It is pertinent to assess customer response and evaluate if they are worth the company’s time, money, and creativity, says Anne Field Any company with an eye to growing the top line ought to continually ask how it can serve its customers better. But that is only half the conversation. Companies then need to turn that question around and ask how well their customers are serving them.
All customers are not created equal, says Sunil Gupta, the Meyer Feldberg Professor of Business at Columbia Business School and a visiting Professor at Harvard Business School. Some simply are not worth the effort and expense required to acquire and retain them. Recognising this is critical to a company’s ability to wring the most value out of its marketing, product-development, and service efforts.
Yet few firms take this message to heart, says Gupta, co-author of Managing Customers as Investments: The Strategic Value of Customers in the Long Run (Wharton School Publishing, 2005). The result? An enormous drain on their bottomline.
So how do companies end up with too many customers who are a burden rather than an asset? In many cases, says Gupta, the fault lies in doing too much of a good thing. For instance, some companies focus so intently upon growth that they overlook the cost of that growth. Another pitfall is an overzealous pursuit of customer satisfaction. The fact is, he says, some customers just are not worth the time and effort required to satisfy them completely. So how can you make sure that the customers you woo and strive to satisfy are worth your time, money, and creativity? Ask yourself, says Gupta, the following questions:
Are you chasing the wrong kind of growth?
Accelerating top-line growth is great — except when it is accomplished at the expense of profits. For instance, in the early 1990s the UK division of Hoover, the vacu um cleaner company, was looking for ways to acquire new customers and juice up sales. The marketing team came up with an incentive saying that anybody who purchased 100 worth of products would receive two free airline tickets from the United Kingdom to anywhere in Europe.
The response was overwhelming and energised by this success, the company made an even more tantalising offer: customers who spent at least 250 pounds on Hoover products would get two free air tickets from the United Kingdom to anywhere in the United States. In a period of a few months, more than a quarter of a million people took Hoover. The company acquired loads of new customers and saw its sales go through the roof. But it also saw its profits plummet. The lesson here, says Gupta, is that in seeking new customers and a boost in sales, a company should not lose sight of profits. It is a lesson that is particularly timely now, in today’s renewed enthusiasm for sales growth.
Are your goals encouraging profit-building behaviours?
Sales people are generally awarded for meeting sales quotas rather than hitting profit goals; they are, in effect, encouraged to cut prices to close deals. When zealous sales professionals slice the margin too thin, the sales they close benefit themselves more than they do the organisations. Take a look at the goals your company sets for its sales team, Gupta says, and if profit targets are not there already, build them in. Another goal that can chip away at profits is attaining 100 per cent customer satisfaction. “If you have 100 per cent customer satisfaction, you are probably spending too much money,” Gupta says. Some customers quite simply are not worth your while to satisfy com pletely. A better approach is to provide different levels of service to customers based on their profitability to you. Are you being misled by averages?
When assessing customer profitability, many companies make the mistake of focusing too intently on averages and overlooking a crucial truth: for most companies, some customers are extremely profitable and others are not. Gupta says the old 20/80 rule — that 20 per cent of your customers generate 80 per cent of your profits — is a thing of the past. What has re placed it is the 20/220 rule: 20 per cent of customers deliver as much as 220 per cent of the profit — and the bottom 20 per cent may provide a negative profit of 100 per cent. If this is the case for your organisation, eliminating the bottom 20 per cent of your customers could dramatically increase your net profits. When you rank customers by their profitability, you can detect patterns that reveal weaknesses in your marketing efforts. But this can also allow you a chance to try to turn less profitable ones into money-makers by crafting special offers. Making this effort is worth your while because serving existing accounts is considerably cheaper than looking for new ones. But if your efforts fail, cut your losses and divert resources away from these customers toward higher-value ones, says Gupta. Do you know what your customers are doing?
Creating and feeding a sophisticated customer database is the key in mining profitability data, but it is important not to be too internally focused. “The database tells you only what the customer does with you,” says Gupta. “You can lose sight of what the customer is doing with competitors.”
For instance, your typical bank may have an enormous amount of data about individual customers’ banking activity within its four walls, it knows very little about the rest of its customers’ financial lives. Without this knowledge, the bank could significantly underestimate or overestimate a customer’s potential profitability. To solve this problem, Gupta advises that companies supplement the data churned out by their database with occasional cus