Managing Customers for Profit and Long-Term Growth
The success (and the ability to sustain success) for any firm is ultimately determined by its ability to serve its customers and to continually identify and obtain profitable new customers to serve. The objective for the successful organization is then to achieve profitable growth in the long term.
For businesses to achieve meaningful long-term growth and return on investment, it is not sufficient to cut costs and achieve operational efficiencies. Although it is definitely necessary for every organization to protect against the waste of its resources, it is also necessary to realize that cost consciousness is not enough to sustain a business. Growth and return on investment ultimately come from the ability to generate profitable sales.
Profitable sales come from the identification, selection, recruitment, and retention of customers who value what you are selling, customers who are willing and able to pay a price that includes profit. Profit is determined by a “simple” equation: price minus costs. Price is influenced and determined by a number of factors, including:
sales discounts and incentives;
market or competitive price matching; and
Above all these, the most important (and frequently the most overlooked) factor in determining pricing is strategy. The strategic process of understanding your product, customers, and markets, and the combination of these elements for your organization is unique. Every business has the ability to act and react differently to the internal and external factors of its environment. These all impact price, because each business has a unique set of capabilities and competitive advantages, and unique cost structures and constraints. So when it comes to pricing, how a business develops its pricing strategy is critical to the bottom line: profitability.
Making the Sale to the Customer
Pricing strategy for many companies is one price for every customer, and is the same price. For other companies, pricing is based on the value the customer places on the product: matching the price to the customer’s perceived value and thus broadening the customer base the product can appeal to. The ability to match price to customer, changing the price on the exact same product, and offering it to different market segments requires understanding the characteristics of the customers, and also requires that the value of the brand not be diluted by the pricing differentiation. The most common example of the application of this principle is the “early bird special” offered at typical U.S. restaurants, a discount applied to the regular-priced dinners for those patrons who would not ordinarily dine at an establishment where prices are more expensive. The restaurant is able to appeal to a more price-conscious market segment that would not ordinarily be attracted into the restaurant, but with the segmented pricing strategy can be brought in—profitably—and not impact the core market segment and pricing of that segment.
Pricing strategy requires the ability to look at customers and markets in different ways. It requires knowing the characteristics of your business, your industry, and your competition. Your business must take a close look at those factors and seek opportunities to innovate the ways you pursue each market segment to maximize profitability.
Priced Right, Managed Well
It isn’t enough to correctly price the product for each market segment. Price is just part of the profit equation, when it comes to a customer’s perceived value of the product. The price always plays a significant role in the sale; however, a company whose sales are made solely on the basis of price will always be subject to the whims of the customer, the competition, and every other environmental factor. The business will always be fighting for profits and short-term in focus. Competing on price for customers is a commodity game. Every product is the same in the eyes of the customers; products are interchangeable, with no differentiation. The relationship with the customer must extend beyond the product price.
A business must be able to differentiate and create value in the minds of the customer on a product, service, and relationship basis. This requires managing the customer relationship and doing it well. The business must be able to drive the three elements of profitability: revenues, expenses, and customer behavior. This requires the business to be able to direct marketing and sales activities toward future results, and requires a shift from a product focus to a customer focus, from messages about the product to messages about how the products and services answer the needs of the customer.
Customer Relationships and Interaction Orientation
To increase customer profitability the strategy has to be not about how many units of the product can be sold to how many customers, but how many units of the product that customers need. “How many of your products does each customer need?” is a very different question than “How many products can you sell each customer?” The focus has shifted to the customer need. You are looking to maximize the value of and to each customer.
To maximize the value of each customer, the business must know which customers are profitable and which ones aren’t. This requires the business to have customer-level information. The business must develop financial statements that systematically allocate the core business costs down to a customer level. This enables all levels of the organization to see the full impact of the various business decisions (pricing strategy, cost structures, etc.) at the customer level. Making activities and decisions that are sometimes “high level” connect to the true profitability points of the business; these measures need to be evaluated not just for a single year or historically, but with a consideration of the future potential contributions customers can make. If a customer’s potential for future contributions to profit are declining, then that is a critical element to be incorporated into the evaluation of investment into the future relationship with the customer.
The Customer Relationship–Lifetime Value Cycle
Your business should be focused on the profitability of customers over the lifetime of the customer. Realistically, however, every business is most concerned about the FUTURE profits a customer will generate. This means the business has to:
select the right customers;
manage efficiently to retain the customers;
manage the profitability of each customer;
maximize the return on investment of marketing resources to profitable customers;
develop the right mix of products with customer mix;
manage the purchasing sequence of customers;
improve the brand value of the business;
improve customer profitability; and
acquire additional profitable customers.
The value of an individual customer to your business isn’t limited to the direct revenues and profits it contributes to your business. Each customer also has the potential to contribute additional customers to you through referrals (they can also harm your business if your customers have negative experiences and become detractors). As part of the customer lifetime value, a business must take into consideration the value of customer referral behavior. Each customer that comes into the business through a referral is a customer that is generally less costly to recruit.