Notes

Outline

Managing Profitable Customer Relationships By Mr. Hitesh Manocha

Issues for Discussion Are all Customers Profitable? Do they need similar treatment? Does loyalty always leads to profitability? How to manage and improve profitability through better Customer Relationship Management?

Customer Relationship Management (CRM) aims to Build long-term relationship Loyal Customers Loyalty will lead to higher Profits

The Assumption Customer is always Right Loosing a Customer means loss of future profits Retaining all Customers critical All Customers contribute to profit

The 80 / 20 Rule 20% of the Customers give 80% of the Business All Customers cannot be treated similarly Two Tier system 20% Customers get one set of treatment 80% Customers get another set of treatment

The Reality Studies indicate Not every customers wants to build Relationship with your company Some customers purchase decision influenced by price Leave you for a lower price No loyalty

The Reality Studies also indicate Customers look for suppliers whom they can trust Reliable products Employees remember and recognize them If cultivated, could stay for lifetime.

The Ground Realities Studies over years provide Diverse results In one study: 10% of customers contributing 30 to 50% of sales 60% of customers contributing 90% of sales

The Ground Realities In another study: 20% of Customers account for 180% of profit in some studies What does this means? Most customers unprofitable

The Introspection Does it makes sense to make relationships with all customers? Does it cost less to serve loyal customers? Do loyal customers pay higher prices for the same bundle of goods? Do loyal customers market the company  i.e. Do they generate word of mouth?

The Ground Realities Further some studies indicate: Weak to moderate correlation between LOYALTY and PROFITABILITY LOYAL Customers were more expensive to serve LOYAL Customers are actually more price sensitive than an occasional one. The fact that loyal customers market the company to their friends, peers etc aggressively is not that strong.

What is Emerging Organizations need not build relationships with all customers Not practical nor profitable to meet all customer expectations. May have to “fire” some customers Loyalty is not all about Profitability Need to relook at your CRM practices It may be a loss making proposition

What is Emerging Some customers are more profitable than others Investments across all groups will not yield same returns Different segments require varying commitment of organization resources Focus on more profitable customers

What needs to be done Identifying segments based on profitability criteria and service quality Profitability impact of improving service quality varies greatly in different customer segments Higher segments should produce a much higher response to improvements in service quality than lower segments.

Is “80/20” concept enough 80/20 Assumptions Customers are similar in each segment In reality it is not Studies indicate differences in Demographics Perceptions Expectations of Service quality Profitability

Organizations Huge pile of customer information Possible to regroup Customers based on the profitability approach

Customer Pyramid Approach One of the approaches Developed four-tier approach Customers divided in four groups namely Platinum Tier Gold Tier Iron Tier Lead Tier

Customer Pyramid approach

Customer Pyramid Approach 1. PLATINUM TIER Company’s most profitable customers Heavy product users Not overly price sensitive Willing to invest in and try new offerings Committed

Customer Pyramid approach 2. GOLD TIER Compared to Platinum tier, profitability levels are not as high Customers insist price discounts Reduces margins Heavy users, not that loyal

Customer Pyramid approach 3. IRON TIER Spending Levels Loyalty Profitability are comparatively less to Platinum & Gold Tier

Customer Pyramid approach 4. LEAD TIER Consists of Customers which cost money Demand more attention Not commensurate to their spending and profitability potential Problematic sometimes Complaining to others

Customer Pyramid approach Use exists in various types of industries Particularly Services Firms

Customer Pyramid approach Example – Market Research Industry Treated all Customers equally Not working Low profitability Need to regroup Customers Used Customer Pyramid Approach

Customer Pyramid approach Market Research Industry 1. PLATINUM CUSTOMERS Large accounts Willing to commit a certain amount of research per year Timing of such research could be anticipated Stay with the Organization Willing to try new services and approaches developed by Market Researcher Ready to provide referrals Low sales costs

Customer Pyramid approach Market Research Industry 1. PLATINUM CUSTOMERS Loyal Used competitor agencies only when services could not be provided

Customer Pyramid approach Market Research Industry 2. GOLD CUSTOMERS Similar profile to Platinum Customers More price sensitive Divided loyalties Use competitor services Large accounts Not willing to provide yearly commitments Provided referrals on adhoc basis

Customer Pyramid approach Market Research Industry 3. IRON CUSTOMERS Moderate spenders Sending request for carrying out research on a specific project Price a major criteria No advance intimation High cost of Selling

Customer Pyramid approach Market Research Industry 4. LEAD CUSTOMERS Little spending on Market Research Sporadic Highest selling costs Make them understand need of research

When to use Customer Pyramid Approach When customers differ in profitability Yet services levels provided are same across groups Best customers are underserved Less profitable, customers get undue attention Organization with Limited resources Service organizations Limited employee time Capacity constraint

When to use Customer Pyramid Approach Customers require different service levels Customer willing to pay for different service levels When customers can be separated from each other Customers sensitive if they receive different treatment Selective access of customers

When to use Customer Pyramid Approach Example – Service Levels Federal Express Products with different service levels Prices depend on speed and type of delivery Express package service Express freight service Fed Ex Packet Fed Ex Box Prices vary Serves customers with different service level requirements

How to improve Profitable Relationships Turning less profitable customers to more profitable customers How ? Move Customer from one tier to next upper tier. Lead Tier to Iron Tier Iron Tier to Gold Tier Gold Tier to Platinum Tier Get rid of unprofitable Lead Customers

Turning Gold into Platinum Tier Existing customer Gold Tier Upgrade to Platinum Tier Detailed Study of present activities How can they be served better Full understanding of Customer needs Various strategies could be Become a full-service provider Provide outsourcing Increase brand impact by line extensions Create structural Bonds Offer Service Guarantees

Turning Gold into Platinum Tier 1. Become a Full – Service Provider Home depot Sell to all customer tiers Hardware store Successful Wanted to convert Good (Gold) into Great (Platinum) customers How ? Provide a complete solution

Turning Gold into Platinum Tier Not only hardware, but added services Renovation Whitewash Provide Contractors, Masons Other related Services Found Gold Customers converting into Platinum Customers as services were highly profitable business

Turning Gold into Platinum Tier 2. Provide Outsourcing Taking an entire function that a customer firm used to perform for itself and providing it for them Customers want to focus on their core-activities Other activities can be outsourced

Turning Gold into Platinum Tier Example – HEWITT Human Resources Function Placement Consultants Subsequently Payroll Administration Retirement benefits

Turning Gold into Platinum Tier Adding value to Customer Customer Commitment longer

Turning Gold into Platinum Tier 3. Increase Brand impact by line extensions Example – Liz Claiborne World’s largest women’s apparel maker Further strengthen Customer relationship Focus on recent Mothers Mothers Post Maternity Conscious about looks Want to look young

Turning Gold into Platinum Tier Created Clothing Make them appear slim Despite adding few pounds Convinced its target group, it really knew them literally and emotionally Created Brand Extensions Liz Collection – Professional Clothing Liz Wear – Casual Clothes Elizabeth – Large Women

Turning Gold into Platinum Tier Increasing sales and customer commitment Improved relationship and customer upgradation

Turning Gold into Platinum Tier 4. Create Structural Bonds Hallmark’s Gold Crown Card Program Greeting Card Company Generate Loyalty Sends high-quality plastic cards Earn points for subsequent purchase Sends regular communication to customer Created a Platinum Tier in 1996 Customers who buy more frequently

Turning Gold into Platinum Tier Given Preferred status Personalized communication Impressive results 1 Billion $ additional revenue in 1997 and   1.5 Billion $ in 1998

Turning Gold into Platinum Tier Understanding what customers value was the keyfactor to Hallmark success. Improved sales and profitability

Turning Gold into Platinum Tier 5. Offer Service Guarantees Occasional problems bound to happen Quick solution the key factor Service Guarantees Compensation to Customers Commensurate with problems Important to Customers

Turning Gold into Platinum Tier Examples Wells Fargo Financial Institution Guarantees that customers do not have wait for more than 5 minutes in a teller line Given 5 $ if exceeded

Turning Iron into Gold Customers Existing Customer Iron Tier Upgrade to Gold Tier Finding out what is important to Iron Customer Key drivers of relationship Various strategies could be Reduce the Customer’s Non-monetary costs of doing business Add Meaningful Brand Name Become a Customer expert through Technology

Turning Iron into Gold Customers 1. Reduce the Customer’s Nonmonetary Costs of Doing Business Objective to maintain margins Not reduce prices How to lower nonmonetary costs of doing business with customers Strategy involves how to reduce the hassle and search costs of customers Work effectively with small businesses

Turning Iron into Gold Customers Example – Alltel – Technology Services Provider High-technology communication firm Oriented toward small businesses and individuals Obtain different services under one roof Paging Wireless Long distance

Turning Iron into Gold Customers Customer deal with single provider Lower company handling costs Earlier customer – ‘Iron’ Now ‘Gold’ Business has increased for Alltel significantly

Turning Iron into Gold Customers 2. Add Meaningful Brand Names Example - K – Mart Create ‘brand-within-a-brand’ image Improve image & profitability Tie up with Martha Stewart, a well known personality A new line of products – Bed Sheets, Towels

Turning Iron into Gold Customers Priced higher than normal K – Mart Products Higher Margins Iron Customers, a new option to make more purchases Mathew Stewart – a favourable personality Overall improvement of the profitability Improved overall brand image of K-Mart

Turning Iron into Gold Customers 3. Become a customer expert through technology Example – The Amazon.com experience Delivery of books Online purchase of books by customers Amazon provides database of books from the same author / Similar topics Repeat purchase by customers Subsequently CDs and Movies Understood Customer’s interests carefully Revenue and profit substantially improved

Getting the Lead Tier Customers Out Get rid of unprofitable Lead Customers Time allocation commensurate to the importance of Customers Lead Customers Buy little Dealing with them cost more than they are worth High transaction costs.

Getting the Lead Tier Customers Out What can be done Upgradation Raise prices Reduce costs

Getting the Lead Tier Customers Out 1. Raise Prices Increase prices for services not paid for Likely reaction Customers exit Customers upgrade to Iron Category

Getting the Lead Tier Customers Out Examples – Telecom Co’s in US Delinquent Customers Cancelled Services Telecom Co’s sharing their database of delinquent customers Stiff charges for reinstallation Margins improve significantly for company

Getting the Lead Tier Customers Out 2. Reduce Costs How to serve ‘Lead’ Customers in an economical manner Many may be potential ‘iron’ Customers May not like to alienate Handle with care

Getting the Lead Tier Customers Out Example – Banking Sector Aggressive on ATMs Reduces manpower, transaction costs Discourage customers to visit banks Charge for services CitiBank Suvidha Account in India

Getting the Lead Tier Customers Out Getting rid of ‘Lead’ Customers As a last measure When nothing works Carefully done Avoid negative ‘word-of-mouth’

Servicing Customers according to their Tiers Customer information across tiers varies Strategies vary Detailed information on ‘Platinum’ and ‘Gold’ Customers Focus on improving value proposition rather low prices Understand what motivates customers at each tier

Customer Pyramid Approach Reduces unprofitable customers Endeavours to convert lower-tiered customers to higher-tiered customers Pampering highly profitable customers Increasing chances of success in the Market Place.

Customer Pyramid Approach A roadmap of how to improve organization profitability by better understanding of Customer behavior

Bibliography “Are some customers more equal than others,” by Paul Nunes & Brian Johnson, Harvard Business Review, Pg. 37, November – 2001. “Using ABC to manage Customer Mix and Relationships,” by Robert Kaplan, Harvard Business Review, 9-197-094, April 7, 1997. “Return on Capital : Primary Measure of Customer value,” by Weiner & Jerry, Banking Account and Finance Journal,     Pg. 15., Vol. 14, Issue –2.

Bibliography “Turn Customer into Customer Profitability,” by Wayland, Robert, Colepaul, California Management Review, July 94, Vol. 83,   Issue – 7. “Loyalty.com,” by Fredrick Newell; McGraw Hill, Chapter 5,6,7 & 23, Year 2000. “Customer Relationship Management”, by Starbackar & Lehtinen, McGraw Hill, Year 2001, Chapter 1, 2 & 3.

Bibliography “Customer Relationship Management,” by Stanley A. Brown, John Wiley & Sons, Canada Ltd. Chapter 4 & 5. “Mismanagement of Customer Loyalty,” by Werner Reinartz and V. Kumar, Harvard Business Review, July 2002, Pg 86. “Services Marketing,” by Zeithmal & Bitner, 3rd Edition, Tata McGraw Hill, Chapter 6.