Tue, 11 Mar 2003

Not all customers bring in profits

Roy Goni, Contributor, Jakarta

"The customer is always right" is becoming an archaic adage, as it is gradually being replaced by an expression that is more relevant to today's highly competitive situation: "Not all customers bring in profits."

Today, a great number of companies regularly study their customer lists to find out who their most profitable customers are. Peter Fader -- a market researcher -- wrote that consumer behavior is currently extremely fickle and unpredictable, and involves sudden surges and declines in spending that cannot be explained rationally.

Fader further said that even past spending data is not always reliable in estimating future sales. This makes it hard for company management to decide which customers are good customers and which customers fall within the category of bad customers.

Apparently, one of the closest-to-reliable ways to ensure a company's profit is to realize that the market consists of layers, and the layers consist of segments, each with its own specific requirements that need special services and care if a company intends to survive amid today's tight competition.

Gary Ahlquist, senior vice president of Booz Allen Hamilton -- the Chicago-based consulting firm -- noted that bad customers have three specific traits: transactions at a low frequency, late payment or sometimes non-payment and, finally, requirements that are hard to understand and fulfill.

This company's findings also reveal that 30 percent of good customers bring in 200 percent profits, 50 percent "middle-of-the-road customers" are sufficiently profitable, while the 20 percent of bad customers more often than not drain the company's profits, as well as energy.

Given such a harsh reality, how should a company react? Another marketing consultant, Mitch Rosenbleeth, says that a well-defined segmentation is one of the solutions, while at the same time a company should revamp its internal structure and embark on relevant strategies and short-term tactical steps to cater to its segmented market. He admits that in reality it is not so simple for a company to delete bad customers from their list. Professor Barbara Kahn -- a marketing guru -- concurs by saying "it's more costly for a company to get new customers in comparison with keeping and maintaining the current ones. Firing customers, therefore, is ultimately the last resort."

Out of the various segmentation "tricks", the one that is preferred by most financial service firms, is personalization. Quite a number of bankers, financial advisors as well as insurance agents are acutely aware that personalization often influences their customers' minds and decisions.

One study conducted by Peppers & Rogers Group and Roper Starch Worldwide -- a marketing research company in the United States -- confirmed that companies that had adopted personalization, or what is also referred to as the relationship strategy, were making huge profits. At least 26 percent of consumers surveyed said that they would immediately switch to another financial company once they felt that the services provided by the original firm had declined in quality.

Capital One -- a credit card issuer with only 20,000 customers -- is one example of a company which was previously unknown but which quickly made a huge net profit of US$180,000 within a year in the early 1980s by applying its Customer Relationship Strategy. This company has since been dubbed as the pioneer in meticulous segmentation and relationship strategies.

Two market researchers from Arizona University, Clemons and Thatchers, conducted a study on the success story of Capital One and came up with two interesting terminologies for consumer segmentation: "Love 'ems" (profitable customers) and "Kill you's" (unprofitable customers). They found out that Capital One experimented with their segmentation through a "test & learn" method whereby elaborate data -- both psychographic and demographic -- on customers is compiled and further supported by an information-based strategy. What other companies can learn from Capital One's successful experimentation are: the importance of accurate and complete customer data, formulation of customer needs, consistency of quality service at all touchpoints with each customer and, finally, the delivery of truly personalized services and products.

Today, all companies, especially banks and financial companies, have no choice but to entirely personalize the features of their products and services if they intend to net a large number of valuable and profitable customers. Personalization in the context of relationship strategy has to be conducted in a holistic way, which means changing the management mind-set and attitudes from product- to customer-orientation. It may sound simple, but in implementation, particularly during the initial stages, it can be most exhausting.

The writer is lecturer in marketing at Unika Atma Jaya University.