1 Managing Profitable Customer Relationships By Mr. Hitesh Manocha

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

18 Customer Pyramid approach Platinum Gold Iron Lead Least profitable customers Most profitable customers What segment spends more with us over time, costs less to maintain, and spreads positive word of mouth What segment costs us in time, effort, and money yet does not provide the return we want? What segment is difficult to do business with?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

34 Turning Gold into Platinum Tier Existing customer Gold Tier Existing customer Gold Tier Upgrade to Platinum Tier Upgrade to Platinum Tier Detailed Study of present activities Detailed Study of present activities How can they be served better How can they be served better Full understanding of Customer needs Full understanding of Customer needs Various strategies could be Various strategies could be 1. Become a full-service provider 2. Provide outsourcing 3. Increase brand impact by line extensions 4. Create structural Bonds 5. Offer Service Guarantees

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

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

37 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 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 Customers want to focus on their core- activities Other activities can be outsourced Other activities can be outsourced

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

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

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

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

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

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

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

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

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

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

48 Turning Iron into Gold Customers Existing Customer Iron Tier Existing Customer Iron Tier Upgrade to Gold Tier Upgrade to Gold Tier Finding out what is important to Iron Customer Finding out what is important to Iron Customer Key drivers of relationship Key drivers of relationship Various strategies could be Various strategies could be 1. Reduce the Customer’s Non-monetary costs of doing business 2. Add Meaningful Brand Name 3. Become a Customer expert through Technology

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

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

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

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

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

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

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

56 Getting the Lead Tier Customers Out What can be done What can be done Upgradation Upgradation 1. Raise prices 2. Reduce costs

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

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

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

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

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

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

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

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

65 Bibliography 1. “Are some customers more equal than others,” by Paul Nunes & Brian Johnson, Harvard Business Review, Pg. 37, November – “Using ABC to manage Customer Mix and Relationships,” by Robert Kaplan, Harvard Business Review, , April 7, “Return on Capital : Primary Measure of Customer value,” by Weiner & Jerry, Banking Account and Finance Journal, Pg. 15., Vol. 14, Issue –2.

66 Bibliography 4. “Turn Customer into Customer Profitability,” by Wayland, Robert, Colepaul, California Management Review, July 94, Vol. 83, Issue – “Loyalty.com,” by Fredrick Newell; McGraw Hill, Chapter 5,6,7 & 23, Year “Customer Relationship Management”, by Starbackar & Lehtinen, McGraw Hill, Year 2001, Chapter 1, 2 & 3.

67 Bibliography 7. “Customer Relationship Management,” by Stanley A. Brown, John Wiley & Sons, Canada Ltd. Chapter 4 & “Mismanagement of Customer Loyalty,” by Werner Reinartz and V. Kumar, Harvard Business Review, July 2002, Pg “Services Marketing,” by Zeithmal & Bitner, 3rd Edition, Tata McGraw Hill, Chapter 6.