Customers becoming shareholders can work for both companies and consumers, writes Peter Thomson.
Owning shares in a company is becoming the ultimate customer loyalty program. Customers who love a business enough to buy shares in it can become brand advocates who spend more, tell their friends, and help the company out in all sorts of unexpected ways. Both small and large companies are finding that selling shares to their customers can make a real difference to long-term customer loyalty.
In 2000, Bain & Company did a major study of share ownership and customer loyalty in large publicly traded companies like Nike and Apple. They found that customers who are also shareholders spend 50 percent more than non-shareholders, refer 100 percent more people and visit the company’s store (or website) 70 percent more often than non-shareholders.
In 2009, Australian researchers looked into public companies like Woolworths and Qantas and found that shareholders are more brand loyal, less likely to churn, more likely to be brand advocates, and more amenable to cross-selling across multiple product lines. International research has also found that customer shareholders are more likely than other investors to hold onto a company’s shares when the share price goes down.
One of the earliest examples of customer ownership of a consumer brand is Ben & Jerry’s ice cream. In 1984, Ben & Jerry’s raised capital by selling shares directly to local Vermont residents. The company was eventually acquired by Unilever in 2000 for US$326million. More recently, companies like Boston Beer (which makes Sam Adams), GoPro and Santander Bank have set aside allocations in their initial public offerings (IPO) specifically for customers.
Encouraging customers to become investors
In New Zealand, we have a strong legacy of public share ownership in companies whose products we use, such as Air New Zealand, Fisher & Paykel, Spark and Trade Me. Several newer sharemarket listings such as Xero, 42 Below vodka and BurgerFuel have widely promoted their IPOs to the general public, focusing heavily on encouraging their own customers to become investors.
Since 2014, new securities laws have allowed private New Zealand companies to make a public offer of shares to their customers without going through a full IPO process. This has opened up the idea of customer ownership to emerging consumer brands with a loyal customer base. For example, Invivo wines recently raised over $4 million from 687 shareholders across two capital raises, and Zeffer cider raised $3.6 million from 503 people. Online investment platforms like Snowball Effect and PledgeMe are providing a streamlined mechanism to facilitate these types of investments.
Shareholders in these smaller companies are often more directly involved than those on the stock market. Invivo’s AGMs are well-attended, lively affairs, with wine tastings and interactive shareholder sessions with the management team. Zeffer’s most recent AGM included open shareholder discussions with management, cider tastings, food trucks and even a concert.
Companies like Invivo and Zeffer are choosing to open their investment capital raises to customers because they want to deepen customer loyalty and encourage word-of-mouth brand advocacy. Anecdotally, Kiwi shareholders also seem to be following the trend of increased spending, with Zeffer and Invivo investors spending more with these brands than they would have otherwise. As winery owners have always known, a drink tastes better when some of the profits are coming back to you.
Once investors have a sensible portfolio in place, investing a small allocation directly into companies they are already a fan of allows them to feel a more direct connection with brands they do business with every day.
It might seem mundane, but the humble email newsletter is proving to be the most powerful way of getting investment into these types of public capital raises. Research by Snowball Effect has found email is the best way for companies to present their capital raise to their customers, beating social media, digital advertising and billboards. Email is a powerful channel for customer loyalty as the company has the recipient’s undivided attention (even if only for a moment) and can follow up more directly than on channels like social media.
However, having customers as shareholders isn’t all roses. Companies need to keep shareholders up-to-date on company progress, and even the most patient investors will eventually want to see a return on their investment through dividends, a stock exchange listing, or the eventual sale of the company. The current lack of an active secondary market for private companies in New Zealand means investors generally have to wait a long time before they can see a return.
Raising capital from the public is easier for companies that already have some level of private backing from cornerstone investors. Companies that have raised capital from major investors have usually had to put in place proper corporate governance and shareholder reporting, so the additional burden of taking on a large number of new investors is not as great. Also, having large investors already involved increases the company’s credibility and gives small investors some comfort in knowing that a large investor has taken the time to evaluate the business.
The recent slowdown in new listings on the NZX seems to be part of a global phenomenon of companies staying private for longer and being wary of the costs of listing. Companies that have opened themselves up to investment from their customers may be in a better position when it comes time to list on a stock exchange, by building up good governance habits and already having a nice, broad shareholder base going into an IPO.
Once investors have a sensible portfolio in place, investing a small allocation directly into companies they are already a fan of allows them to feel a more direct connection with brands they do business with every day. Private companies make for high-risk investments but there’s a lot to be learned from the process of becoming a direct shareholder. In terms of financial literacy, it’s eye-opening for everyday New Zealanders to get the chance to peek behind the corporate veil and share in the ups and downs of building a Kiwi business.
Snowball Effect is New Zealand’s leading private equity marketplace. The company has facilitated over $45 million in investment for more than 40 companies. Snowball Effect also provides related services including preparation of investment materials, shareholder communication, share registry management and sourcing of company directors.
