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He or she who owns the customer relationship clips the most value.
It’s a maxim I recently discussed with Alex Song, former VP of Finance at Ramp on Run the Numbers.
Owning this relationship means being the primary touchpoint the customer interacts with and trusts, essentially becoming the gateway for transactions.
All money must pass through you.
This coveted position can be achieved through several avenues:
Long-Term Durability: Companies like Mastercard dominate credit card processing because they've established a long-standing, reliable infrastructure that users and businesses trust implicitly. As a result, they clip the most value, even when more “innovative” fintech companies build on top of their gateways.
First-Mover Advantage: In new sectors, like crypto, platforms like Coinbase secured a significant portion of the market by being early entrants. Because they were the first reliable platform to transact a new currency, they earned customer trust, despite regulatory scrutiny and macro swings (I stand here today, financially solvent, because they never approved my account back in late 2020, lol…)
New Ways of Accessing Deals: Platforms like Tropic for software procurement and Robinhood for stock trading have redefined access, making transactions simpler and more accessible.
Monopoly: The Apple App Store exemplifies a scenario where a single entity has control over a critical ecosystem, dictating the terms and reaping substantial (predatory?) benefits.
When a company owns the customer relationship, it can leverage this position to extract disproportionate value… Even an amount past what market participants may deem as fair (see: Apple). This might manifest in access to lucrative payment processing fees, valuable data insights, and the potential for resale and upsell opportunities.
Monetizing the Customer Relationship
For instance, credit card giants like Visa and Mastercard not only earn a cut from every transaction conducted on their networks but also capitalize on the transactional data generated. Hedge funds have long utilized this data to gain insights into consumer behavior and economic trends, slicing and dicing the information to understand regional spending patterns, popular products, and menu item profitability (yes, they know you went to Chick-fil-A five times last week). This data is invaluable for making investment decisions and forecasting market trends. As a result, these companies are not just facilitating transactions; they’re also in the business of selling insights. You can’t do that if you don’t own the customer relationship.
Value-Added Services from Data Insights
Beyond merely collecting and reselling data, companies can create additional value by providing actionable insights to their customers. For example, a payment processing company might analyze transaction data to identify opportunities for cost savings or efficiency improvements. They could approach a business and say, “Based on your transaction history, we’ve identified a way to reduce your payment processing fees” or “Here’s how you can streamline your checkout process to increase conversion rates.”
In the procurement space, companies like Tropic harness data for strategic advantage. By analyzing purchasing patterns on their platform, Tropic can provide quarterly reports on the most popular tools and software products being bought. This takes the form of price checks so customers can see if they’re getting a good deal based on historical data for similar purchases. You can’t do that if customers don’t go through you to begin with.
In fact, a company may even provide data to cannibalize one of it’s own services in favor of others. AWS is the prime example here. They’ll help you “optimize” your cloud spend, only to get you hooked on 17 other products they offer.
This shift from passive toll collector to active participant in the value chain not only solidifies customer relationships but also opens up new revenue streams.
Ways this can go wrong
However, it’s possible to actually get “too” in the way of the money. Companies need to be cautious about overstepping boundaries. Sam Walton used to say “your margin is my opportunity.” And he was right. If you get too greedy, customers will churn out the top the second a better alternative comes along.
Being seen as a “toll”
Any time you’re called a “toll collector” or a “tax” it’s a leading indicator that your customer will drop you the first chance they get. It means you take more value than you provide, and it culminates in churn and resentment. Ticketmaster has received widespread criticism for it’s high service fees, opaque pricing, technical issues, and limited competition.
Lack of flexibility
Many traditional cable and telecom companies have faced public scrutiny for their inflexible service plans, long-term contracts, and limited (sometimes nonexistent) customer service options. For years, customers have complained about restrictive data plans, high overage charges, and difficulties in changing or canceling services. This rigidity often stems from a lack of competition and a focus on maintaining revenue from existing business models rather than innovating or improving customer experiences. You’ve seen millions of Americans drop their cable packages in favor of YouTube TV or Fubo, only maintaining a partial relationship with the detestable cable company to access the Wi-Fi they need to stream.
Misuse of customer data
A notable example is Carta's venture into the secondary market, which was closely tied to its core cap table management services. The initiative faced challenges because clients were uncomfortable with the idea of their confidential cap table data being potentially used in secondary market transactions.
This highlights a critical point: sometimes, the very data that gives a company a strategic advantage can also restrict its ability to fully capitalize on that advantage. The trust customers place in these companies hinges on the assurance that their data will not be misused.
Getting MORE in the way of the money
As Uncle Ben from Spiderman would say, getting “in the way of the money” is a powerful position that comes with both significant opportunities and responsibilities.
Companies that own the customer relationship and trust can capture outsized value. But they must also be thoughtful about the ethical implications and potential conflicts of interest that come with handling sensitive data. There’s a fine line between using data for customer success vs customer exploitation. This dual role of gatekeeper and enabler is where the real opportunity lies for companies looking to strategically position themselves with customers for a larger wallet share.
Run the Numbers
Spotify | Apple| YouTube
Alex and I discuss:
How you can securitize anything
The need for a balance sheet when there’s risk
Crazy stories from his investing career