Alan Mitchell: Why the less valuable may be worth a lot more

Companies often think it’s simple and clever to concentrate on their most valuable customers. Only it’s neither simple nor clever, says Alan Mitchell

The next time I hear a marketing – or managing – director announce his determination to delight his most valuable customers and to cut the cost of serving his less valuable ones, I think I shall scream. Of course, there is a grain of sense in such notions. Clearly, it is more damaging to lose extremely valuable customers than marginal cases. And, given limited budgets, time and energy, it’s always a good idea to focus precious resources on the things that matter.

So what’s wrong with this particular type of focus? First, despite its apparent simplicity, “most valuable customer” is a dangerously elusive notion. Second, even assuming you do know who your most valuable customers are, using this information to improve the bottom line (for either side) is hardly straightforward. Third, and most crucially, this is often the wrong thing to be focusing on in the first place.

What, then, is a “most valuable customer”? Is value to be calculated by sales alone? By operating profit (sales minus cost to serve)? Or by economic profit (taking into account cost of capital and expected shareholder returns)? Invariably, each calculation leads to a different answer. And to get that answer assumes you have a “single view” of the customer, integrating many different bits of information about different product purchases and interactions, perhaps across many different divisions – the quest for which has kept banks’ IT departments busy for years – plus some form of activity-based analysis of cost to serve, capital employed in serving, and so on.

But that’s just the beginning. Are you focusing on customers’ current value, or future potential value? The two may be very different. There’s the issue of customer lifecycles (banks recruiting penurious students in the hope they’ll grow up into rich lawyers, for instance). And do not forget “share of requirement”. If you currently provide customer A with 100 per cent of his or her requirements, you’ll have a hard time increasing their value. Customer B might have a much lower current value, but if you’re only providing him with 25 per cent of his requirements, he might be a much more lucrative seam to mine. Note how all sorts of imponderables, guesses and judgements are entering this once-elegant calculation.

These imponderables move towards centre-stage when you include more of their number. Take learning and advocacy. Michael Dell, of Dell Computers, insists that the most valuable customers are the ones that challenge him the most and teach him the most. This is an intangible value that no software system captures. Likewise, one major bank was stunned when it realised that many of its least valuable customers (in monetary terms) were among its most ardent advocates, significantly reducing its customer acquisition costs. They were hugely valuable, in other words, but in an unexpected way.

If value is not as easy to quantify as it looks, nor is defining your customers. Do you mean individual customers, or segments, for instance? One travel company was horrified to discover that few of its most valuable individual customers fit its key – most valuable – customer segments. Or perhaps you mean customer networks – families, friends or colleagues rather than individuals. Hence the apocryphal stories of banks “sacking” little old ladies whose sons are zillionaire customers.

And who says you should be focusing on most valuable customers, anyway? Why not focus on your most valuable product lines, or most valuable sales channels? Have you clarified exactly how the three interact? Do your most valuable customers buy only your most valuable products? What happens if that (usually separate) project to eliminate less-profitable product lines gets up the noses of your most valuable customers?

Assuming, for the moment, that you can negotiate your way successfully through this minefield (in under three years and with less than &£1m spent on market research and IT revamps), what next?

You still have to do something with this analysis: something more than the sensible things (like good customer service) that you should have been doing anyway. And these additional initiatives need to earn enough of a return to justify all the time and money that has been ploughed into them.

Of course, attempting to answer all these questions may be a very fruitful exercise. But the “focus on the most valuable customers” mantra also tends to fuel two regressive tendencies. First, it plays on the endless tension between customer value and corporate value: as with so many CRM programmes, the focus on marketing efficiencies, cross-selling and up-selling is so intense that benefits to the customer take second place and unimpressed customers still walk away.

Second, it encourages conflict between marketing and business models. There is no such thing as “good” marketing in the abstract. Good marketing is always defined by the underlying economic dynamics of the business. And businesses that rely on economies of scale in production, distribution or marketing (most of them, in other words) simply cannot afford to focus on a small minority of customers, no matter how valuable they are. It is a bit like the story of the apple farmer who decided to focus on the most profitable aspect of his business – harvesting apples – and so stopped investing in the least profitable part – cultivating apple trees.

For most businesses, it is the apple trees – the rest of the customers, in this case – that actually provide the business with its foundation and critical mass. Neglecting “the rest” can kill the business. Arguably, for instance, British Airways aggravated its current mess by neglecting the riff-raff at the back of its planes, year after year, to focus on highly valued frequent-flying business passengers. That left the market wide open for the Ryanairs and easyJets that are now doing so much to undermine BA.

In other words, even for a business with a customer profile as skewed as BA’s, the “most valuable customer” philosophy can be dangerous. Indeed, this is probably true for most businesses, as Edwina Dunn of Dunn Humby argues: “It is the massive middle tranche where the profits are”. And when a “most valuable customer” focus leads to neglect of this “middle tranche”, that’s when it’s likely to end in tears.

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