Any typical recency/frequency/spend analysis tells us that some customers are more valuable than others in terms of the sales given to a retailer or brand. Further, loyalty industry methodologies such as the EMO Index and the Net Promoter Score indicate that those customers who are more emotionally engaged with, or who more strongly advocate for, any retailer or brand tend to be more loyal to that entity.
Logically, it might follow that some customers might be more profitable than others, and conversely, some could be downright unprofitable. Knowing which is which is the all-important question in a popular relationship management concept called “customer profitability.”
Typically, customers have choices around which retailer they spend their money, what brands they select, and how much they engage with a brand’s marketing. They decide to what degree 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?
I don’t think so.
Doing What’s Right for Business—and for Customers
Every business—and most particularly a “customer first” organization—must focus its decision-making energy on doing what’s right for its customers and its shareholders at the same time. For customers, it’s about which value propositions increase participation (reach), sales (uplift), or frequency (visits) and thereby incrementally grow the basket “one more item, one more time.” For shareholders, this means understanding which value propositions grow sales and margin and which don’t.
Customers expect a fair exchange of value for their money. Shoppers cannot be expected to understand the cost to the business of the value offered. It is not the customers’ fault if a loss leader is offered, or if a store coupon reduces the net margin, or if the mix of the products bought according to one level of affluence and lifestyle delivers a higher basket margin than that of another.
In my 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 or switch each new customer account is in the hundreds of dollars. 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).
It’s my observation that a “customer profitability” mindset sits at the heart of these disrespectful and anti-loyalty practices.
Proposition Profitability vs. Customer Profitability
In a customer first organization, measuring the profitability of 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).
Analyzing the relative cost of each customer or customer type is a misguided exercise, and is counter productive to growing true loyalty. If anything, the data reveals more about the retailer’s bad habits than it does about “bad” customers.
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.” Yes, there is a value in understanding “customer lifetime value” and “customer value management cycle” – but only by using spending and preference metrics. Profitability considerations do not belong in the equation.
- Guide toward the best practice of measuring the relative cost of each proposition to customer impact, using a standard cost metric.
Customers do not have a choice on how much margin they give to a retailer or brand. Treating customers differently based on their “profitability” is counter-productive to building loyalty and toward creating a healthy retail customer experience.
David Ciancio is Global Customer Strategist for Dunnhumby, a pioneer in customer data science, serving the world’s most customer-centric brands in a number of industries, including retail. David has 48 years’ experience in retail, 25 of which were in store management. He can be reached at David.Ciancio@dunnhumby.com