"Managing Customers for Profit" by Ken Bernhardt Taylor E. Little Jr. Professor of Marketing and Special Assistant to the Dean Robinson College of Business, Georgia State University Atlanta Business Chronicle - August 7, 2009 One of the hottest concepts in marketing today, Customer Lifetime Value (CLV), is the net present value of future profit from a customer. Use of this metric requires a dramatic change in orientation, from a product-centric view of the world to a customer-centric view. Thus, instead of focusing on products and new product development, managers must focus on customer segments based on their future profitability to the firm. The customer rather than the product becomes the driver of a firm's profitability. A new book by one of my colleagues, V. Kumar, Managing Customers for Profit: Strategies to Increase Profits and Build Loyalty, documents how companies can sustain and build profitability over the long term by using the CLV metric. Kumar is the Richard and Susan Lenny Distinguished Chair in Marketing and director of the Center for Excellence in Brand and Customer Management at Georgia State University's Robinson College of Business. His work focuses on how to manage customers instead of products, how to focus on the most profitable customers instead of the most loyal ones, and how to base marketing decisions on forward-looking metrics instead of backward-looking ones like sales, profits and market share. Knowing the CLV enables marketers to know how much they can invest to attract and retain a customer. A major point in Kumar's book is that loyal customers are not always profitable and not all profitable customers are loyal. An approach is needed that links loyalty with profitability. The CLV metric uses the Pareto Principal, the often-cited 80/20 rule - - 20 percent of customers provide 80 percent of the total value to the firm. Thus the emphasis shifts from managing a portfolio of products to managing a portfolio of customers. The focus must change from "how many customers can we sell this product to?" to "how many products can we sell to this customer?". Kumar describes how traditional loyalty measures, based on behavioral loyalty; how long someone has been a customer; or how much they buy can result in rewarding the wrong customers. Long-term customers tend to be less profitable because they purchase in high volumes and demand deeper discounts and more personalized services. Behaviorally loyal customers expect to get something in return for their loyalty and also are more aware of reference prices. Kumar demonstrates that it takes both attitudinal loyalty and behavioral loyalty to get good word-of-mouth benefits - - loyal customers telling others to buy from you. It is important to manage loyalty and profitability simultaneously. Loyalty programs should reward customers based on profitability not frequency. The airlines learned this lesson when they rewarded frequent flyers based on number of trips, awarding many free flights to relatively unprofitable customers. Today most airline frequent flyer reward programs are based on the price of the tickets purchased with more reward for more profitable trips. Kumar uses business to business examples to describe "relationship benefits," loyalty program rewards for B2B customers. One chapter in the book discusses segmenting customers by profitability. Long-term, low profitability customers are called "Barnacles." The strategy for this group is to determine their share of wallet (their purchases of the product category) - -if it is low, engage in specific up-selling and cross-selling. If it is small, engage in strict cost control. High profitability, long-term customers are "True Friends" and retention is key. High profitability, short-term customers are "Butterflies" and it is important not to over invest in these customers. Finally, "Strangers" are low profitability, short-term customers and companies should not invest at all in this segment. The first step in effective customer management is to select the right customers. Most marketers have limited resources so they have to make choices regarding on whom to spend these limited resources. Once customers are segmented by their profitability, resources can be prioritized based on this ranking. Many companies tend to go after those customers who are cheapest to acquire. These are often not those that are most profitable. Kumar presents a case study of how IBM used CLV to determine which customers to target and the level of resources to allocate to these customers. They divided their customer base into those they touched in the past year, via sales calls, direct mail, telesales, email, etc., and those who were not touched. They then divided each group into deciles based on CLV and reallocated the resources previously directed to the lowest decile among the touched group to the top deciles among the untouched group. The revenue of the untouched group increased 10 times compared to the previous year's revenue. The book also presents strategies for preventing customer attrition, often called customer defection or churn. The key is to hold on to high profit customers. Losing low profitability customers can be a good thing, increasing overall profits for the firm. A customer-centric approach requires a different orientation vs. a product-centric approach. There must be a shift from product-based profit centers, product managers, and a new product development focus to customer-based segment centers, segment sales teams, and customer relationship managers. Measurement must change from number of new products and market share of products to share of wallet and Customer Lifetime Value. Even companies that claim to be focused on customers often do not take a very scientific approach to customer management. This book will help you acquire more profitable customers, manage and reward existing customers based on their profitability, and invest in high profitability customers to prevent attrition by allocating your marketing resources more effectively. In sum, it's a worthwhile investment of your time.