Why a City’s Primary Customer Is Not Its Citizens

The most important customer for a city is the one that makes the biggest net contribution.
by | March 2, 2015

Jerry Presley

Jerry Presley has served on the Greenwood, Colo., city council since 2007.

I serve on the city council in Greenwood Village, Colo., a suburb of Denver, and I have asked myself this question: "Who is the city's primary customer?" The answer I came up with may surprise you.

Businesses ask themselves this question all the time. An organization usually has many types of customers, and the challenge is to identify the primary customer. In the business world, this is called market segmentation, and it's important because organizations cannot be all things to all people. An organization needs to focus.

A city is not too different. It provides services, generates revenue and has to meet a payroll. While a city is not in business to make a profit, it should be run in a business-like manner. Just like a business, a city needs to focus on its primary customer.

Most people would say a city's primary customer is its citizenry. It's called a city for a reason, after all. Not surprisingly, most elected officials may drill down further and say the primary customer should be the voters.

I want to present the case that in most cities, the primary customer should be the business community, and maybe even a segment within that category. But the primary customer should not automatically be the citizens or voters.

Customers typically receive goods or services in exchange for monetary consideration. Customers generate revenue, and it's pretty simple to follow the money trail.

The business community pays sales and use taxes, commercial property tax, "head" taxes, franchise fees and other levies. Homeowners pay residential property tax (at a much lower rate than commercial property owners) and other fees.

But it's not the gross revenue that's important; it's the net revenue.

Businesses are net-cash contributors and citizens are net-cash consumers. This should be true in every community, and if it's not, something is fishy. Perhaps the city is giving away too much in business incentives. As a matter of public policy, citizens should never subsidize business. It should always be the other way around.

The business community may generate, let's say, 40 percent of the revenue in a given city, but the cost of service to that market segment should be less, and the difference will be a contribution to the city's coffer.

Citizens may generate, let's say, 60 percent of the revenue in that same city, but the cost of service to the residential market segment should be more, and the difference will be a withdrawal from the coffer. This is like a dividend to the citizens. They get something for less than it actually costs, paid for to some degree by the business community.

So while citizens may generate more gross revenue, the business community generates more net revenue. If the city were a business, which market segment would you want more of? The answer is more businesses.

The citizens are more like shareholders, each with the ability to vote exactly one share. They elect the board of directors -- the city council -- and the board's mission is to maximize shareholder value. It's in the shareholder's best interests when the board correctly identifies the primary customers and establishes policies that attract more of those customers.

A thriving business community pays dividends to shareholders in the form of more hiking and biking trails, faster police response, more snowplows, lower residential taxes, a stronger economy, more jobs, better pothole repair, more flowers, better traffic control, less-expensive trash removal, a cleaner environment and many other benefits.

I am not advocating that a city blindly court business, because some businesses could easily diminish shareholder value. Excessive traffic, inappropriate signage and unacceptable levels of noise are just three of many examples of how a business could decrease shareholder value. A good council member will always do what's in the shareholder's best interest.

Citizens are customers for sure, but they are shareholders first. Citizens benefit when their elected representatives are able to identify the primary customer.

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VOICES is curated by the Governing Institute, which seeks out practitioners and observers whose perspective and insight add to the public conversation about state and local government. For more information or to submit an article to be considered for publication, please contact editor John Martin.

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