Abstract
This article looks at what we mean when we talk about customer profitability, and examines the idea of ’total customer value’ - how much a customer is worth to the firm. The conclusion is that we cannot form an accurate view of what a customer is worth using a traditional profitability analysis. I argue that a broader approach to the problem of identifying profitable customers is needed if marketers are not inadvertently to destroy shareholder value by favoring costly customers.
Some customers cost us money
It’s a familiar saying that business would be great if we didn’t have to deal with customers. But have you ever stopped to consider that your business might be more profitable without customers - without some of them, at least?
In an article published in the Harvard Business Review, Cooper and Kaplan (1) reported the astonishing case of a heating wire company which analyzed its customer profitability and discovered that the famous 20 - 80 rule, which would suggest that 80% of profits came from 20% of customers, had to be revised:
"A 20 - 225 rule was actually operating: 20% of customers were generating 225% of profits. The middle 70% of customers were hovering around the break-even point, and 10% of customers were losing 125% of profits"
Even more amazing
it was the largest customers who were producing the biggest losses.
Changes in our market places, and better information about the profitability of our customers, are challenging some of our cherished notions about what constitutes a good (and profitable) customer. Large accounts, for example, may carry the prestige but may actually cost us money by demanding exclusive service whilst simultaneously squeezing us on price. Nor are customers who use a portfolio of our products necessarily profitable, as
one bank discovered
"Interestingly, the most......
