Customers Aren’t Equal – Don’t Offer Them Equal Benefits!

Posted on 21. Oct, 2010 by tvavra in Customer Recognition

Misguided Loyalty Programs

In most developed countries there is a basic cultural value which recognizes the unquestioned equality of all people – requiring they all be treated with equal respect.  Egalitarianism is a popular political doctrine and a social philosophy.  But when it comes to running a business, egalitaristic principles shouldn’t prevail!  If a business manages its customers as if they are all equal and does so without applying any discretion, it can be a recipe for financial disaster!

The Troubling Fallacy

Altruistic businesspeople are inclined to want to be “fair” and treat their customers equally.  They advocate treating all of their customers with equal respect and homage.  This perspective may mistakenly originate from a desire to be perceived as fair and magnanimous.  So businesspeople  roll out loyalty programs offering all of their customers the same benefits.  The problem with this approach is that no matter how egalitarian businesspeople want to feel, they must not consider all of their customers to be of equal value to their businesses.  The hard fact is; customers aren’t all equal!  They don’t all interact with businesses in equal ways and they don’t all yield equal profits.  In my book, Loyalty Myths, I describe three types of customers all businesses have.  Recognizing these three types provides a useful customer triage process for businesses to adopt.

The Three Types of Customers

While appearing outwardly similar, there are three basic types of customers based on how they impact a business’s bottom line.  Businesses have Breakeven Customers – those customers who neither add to nor subtract from corporate profitability (either they buy a lot but demand equally heavy servicing, or they buy very little).  Businesses also have Costly Customers – those customers who demand so much attention or such excessive price concessions that maintaining them as customers reduces a business’s bottom line.  Finally (and hopefully not least), businesses have Desired Customers – those cherished customers whose volume of purchases and reasonable requests for servicing make their transactions highly profitable.

A typical company’s customerbase when dissected into these three segments, will show about 20% as Desired, 60% Breakeven and as many as 20% as Costly Customers.  With this insight, it’s easy to understand one of the basic myths of customer loyalty; we’ve been misguided by the maxim to retain as many of our customers as possible.  Customer retention efforts (and a loyalty program specifically) are appropriate only when directed at Desired, profitable customers.  The objective of any strategically sound loyalty program should be on keeping Desired Customers and trying to improve the profitability of current Breakeven Customers.  Any spending directed at retaining Costly Customers is a recipe for bankruptcy!

Strategy or ?

But ask yourself; how many loyalty programs actually start with such a basic, yet strategically sound objective?  The unfortunate truth is the genesis of far too many loyalty programs is some form of incentive or need for customer tracking, with only a modicum of attention directed at who to retain.  It’s a sad truth that most loyalty programs are far more tactical than strategic.  Whether you have a loyalty program in place or are in the process of devising one, the most important issue is to identify which of your customers you want and need to retain!  And that means scoring your customers first.

Tags: appreciating customers, customer scoring, Delight Analysis