Treating Customers differently based on their ‘profitability’ is counter productive to building loyalty and Customer First.

All Customers are not created equal…

An analysis of shopping behavior tells us some Customers are more valuable than others in terms of Spend with a retailer or brand. Further, we know those Customers who talk about and engage more with a retailer or brand and who more highly prefer that retailer or brand tend to be more loyal to that entity.

Logically, one would think that some Customers are more profitable than others, and conversely, some are downright unprofitable. Knowing which is which is the all-important question in an increasingly popular relationship management concept called ‘Customer Profitability’.

A recent Google search returned more than 6 million references to Customer Profitability – how to segment, measure, and manage relationships with Customers based on how much an individual contributes to the firm’s bottom line. A accountancy method even has developed around this concept: for example, understanding ‘Customer Lifetime Value’ and ‘Customer Value Management Cycle’ are seen as keys to business health by some firms.

Customers’ gifts of choice

Typically, Customers have choices around at which retailer they spend, what brands they select, and how much they engage with a brand’s marketing. They decide how much they prefer one brand to another, and advocate at will for their best (or worst) retail and brand experiences.

Customers do not, however, have a choice on how much margin they give to a retailer or brand.

So, how is it that Customers can be responsible for their own profitability? Is the Customer accountable to margin by choosing to respond to a particular set of value propositions offered on the retailer’s terms? Is the Customer culpable if a value proposition is not itself profitable, or if it allows for choices by Customers that vary in net profitability?

Being clear on the context and language

For the purpose of this discussion, we mean ‘Customer’ in a B2C sense as the end shopper or purchaser of a product or service in a retail context. The concept of ‘Customer Profitability’ has, arguably, a different meaning or application in the B2B context.

[For example, in the B2B context, client ‘customers’ in some industries can 1) negotiate cost prices, 2) negotiate various levels of service and support, i.e. Service Level Agreements, or 3) present vastly different technical and operational challenges that must be accommodated by the supplier business. In these contexts, the client ‘customer’ has a greater influence on supplier profitability.]

Unfortunately, some valid and well-intended B2B theories around the costs to serve business customers and the resulting profitability to the supplier organization have bled over into retail B2C thinking, much toward the detriment of Customers.

Doing what’s right for the business…and for Customers

In this author’s experience, credit card and financial services providers are the strongest advocates of a ‘Customer Profitability’ approach to relationship management. It’s little wonder in these quarters that annual industry churn of accounts is greater than 40%, or that the cost to acquire / switch each new customer account is in the hundreds of dollars as industry standard, or that business costs have spiraled upward now for decades. Of course, these increased costs are transferred to the Customer via higher interest rates or hidden in higher exchange rates for the retailer (which in turn, drive up retail prices).

‘Good’ profitable customers maximize their credit limits and retain high balances owed, whilst ‘bad’ customers ‘revolve’ by regularly paying off their balances. Poaching to encourage switching is a hallmark industry tactic, using offers like ‘freeing balance transfers’, oft times punishing the Customer with hidden charges and costs to serve so that profitability by Customer might be optimized.

It’s this author’s observation that a ‘Customer Profitability’ mindset sits at the heart of these Customer-disrespectful and anti-loyalty practices. Simply, Customers do not have the gift of choice or the ease to understand which factors drive individual profitability, particularly given the customary qualification requirements and fine print common to this industry.

A better language – Proposition Profitability v Customer Profitability

In a customer-centric organization, measuring the profitability of its various value propositions should become a business imperative: without it there is no fact basis for managing the value exchange between the company and its Customers.

In a respectful, Customer First approach to business growth, each value proposition delivers recognizable value to Customers as well as recognizable margin to the retailer or brand. The better mindset and language is, therefore, around Program / Proposition / Offer profitability.

An emerging best practice in this area is an analysis of the relative cost of each proposition using a common cost metric vs. the Customer impact (uplift).

Implications for retail leaders

Think about the choices Customers are given in the value propositions you offer; is the profitability of these offers in any way within the Customers’ gifts of choice? Who makes the profit margin decision – you or the Customer?

Mind your language, and coach your loyalty people away from segmentations based on ‘Customer Profitability’. There is a value in understanding ‘Customer Lifetime Value’ and ‘Customer Value Management Cycle’ using spending and preference metrics; profitability considerations do not belong in the equation, however.

Guide toward the best practice of measuring the relative cost of each proposition to Customer impact, using a standard cost metric.