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MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Introduction

Now that we have a better sense for what customer value means and some valuation
concepts needed to differentiate customers, let’s apply this learning to actually classify customers
based on their value to a business.

In Module 2, we introduced ways in which customer value could be measured. It may be a good
idea to review these concepts as they will help you determine ways in which value can be
measured. Every company has to decide how they want to do this. There are many approaches
and metrics that can be used. This course simply presents you with some options, but at the end,
each business has to assess the tools, the data and the resources they have available to them. The
objective is to use what is available to them to create a quantifiable representation of
the customer and to compare that customer with others.

©2021 Sarah Cherres 1

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MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

©2021 Sarah Cherres

Growing Share of Customers
In our last unit, we discussed the unrealized potential value of a customer as being the amount by
which a business could potentially increase the value of a customer if it applied and implemented a
strategy. The official definition is the difference between a customer’s potential value and a
customer’s actual value. The objective is to grow the share of the customer, being that the customer
could be an individual, a household or a portfolio. Before we talk about classifying customers
based on their value, let’s look at the reasons why a customer may not be realizing all of the
potential value with a company. So many companies overlook this aspect of their business.

Ask yourself these questions if you had a company trying to assess a customer’s potential value:

• Why isn’t a customer doing business with your company? Is the most obvious answer that the
customer or entity is doing business with your competitor? And do you know why? What is it

that the competitor offers that your company does not? How much of the customer’s business?

• How many more product lines might the customer buy from you? What other services or
products could you sell the customer if you had the products available?

• What additional value would you capture if you could prevent customer defection?

• The customer has needs you know about. How can you identify the needs you don’t yet know

about?

• How much could you reduce the cost of serving the customer, while maintaining the customer’s
satisfaction?

• How much could this customer be worth in terms of referrals and other non-monetary
contributions?

A company’s opportunity for organic growth is directly related to the unrealized potential values
of your current and future customers. Keep in mind however, that this is only from a company’s
perspective. From the customer’s perspective, potential value has to do with the customer’s needs.

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

The Pareto Principle (80/20 Rule)
An important principle of customer differentiation, and at its core is the Pareto principle which is the 80/20 rule.
This means that 80% of your sales come from 20% of your customers. The same rule applies to profitability. It also
applies to value, however a company measures value.

Is customer profitability simply driven by the size of the account (revenues)? No. There are many data points that
a company measuring LTV should consider capturing:

• Repeat customer purchases
• Cost per sale from repeat customers
• Indirect benefits from customers such as referrals
• Willingness to co llaborate – the customer’s level of trust to participate in data exchange that can result in better

customer experiences
• Customer’s stated willingness to do business in the future (could be contractual)
• Customer records
• Transaction records for every touch point
• Products sought, products bought, and product costs
• Cost to serve/support
• Marketing and transaction costs for acquisition
• Response rates and levels of interest (digital) to marketing and advertising efforts

The focus is to identify the “most valuable” customers and invest more resources in them to continue to grow the
value. Such analysis and customer focus should then be used to create a small segment of current accounts/

customers that have the potential to be grown into tomorrow’s big, profitable accounts. This focus selects out the
“small” or least valuable accounts/customers that have no potential and are costly to maintain. To put it bluntly,
they need to be identified and possibly churned out. Keep in mind that these are generalities and that concepts
like these can vary between companies, industries and markets. It can vary between B2B and B2C. It also
requires that a company have a financial focus as well as analytical CRM tools and metrics.

This approach may sound brutal, ungracious and not very likely to satisfy the customer. But it is the invisible
hand of competition at work. A company that spends too much of its resources on unprofitable customers is more
likely to fail at the cost of investor capital and jobs than a company that spends less of its resources on unprofitable
customers. Competition demands this level of customer focus, as drastic and unfair as it may seem.

©2021 Sarah Cherres 3

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Customer Value Matrix

As we’ve seen, the unrealized potential value of a customer is the difference between the

customer’s potential value and the actual value. It represents the potential additional business that a
customer is capable of doing with the company, much of which may never materialize. As a business
realizes more and more of the customer’s potential value, however, it can be said to have a greater
and greater share of that customer’s business.

Let’s take a look at Peppers and Rogers’ way to categorize customers based on their actual
and unrealized potential value. Every customer has an actual value and the potential value.
By visualizing the customer base in terms of how customers are distributed across actual
and potential values, marketing managers can categorize customers into these different value
profiles, based on the type of financial goal the business wants to achieve with each customer. For
instance, one of the company’s goals for a customer with a high unrealized potential value could
be to grow its share of customer, while one of the goals for a customer with low actual
value and low potential value would be to minimize servicing costs. By thinking of individual
customers, both in terms of each one’s actual value or current lifetime value, and its unrealized
potential values or growth potential, a company can arrange its customers as shown in this slide.

Here we see five different categories of customers: the most valuable customers or the MVCs; the
most growable customers which are the MGC’s; the low maintenance customers; the super growth
customers and last but not least, the below zeros. The below zeros are those that have very low or

negative actual and potential values. These customers, no matter what effort a company makes, are
still likely to generate less revenue than cost to serve which means that the company is losing money.
In these cases, sometimes companies must make a decision to churn these customers out.

While LTV is the variable most companies want to know, it may not always be possible to create

this. Instead, a company may need to employ a proxy variable. As we mentioned in our last unit, a

proxy variable is a number, other than LTV, that can be used to rank customers in some order, given
the data and analytics available. A proxy variable should be easy to measure, although it may not
provide the same level of accuracy when it comes to quantifying a customer’s actual value,
or ranking customers relative to each other.

©2021 Sarah Cherres 4

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Customer Value Matrix

Let’s further describe each of the categories and how these can help the last two stages of IDIC: interact
and customize. The primary goal of the analytical stages is to figure out how to more effectively interact
and customize offerings.

Most Valuable Customers

• Highest actual value to the business for several reasons: highest volume of business, yield highest
margins, stay more loyal, cost less to serve, and/or refer the most additional customers. It all depends
on what’s most important to the company.

• Likely the greatest share of customer wallet
• May or may not be the heaviest users of the product or service. For example, in the case of an airline,

the MVC may fly a lot less than other customers, but will always pay full fare for first-class tickets.
• Primary goal is RETENTION of these MVCs. An airline may offer bonus miles, special check-in

lines, or club benefits for their “platinum flyers.” In a pharmaceutical company marketing to
physicians, the MVCs may be those physicians who have the most influence over other physicians.

Most Growable Customers

• Little actual value but significant growth potential because the customer has the ability to do more
business with your company but doesn’t.

• Primary goal is to find out why and then develop strategies to shift more business to your company.
These customers are often large volume or high-profit customers who simply patronize a different
company. These may be the MVCs of your competitor!

• You need to change the dynamics to achieve a greater share of this customer.

Low Maintenance Customers – Little current value and little growth potential. They are still worth
something so don’t totally ignore them. The primary goal for a company is to streamline the services
provided to them and to drive interactions to more cost-efficient, automated channels.

Super Growth Customers – Substantial actual value and significant untapped growth. These are
mainly B2B firms. The primary goal is to RETAIN and MINE for more business but beware: these
customers know they are important so they may require smarter negotiation.

©2021 Sarah Cherres 5

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Differentiation Based On Loyalty

In this slide, we see another approach for differentiating customers based on two dimensions. This
model was developed by Reinartz and Kuma r based on studies they conducted on loyalty and its
link to profitability. The reality is that loyalty is not always profitable.

The first dimension used to classify customers is the level of profitability, which is shown on the
vertical axis. The second dimension is the projected duration of the customer’s relationship with the
company, on the horizontal axis. Four quadrants were developed, one for each category of customer:
butterflies, true friends, strangers, and barnacles. A company can get creative in terms on how to
name these categories.

Although this model only measures two dimensions of the customer relationship, it illustrates how a
company can differentiate its customers and label each cluster or segment according to these
variables. It also shows that different customers require different levels of time and interactions.

Here are some things to consider:

• How is customer loyalty measured? Using NPS and RFM? Or even a combination of the two to

come up with a loyalty index or numerical value.

• How is profitability measured? By individual customer in B2C or for portfolios?

• Is the customer referral value measured? NPS would be helpful in this case.

• Should you use a proxy variable to capture loyalty as well as relationship strength? How?

• Once you decide what to measure, the next step is to figure out how to capture the data. Through
interactions, VoC processes, surveys, big data analysis?

©2021 Sarah Cherres 6

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

A Value Ladder

Companies benefit both from additional revenues and lower costs the longer customers remain with
them. The goal is to keep profitable customers with you for as long as you can. As tenure increases,
loyalty is expected to increase. To illustrate this, companies can also use a “value ladder” or “value
staircase” to categorize or give each customer a status with the company. This enables the
company to determine when and how to invest in the customer. Some companies measure value
through LOYALTY, so they could call this the loyalty ladder.

It’s important for companies to segment their customers and then, within each segment, differentiate
the customers based on criteria that is important to each company. Some companies go strictly by
profits; others measure loyalty; others measure tenure.

Be sure to read the description of the characteristics of each category of customers. Imagine what it
would be like for a company if all of its customers were advocates. They would not need a sales
force, would they?

©2021 Sarah Cherres 7

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Example: AMEX

Let’s look at an example. AMEX offers many different cards. The four main segments are: Personal,
Business, Corporate, and Prepaid Cards. On this slide, we see the company’s ten offerings for
PERSONAL cardholders:

• Offers
• Cash Back
• Rewards Points

• No Anual Fee

• More (Travel, 0% APR, No FX Fee, Airline, Hotel, Low Interest)

Do you think that all current customers within each of these portfolios behave the same? Do they all
spend the same amount of money? Absolutely not. AMEX uses a proxy variable that includes
monetary expenditures, frequency of expenditures, payment history, most recent activities, where
customers spend, etc. By capturing this data on each customer, the company is able to LEARN about
each customer and use this knowledge to help them tailor marketing campaigns, level of
personalized treatment, etc.

That’s what CRM is all about. As a company, how can AMEX spend its money wisely? How can
they ensure that they are investing their sales and marketing dollars on those customers that will
MAXIMIZE a return on their investment? For some cards and “less valuable” customers the
customers may need to pay an annual fee. For “more valuable” customers, the fee may be waived.

AMEX tracks the LTV of each customer as well as the unrealized potential value of each customer .
This represents the potential additional business a customer is capable of doing with AMEX. Part of
AMEX’s strategy is to gain more share of the customer by partnering with other card companies and
financial institutions. In essence, the company is trying to keep the customers within the same
“family.”

©2021 Sarah Cherres 8

MAR 4860 – Customer Relationship Management MODULE 4 UNIT 2

Customer Value Differentiation

So to recap regarding customer value differentiati on, let’s bring the element of technology into our discussion.
First, a company should begin by segmenting the customer base by value, not by needs, both actual value and the
potential value. This enables the company to then focus its relationship-building efforts on the most valuable
customers (MVCs – the customers that have the highest actual value) and also on its most growable customers
(MGCs – the customers that have the highest potential value), while divesting resources from customers with
limited or negative actual or potential valu e.

Companies often don’t realize that many of their large customers who they consider to be their best customers
since they provide significant amount of revenue, are actually unprofitable because the costs associated with
serving them are greater than the value that they provide.

Customer value differentiation enables the company to deliver targeted programs, services, and relevant messages
to customers that provide the greatest growth and value instead of scattering its marketing and sales efforts.
Companies that proceed down the “technology-first” path typically end up with the scattering effect serving
unprofitable customers, neglecting the profitable ones, and then losing money in the process. By concentrating on
the customers with the greatest value and the greatest growth potential, finite resources can then be allocated and
aligned accordingly to generate the highest return on investment.

Customer value differentiation provides unique insight by identifying the most valuable customers to retain, the
most growth opportunities, and the opportunities for cost reduction. Considering both a customer’s actual and
potential value helps in d etermining whether the focus should be on growing share of customer (customers with
relatively high potential) or on retaining existing customers (customers with relatively high actual value).
However, lookin g at only actual or potential value only allows us to look at a part of the picture.

The diagram in this slide illustrates how customers differ in opportunities for both growth and retention. You’ll
notice that the blue bars are the customers that have actual value and then you see the customer’s potential value
in green. The goal is to retain loyal most valuable customers which would be at the left side. Towards the middle
of the diagram, you see the most growable customers because they have a very high potential value in green.

As you move to the right, you’ll see that the customers that have the low actual value and low potential value are
more expensive to serve than those above the line of service costs. So different customer groups have different
contribution levels but they also have different service costs associated with them. So the idea here is to pick those
that are always above the line of service costs while at the same time allowing the company to maximize their
growth potential and maximize their actual value.

©2021 Sarah Cherres 9

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