A New Year’s Resolution: Examine Your Customerbase!

Posted on 12. Jan, 2012 by in Customer Research

Out with the old, in with the new”!  So goes the traditional mantra of the New Year.  To the business person this cry could be interpreted as a challenge to review his/her customerbase; eliminating current costly customers, goaling to attract more profitable customers.  In the spirit of the New Year, let’s reconsider some of the misconceptions surrounding customer retention.

The business community has largely bought into the strategy of customer retention.  But, as in so many movements, the advice has been adopted in a wholesale manner; special considerations are over-looked.   In my book,  Loyalty Myths I placed substantial qualification on the urge of many marketers to retain all of their customers by reminding them that not all customers are profitable!

In Loyalty Myths, I suggest that businesses have three types of customers: Breakeven Customers (those customers who neither contribute to nor drain from the bottom line); Costly Customers (those who either demand so much special treatment or so abuse privileges offered them that they ultimately end up costing a business more than they contribute); and Desired Customers (customers who, because of their constancy and buying volume, contribute significantly to the bottom line).

While most businesspeople will casually acknowledge the existence of these three customer-types, few actually manage their businesses accordingly.  Not many organizations have actually scored their customers into these three categories.  But, if an organization does so, two important learnings emerge.

The first learning, the “macro perspective”, is an awareness of the “health” of one’s customerbase.  Most customerbases will be predominated by Breakeven Customers.  Desired and Costly Customers will each be in the minority – with hopefully more Desired than Costly.  If one has more Costly Customers than Desired Customers, the first order of business has to be to reduce the number of Costly Customers – either by “firing” them (“polite-relocation” is best) or by converting them into  Breakeven Customers – at the very least.  Experience dictates that a business’s customers will be approximately allocated as follows: about 40-60% will be Breakeven, with ideally no more than 10-15% as Costly, and hopefully as many as 25-35% as Desired Customers.

The second learning, the “micro perspective”, identifies specific customers who are in each category.  This allows treating customers differentially according to their value or profitability to the business.  The reason so many retention programs fail is that they’ve overlooked identifying their most valuable customers (the only ones who should be retained) and instead direct resources to all customers!

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