Customer profitability segmentation methods

Which customers should you cultivate and grow? You do not have to sacrifice profit for growth. You can have both…when the needs of marketing, operations, and finance are balanced,

  • when your organization is aligned cross-functionally so that everyone speaks in the common language of profit, and
  • when customer value expectations are set.

Thought leaders from Robert Kaplan to Martha Rogers to Frederick Reichheld and Religence’s own Executive Consultants Bob Sabath and George Fruehan have put forth a number of ways to approach profitability segmentation to help organizations focus their efforts and identify the biggest potential rewards. There are many levels of sophistication and many levels of marketing, operations, and finance integration. But using any of these methods will help you get started aligning your organization for profit—from senior executives to middle managers and then from middle managers and their group leaders to the people on the frontline with customers.

The following summarizes seven leading approaches and what’s next.

1. Customer Satisfaction Research: Identify the most satisfied customer.

What’s Next: Build Voice of the Customer research into the customer relationship development process to track what people DO, not just what they SAY. Calibrate what they DO with what they SAY.

 

2. Net Promoter Score: Identify those who promote or recommend your company.

What’s Next: Track recommendations and results; correlate to profit patterns. Build Voice of the Customer research into the customer relationship development process to track what people DO, not just what they SAY. Calibrate what they DO with what they SAY.

 

3. Recency, Frequency, Monetary (RFM) Transactional Analysis: Data mine for those who bought most recently, most frequently, and who make the largest purchases.

What’s Next: Improve upon predictive modeling by adding real-time operational data to historical data.

 

4. Customer Lifetime Value (CLV): Calculate CLV, the potential future profits expected from customers. Linked either to attitude and perception research or to cash flow.

What’s Next: Link CLV to profit, not just cash flow, in planning. Link CLV to the customer relationship development process and what people DO, not just what they SAY in strategy execution.

 

5. CLV to Contribution to Profit-to-Date Matrix: Compare customers’ anticipated CLV or contribution to profit to their actual contribution in real time. (A new approach from Religence’s Executive Consultant George Fruehan.)

What’s Next: Track customer relationship metrics and patterns to see what customer interactions lead to success of disaster to iteratively improve the process.

 

6. Profitable Customer to Profitable Products Matrix Analysis: Correlate the most profitable customers with the most profitable products in terms of total contribution to profit using Activity-Based Costing (ABC) and then identifying those with the highest potential for high-profit growth. (A method for how to calculate contribution to profit from Religence’s Executive Consultant Bob Sabath. Link to more. )

What’s Next: Make ABC even more robust by expanding the use of variable costs from cost-to-serve to include cost-to-acquire and cost-to-retain as well. Update variable costs tied to individual customers as strategy is executed.

 

7. Activity-Based Costing (ABC) to Balanced Scorecard Matrix: Compare profitable and unprofitable customers with those targeted and those not targeted.

What’s Next: Make ABC even more robust by expanding the use of variable costs from cost-to-serve to include cost-to-acquire and cost-to-retain as well. Update variable costs tied to individual customers as strategy is executed.

 

What’s next is real-time profit

Any of the methods described can help you understand which customer segments are more profitable and help you target customer segments with profit improvement potential. That’s a first cut for us in the Religence CRI Framework. It helps us show our clients where it is practical to start.

What’s next is moving beyond these static, high-level, snap-shot methods to dynamic, real-time operational control at the channel/product group level where the action is,

    • where Voice of the Customer is tracked for real-time feedback as part of the customer relationship development process,
    • where people on the frontlines with customers are guided to make hundreds of small, more profitable decisions each day, and
    • where the operational data creates a leading indicator for profit and satisfaction for executives

 

Our team of senior people is ready to help you listen to your customers, deliver more value, and identify the customers you should cultivate—not only who the most profitable customers are, but what their potential is for profitable growth.

 

 

Customer Experience Wisdom: What the customer experiences happens in real time. Lagging indicators for satisfaction and profit are only a first cut.

Questions: Do you know who your most profitable customers are and why?

Do you know what’s important to them?

Do you know what to promise and what to deliver to “develop” the relationship?

If not,

Be In Touch.