All Customers Are NOT equal

Marketing is transforming and changing directions - we started by concentrating on markets, then segments now the route is individual customers. The profitability of an individual customer can be determined by various measures and firms are therefore better able to allocate marketing efforts across consumers. Firms have to make a new set of choices - which are the customers that they want to have a relationship with and which are the ones to slowly weed out or 'unbundle' some services for.

All customers are not equal neither should they be treated equally – that would end up causing firms too much money. Customers these days want to pay less and get things at the lowest cost yet they also demand the best service. They have to realize that there will be a trade-off. If you want cheaper prices you will have to forego some aspects of service. Thats the economic reality of business. Given the difference in customer segments along this dimension, a firm’s management of their portfolio of customers to maximize profits is the central issue faced by firms.

- Customer Management - Selection of customers:
There is an interplay between customer choice and the skill sets that a company develops through serving certain types of customers. If you want to charge high prices you will have to provide exemplary service, the customer is not a fool and no matter how powerful your marketing efforts are in creating 'wants' you might get them but they will make a mental calculation and if you are not delivering as much as you are costing you can say goodbye to that particular customer.

- Different Customers need to be handled differently
With a customer profitability analysis it is possible to classify customers into different profit tiers like platinum [most profitable], gold [profitable, iron [low profitability but desirable] and lead [unprofitable and undesirable]. The company’s job is to move the customers higher up the tier. This is why concepts like priority banking and even different classes in frequency programs like Skywards are the norm of the day. The firm has to look after its hen if it's to enjoy the egg of gold.

Ultimately, marketing is the art of attracting and keeping profitable customers. Yet, companies often discover that between 20 and 40 per cent of their customers are unprofitable; furthermore, many companies report that their most profitable customers are not their largest customers, but their mid-size customers. The largest customers demand greater service and receive the deepest discounts, thereby reducing the company's profit level. The smallest customers pay full price and receive less service, but the costs of transacting with small customers reduce their profitability. In many cases, mid-size customers that pay close to full price and receive good service are the most profitable.

Customer profitability Analysis [CPA], conducted through Activity Based Costing, helps companies estimate the amount by which revenues from a given customer over time exceed the company's costs of attracting, selling and servicing that customer.

One thing to be mindful of is that a single transaction is not what decides the amount of profit a customer is bringing in and so to decide the net worth of the customer you have to calculate the customers lifetime value, which is "the net present value of the stream of future profits". To put it simply it means calculating the value of a customer over the entire history of that customer's relationship with a company - the transactions he has made, the value in money terms he brings in, in comparison to what it costs to retain that particular customer. Companies use certain data [acquisition costs, churn rate, retention rate, time period, profit margin etc] about the customer to arrive at this figure.

To create customer satisfaction, companies must manage their own value chains and the entire value delivery system in a customer centered way. If firms manage to cut costs at every step of the value chain whether through excellent operations or supply chain management, this value is passed on to the customer in the form of lower prices and excellent service.

Companies must decide the level at which they want to build relationships with different market segments and individual customers. Which is best suited, depends on a customer's lifetime value relative to the costs required to attract and retain that customer.

Ultimately how much the firm spends on its marketing is determined by the type of customer and size of account