The accounting is misleading. Accounting standards say that marketing is an expense and that your inventory is your biggest asset.
But if we step back, take off our green eye shades and look at our business as it truly exists, we see something different.
Our customers are our most important assets.
The issue is one of definitions. Colloquially, we understand an ‘asset’ as something that can deliver value over time. An oil well, a factory, a warehouse, IP, but even a bunch of META shares. These have all been built or purchased over time with the expectation of delivering greater value in the future.
The ‘how’ that conversion happens matters. In the case of META shares, we just hope that people in the future value them more than they do now. But in the case of a factory, raw materials are turned into finished products making them more valuable.
How does it work in omni channel? While some brands may own their own manufacturing and warehouses and offices, the most important conversion happens when customers buy the finished products. In that instant of payment, the value suddenly converts from what you paid for it to a (hopefully) much higher value of what the customer paid. That conversion can only happen through your customers. They are the key to the whole process.
We advertise to acquire customers.
We buy inventory at a low price in order to sell it at a higher price to those customers.
In reality, we have created a machine.
The purpose of the machine is to convert low priced inventory into high priced sales.
We invest in the form of marketing dollars to build a bigger and better conversion machine, our customer base. We then feed that machine inventory to produce sales. That’s it.
But accounting tells us a different version. Our marketing is an expense and our inventory is the asset. That collection of customers? If they are accounted for at all it’s in a liquidation scenario where they become ‘the customer file’ or in an acquisition where they become some vague concept of ‘goodwill.’
The accounting obscures what’s really important because it leaves out the critical ‘asset’ in the machine. It leaves out the customers. My point here isn’t to change accounting standards and practices. The point is that it’s easy to allow the accounting to distract us from what is really important in our business.
Our margin is the measure of how effectively our machine converts low value to high value.
Our CAC’s, payback periods, first purchase profitability, MER’s are measures of how efficiently we are investing in building the customer base. They also provide us indicators of our limitations in building that customer base.
Days Inventory, Inventory Turnover, Cash Conversion Cycles, Net Working Capital as a percentage of Net Sales and Free Cash Flow as a percentage of Net Sales help us understand how efficiently we are using cash in that conversion process, how much cash we produce from sales and how much cash we need to keep the machine running.
More sophisticated metrics like ROIC (Return On Invested Capital) and ROE (Return on Equity) tell us how effectively we are investing our capital and how we compare to alternatives.
But how do we understand our most critical asset, our customer base?
It’s easy to know if our customer base is getting bigger, but how do we really measure if it’s getting better? And how do we better focus our investments in building that customer base?
We start by understanding our customer base as a collection of forward cashflows. Each customer whether they bought from us ten years ago or we plan to acquire them two years out, represents a forward cash flow. Our goal over time isn’t to simply stack these cashflows.
Our goal is to create the best stack of cashflows with the resources we have. In other words, the best stack as efficiently as possible.
The key is to create a measure of the quality of our repeat customer cashflows. You already know that not all customers are equal. Some buy once and never come back. Some only buy with discounts. Some buy and return like crazy. Some use chargebacks to steal from you. And some, those amazing few, buy from you frequently in large amounts and at full price.
Calendar based cohorts e.g. the August 2025’s are a start, but tell a cloudy story because by definition, they place primacy on the date of first purchase. As a result, they are an average of all the customers whose first purchase was in August 2025. This makes it harder to see the types of customer discussed above. Calendar based cohorts are also skewed by seasonality. And they are easily skewed by marketing changes (that was when we had our big sale or that’s when we were really pushing XYZ), inventory issues (that’s when we stocked out) and product changes (that was when we introduced products ABC). Calendar based cohorts can provide clues, but only indirectly.
The better way is to measure directly. If we think of our current customers as a stack of future cashflows, then we can sort those cashflows by quantity and quality. When we do that, we find that a majority of our profits come from a small number of customers. It’s a power law. Not all customers are equal so not all their cashflows are equal. By numbers, this sorting will look like a pyramid with a few super high value customers at the top and the large majority of customers who bought once and never returned at the bottom.
The next step is to create a few layers to our pyramid. Don’t overdo it. Three to five layers is a good start.
Contribution profit is the key metric. You want to account for the discounts and refunds, not just the gross sales. But you also want to account for what the customers are buying. Most brands have multiple products with very different unit economics because the product margins are different and the shipping and fulfillment costs are different. This product mix tends to skew bundling. And it influences repeat buying. For example I had a client with a wide range of products and prices with multiple bundling options. It was clear that customers who bought the expensive products came back and bought more expensive products while the customers who started with the low prices either didn’t come back or when they did, usually bought more low priced products. Lastly, you need to measure this over a reasonable timeframe. This will depend on your specific business but it’s probably more like 12 or 24 months. It’s definitely not lifetime.
So now imagine re-sorting our customer file by contribution profit over X months e.g. 24 months. At the top of the list are the most valuable customers and at the bottom the least valuable. And then we create our layers by setting greater than values for each layer i.e. greater than $1,000, $500, $100 - whatever makes sense for your business.
With these definitions we can then create our customer pyramids as snapshots over time. The change in our customer pyramid over time is how we understand if we are getting better or worse at stacking quality cashflows. And once we can understand that, we can then judge our customer acquisition by that standard. We will continue paying attention to CAC, LTV, payback periods and MER. But we will really be interested in how efficiently we use our ad budget to create higher value customers and how many of these higher value customers we can create while maintaining acceptable efficiency metrics.
What’s fascinating with this analysis is how customer pyramids can change over time. If the pyramid is broadening it means the company is becoming more reliant on lower value customers. Rapid growth and increased marketing will do this. It will take time for the newly acquired to move up the pyramid of value. But it can also indicate the company is losing product market fit and struggling to convince customers to buy again and at the desired prices.
If the pyramid is steepening, it means the company is becoming more reliant on the highest value customers. This could indicate the company is exceptional at converting newly acquired customers into high value customers. But it could also indicate the product set struggles to appeal to a wider audience or the company is under investing in customer acquisition.
The customer pyramid analysis enables you to directly measure the value of your customer base, your critical asset, as well as understand how effectively and efficiently you are building that asset over time.
What you are really doing is measuring the value of your brand. Because your brand is just the predisposition of a group of people to buy from you, you now have a tool to measure your brand building. Not only will you build a better brand, you will have a clear analysis and proof to show investors and potential acquirers the value of your brand in a way that standard financials never can.