Friday, February 24, 2012

All Customers Are Not Created Equal

On Tuesday, I took a look at the Apostle Model, which segments customers by their ratings to two survey questions: overall satisfaction and likelihood to repurchase.  Today I look at another approach to segmenting customers in a meaningful way that was presented in "The Mismanagement of Customer Loyalty'' (Werner Reinartz, V. Kumar, Harvard Business Review, July 2002).

In this article, Reinartz and Kumar outline their research and their approach to looking at customers segmented by profitability and loyalty; this is an important exercise to help you understand which customers to wine-and-dine and which to "ignore." I won't regurgitate the article here, but if you get a moment, read it to get the background on how they came to these segments.

Similar to the Apostle Model, this Loyalty-Profitability Model is depicted in a quadrant chart that segments customers four ways. The chart below shows the segments and the appropriate actions to be taken for each one, according to Reinartz and Kumar.


Segmenting your customers like this is a very enlightening exercise, and you can very clearly see where to focus your efforts and resources.

As you can also see, True Friends are the best fit. In the article, they note that companies need to focus on growing the True Believers, which are not shown in the quadrant above but are your True Friends with the highest levels of loyalty and profitability. (In the Apostle Model, they are equivalent to your Apostles; in NPS, they would be your Promoters.) They are your most-valuable customers. True Believers display high levels of both behavioral and attitudinal loyalty. These are relationships that companies really need to nurture, support, retain, and grow. Continue to delight.

The Butterflies flit in, make a purchase (or purchases) at a nice profit for the company but are not committed to your brand. Efforts to convert these customers to loyal customers are typically a waste of time and resources, despite their high profit potential. But, because of that, they should not be ignored; make the transaction(s) delightful and move on. You won't be able to convert them.

Barnacles can be, like their namesake, a drag on the ship. They are loyal in name but may take advantage of free services and offerings more than they actually spend money with you. They may purchase one product and call your customer support line daily, exhausting resources there without spending another dime. These require a closer look, and actions toward these customers are based on financial/profit potential, specifically on their size of wallet (i.e., value) or share of wallet (i.e., potential value).

And finally, Strangers are not worth any additional effort. They likely bought an item at a steep discount and won't be back. Don't invest any resources in these customers.

As noted by the title of this post, not all customers are created equal; handling the various types of loyal customers with the same approach can lead to wasted resources. It's not practical or profitable. Looking at loyal customers through the profit lens gives you a better picture of where you should focus and helps you tailor your customer relationship strategies.

4 comments:

  1. Hello Annette,

    I think you're absolutely right when you argue it makes perfect sense to treat different Customers differently, depending on their value to the firm.

    It is applied widely and should be considered best practice in a world where resources are scarce.

    There are a couple of 'but'-s I'd like to share with you though. For one because many companies find it difficult to actually do this (treat different customers differently) on the bases of Customer value and secondly because a too narrow focus on profitability can result in value destruction, not creation.

    My first 'but' is that if we do not also look into the value someone brings to the company by means of referral or by being connected to some very good and highly profitable other Customers, you may be mistaking the Customer for being a stranger or barnacle (in your quadrant), whilst her voting with her feet could lead to less new Customers coming in and some very good Customer to leave as well (recent research shows that when a Customer leaves, the likelihood her close relations leave as well, increases by 80%!!)).

    Another 'but' is that Customers may not always bring in cash, but they can also bring in 'knowledge' by means of feedback or participation in co-creation. In these days it is even likely that your Customer is your supplier at the same time.. What if you didn't take into account this kind of value?

    Last 'but' not least: Have you tried doing this? In most organizations it is not that easy to come up with a trustworthy calculation of Customer profitability, let alone apply it in their processes to differentiate. Let there be no mistake: they should try, but in the meantime it could be a good idea to take a little different approach and start using the knowledge the company already has to improve the Customer's experience. E.g. let's use the knowledge that someone dialed into the call center two days ago on a billing dispute when someone dials in again two days later.. Let's not put her through the voice response system, but immediately patch her through to the best equipped and available agent to deal with the request directly. This may prevent her from having to call in again (and thus saves costs) and increases her satisfaction with the company (and thus her likelihood to recommend, buy more, stay longer etc etc..)

    Bottom line: managing Customers for their value makes sense, but managing the Customer's experience even more. You should understand the first, but never forget that your priority is on the second :)

    Thx for the platform. I hope this helps you in any way. If you have questions, don't hesitate to ask. I'm @wimrampen.

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    Replies
    1. Wim, thank you for taking the time to read and to comment. I appreciate your insights and cannot disagree with your thoughts. And your bottom line is right on!

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  2. I think this article will fully complement you article. PLease continue publishing helpful topics like this. Regards, from Always Open Commerce

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