Wednesday 10 December 2008

A distribution of surplus in proportion to trade

The Co-operative Group in the UK announced recently that its interim dividend payment for the first 6 months of 2008 was to be £8.9m, this is £2m more than the interim payment for 2007 and comes on top of a full year dividend payment of £38.1m in June.

For those that don't know the Co-operative Dividend programme was re-launched in 2006 and essentially awards points to members based on their spend within the group of companies – these points are then assigned a value every 6 months as an interim and full year dividend, based on the profits of the group. In this way the programme pays out a true dividend or share of profits based on the contribution the customers make to the group as a whole. Since its re-launch the Dividend programme has recruited over 500k new members, taking the Co-operative membership to 3.1m.

Although the programme has recently been re-launched and replaced a previous "standard style" retail loyalty programme it is essentially nothing new. The founding members of the current Co-Operative movement, the Rochdale Pioneers Society were established in 1844 and within their original eight 'Rochdale rules' was the inclusion of a requirement for the "distribution of surplus in proportion to trade" which became known as 'the divi' - this was probably one of the first "loyalty" programmes in the UK.

The Co-Op aren't the only organisation to support loyalty through a share of profits. The Britannia Building society in the UK has been running a whole of bank style loyalty solution called Britannia Membership Rewards (BMR) for over 10 years. This scheme rewards customers with points based on their financial product holding and value within those products. On an annual basis the points are converted to a cash value based on a proportion of the society's profits and are then paid out to its members.

Although these businesses as co-operatives and mutual societies are built around ownership by their members and the return of excess profits as either a dividend or competitive pricing, there is probably a lesson here for all businesses.

The recent financial crisis highlighted the unhealthy focus some companies have on either their employees (and associated bonuses) or on shareholders and their requirement for ever increasing profits – sometimes at the expense of long term growth and stability. Badly sold mortgage products to customers who clearly had no ability to pay or would struggle to pay in the future were sold by financial institutions who were thinking more about short term gain than a long term relationship. The other banks and investors buying these badly sold mortgages up as packaged portfolios or Collateralised Debt Obligations (CDOs) weren't thinking of the customers either – they were all just looking at the profits to be made. You could argue that for these businesses the customers were almost an inconvenience, with the focus simply on making money for stakeholders rather than thinking about delivering benefits to their customers.

A sustainable business however is based on both acquiring and retaining profitable customers - this doesn't mean a business has to be owned by its customers but it does need to recognise that customers are the lifeblood of the business and it needs to acquire them with a view to retention - providing great products, customer service and recognition of their loyalty from day one. In their book "Return on Customer" Don and Martha suggest that "the only value your company will ever create is the value that comes from customers -- the ones you have now and the ones you will have in the future. Businesses succeed by getting, keeping, and growing customers."

They go on to put it succinctly saying "Without customers, you don't have a business. You have a hobby". You could probably spin this around a little and say "Without focusing on customers, you don't have a business. Period."

Whether the Co-Operative Groups recent renewed success is a result of the re-launched dividend programme, their group wide rebranding or their increased focus on ethical investments and fair-trade products is difficult to tell – what isn't hard to tell is that a business which is still growing after 160 years must be doing something right.


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