Is Customer Profitability Important to You?
Forget CRM!
Laurie Webster-Saft
Partner
Do you equate customer
longevity with motherhood and apple pie? Everyone wants long term
customers. Upon reflection, is it really a good thing? That’s what two
researchers, Reinartz and Kumar, wondered when they set out to test
whether loyal customers are a “good thing.”
Their definition of
"good" equated to profitable customers. They poured over data from four
different types of businesses. Their findings, written up in the July 2002
issue of the Harvard Business Review, are clear:
Customer loyalty
does not guarantee profitability!
(To purchase a copy of
the HBR article, please visit the HBR
website.)
How can you apply this
finding to your business? Do you have long term customers who cost you
more than they bring in? You need to identify the appropriate metrics to
evaluate this question, including:
-
margins on each
purchase
-
technical support
costs
-
other affiliated
sales costs (higher than typical returns, outstanding accounts
receivables, etc)
-
customer retention
activities such as customer visits or marketing campaigns
Technical support is an
area ripe for evaluation. You might find that although a customer is
paying you $20,000 a year for your service, you estimate they are costing
you $30,000 to deliver the service.
You also see that due
to their long term status as a customer, they expect better prices when
coming back for more purchases. And since they are a long term customer,
you are planning to spend another $3,000 in marketing / relationship
expenses this year...money perhaps better spent in new customer
acquisition. When you add it all up, you see revenue, but little net
profit.
Most of our clients
have data about their customers. They may have a customer database, a
financial system, and a help desk app. We find with our clients, many
have separate systems or “lightly” integrated ones. Pulling all of this
data together to make decisions on further marketing investments can be a
challenge.
Many of our clients do
not want to invest in business intelligence and analysis tools right
now. Based on well formed questions, we counsel them on the questions to
ask and methods to build data extracts for analysis with basic office
productivity tools like Microsoft Excel. This type of analysis helps to
identify where is the profit really being made.
So when evaluating your
next marketing campaign, you need to think twice about where you want to
invest your dollars. A little analysis can really help the bottom line!
. . .
Comments on this article appreciated
Article Copyright 2002,
The Acelera Group. All rights reserved.
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