Leadership Fieldnotes #4: The 'real' customer — Raju Vegesna

(Welcome to Leadership Fieldnotes, a series that draws from the Zoho leadership's notes to the organization on Connect, our workplace intranet platform and knowledge base. The following is a slightly edited version of a note from Raju Vegesna, chief evangelist at Zoho, originally posted on 5 September 2024.)

When we sell a product or a service to an individual or a company, we call them a customer. A business optimizes themselves to serve the customer by creating offerings their customers need. In this process, there are essentially two key entities: employees and customers. This is straightforward, until the business takes on a third entity: the investor.

When a business takes on an investor, things change, immediately or eventually. Inevitably, the investor becomes the 'real' customer.

Most companies share Milton Friedman's viewpoint that a business exists primarily to serve its shareholders. So when an investor enters a business, the focus inevitably shifts from serving their customers to serving their shareholders, who then become their 'real' customers. This is the reason public companies report their performance every quarter to their 'real' customers and not their customers.

As the business prioritizes shareholders, incentives change. Often times, what is good for an investor is not always good for an employee or a customer. An investor expecting higher returns leads to businesses cutting employees or raising prices for the customer. The focus of the business shifts from delivering customer value to delivering shareholder value. Investments transition from R&D to share buybacks. Incentives change.

A business optimizing for repeat customers is okay if the business is a restaurant. But it is not okay if the business is a hospital. A hospital's incentive of wanting repeat customers (to maximize revenue per customer) is misaligned with patient's incentives. Similarly, a hospital wanting doctors to maximize the number of patients (hence reducing time per patient) is misaligned with patients wanting more time with their doctor. These misalignments come from the fact that the customer is different from their 'real' customer.

Sometimes, there is a multi-point misalignment. Google is a good example. We think, as users, we are their customers. But their customers are advertisers. But their 'real' customers, of course, are their shareholders. Degrading user experience and increasing ad prices are a result of Google serving their real customers.

Between the three entities (employees, customers, and investors), investors are the most disloyal of the bunch, yet businesses optimize and financialize themselves to serve them. By optimizing to serve the accelerating greed of disloyal investors, they lose their loyalists—customers and employees. This misalignment eventually leads to the company's decline, shrinking their lifespan.

By not taking on any investors, our customers are our 'real' customers, and this alignment is a significant long-term advantage.

Charlie Munger said, "Show me the incentives, and I’ll show you the outcome."

I'll preface this by adding, "Show me the 'real' customer, and I'll show you the incentives."