value.

Michael Mauboussin, head of Consilient Research at Counterpoint Global, Morgan Stanley Investment Management, uses Chris’s story to illustrate his belief that businesses need a strong approach to understanding total addressable market (TAM) and customer lifetime value (CLV) so they can make small, precise adjustments that increase their odds of success. “Often investors throw numbers out there without having it grounded in one or more of these basic fundamental concepts,” he says.

Over- or underestimating TAM can cause investors to pressure companies into making moves that don’t pay off. For example, they might press a company to expand products and services too fast or too far afield of its core. While expanding products and services can lead to profitable growth, Michael points out that it comes down to how well these new products generate value. “Not all dollars are created equally,” he says. “Companies may pursue growth in terrific ways but also in ways that dilute the customer experience and don’t create a lot of value.”

Success requires a sophisticated and thorough understanding of your customer. Companies that take the time to disaggregate their customer base and understand the underlying customer heterogeneity will make better investments in new and improved products and services. And as Michael notes, that means choosing the right data and evolving it over time to generate accurate revenue forecasting.

For the first time in more than 200 episodes of the Net Promoter System podcast, my guest takes over the role of interviewer, quizzing me at least as much as I interrogate him. Together, Michael and I discuss the metrics required for good revenue forecasting and value creation. We also share memorable examples of companies’ successes and failures.

In the following excerpt, Michael shares his thoughts on CLV and customer acquisition cost (CAC) missteps.

Rob: If you’re doing CAC blindly, you can make horrible mistakes. What are examples you’ve seen of misuses?

Michael: You want to take into consideration all the costs you’re absorbing. What I want is a very specific bridge from the components of CLV to CAC, to the ultimate cash flows that drive my valuation model.

Anytime there are missing components to that, those have to be reintroduced in a way that’s thoughtful. It’s as simple as that.

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