For many years now the principle of Customer Value Management has proposed that companies should invest behind those customers who offer the highest return and ignore those with low profit potential.
The latest manifestation of this seemingly rational approach is the recent proposals from CRM gurus Don Peppers and Martha Rogers that companies should be using “Return on Customer” rather than “Return on Investment” to measure the effectiveness of their activities and allocate resources.
There is, however, a somewhat different perspective that is now gaining interest amongst a number of leading lights, based on observations of who is winning and losing in the marketplace.
Rather than ignoring low profit customers, or worse still, seeking to evict them, many people now believe that this group hold the keys to creating a successful and healthy business. “How so?” you well may ask.
The thinking behind this approach begins by recognising that individual customer profitability is the product of both fixed and variable cost elements. The fixed costs, such as running a branch network, are shared equally across all customers (or should be) and additional costs are then attracted to each account depending on the types of transactions they have. Those using the branch will cost more per transaction than those who use the equivalent telephone banking service.
If customers are managed purely on the basis of their profitability however, those using the branch will be discriminated against. A number may leave or the bank may decide to close a number of branches if they deem that the level of business it supports is insufficiently worthwhile.
If customer numbers are reduced however, this does of course mean that the fixed costs are now spread across fewer people, making even the higher profit customers less profitable than they were. Moreover, if branches are closed or other cost reduction measures introduced, the satisfaction levels of the customers who remain will also tend to fall. This increases customer defection rates and reduces loyalty.
Meanwhile, the disenfranchised customers seek alternative providers who are willing to provide services at lower cost, such as supermarkets. The fixed costs of their branch networks are already covered – probably by exactly the same people as were previously customers of the banks. They are therefore able to introduce such services and incur only the variable costs associated with doing so. Whilst they are unlikely to ever be able to provide the specialist financial services required by the really high value financial service customers their business gains from serving a mass market of lower revenue but relatively easy-to-service customers.
Therefore the Customer Value Management approach leads to a smaller but more profitable business in the short term but with a possibly shrinking pool of loyal customers and an increasing pool of dissatisfied ones. This is not a recipe for lasting business successful. Little wonder then that we now see on TV companies like Nationwide advertising a single loan rate for all customers, RBSNatWest putting back into its business many of the costs others had stripped out, and even Barclays reversing its branch closure policy and re-engineering its customer centricity.
There is also one other big gain. By learning how to service low profit customers more effectively, and doing so in a way that does not alienate either them or the vast majority of other, more profitable customers, the lessons can be used to make all of your customers more profitable. In the UK, for example, one leading high street mobile phone retailer believes that every customer is valuable – even the unprofitable ones. Their approach is to try to understand why the customer is unprofitable and to seek ways to reduce the costs of servicing such customers. By looking for new, lower cost suppliers, re-bundling activities, understanding their motivations and hence what their needs are and so forth, they find ways to make those customers profitable. Not by changing what the customer is doing but by changing the way they service them.
These new, lower cost, way of working are then re-applied across the whole customer base suddenly making the initial, seemingly low return investment into a massive win. Finding out how to raise the profitability of the lowest 20% by £5 per customer can easily end up increasing the profitability of every customer by £5.
So the next time someone puts up a four box grid with the labels “Defend”, “Develop”, “Switch” and “Ignore” and argues that your low profit customers should be left to wither on the vine, just remind them that those customers are exactly the ones who should be getting the highest attention, not the lowest. Then simply re-label their chart for them using the word “Manage” instead of “Ignore”.