Targeting service to your profitable customer segments

It took one of our clients several months to work out the profitability of their different customer segments. Theirs is a complex business with data in various systems, so little wonder it took a while to tease out the numbers. Even for simpler business models, the analysis can be a painstaking experience because of the variety of ingredients that go into the pot. One of the difficult areas to put a value on is the referral revenues derived from existing customers advocating the business to others via word of mouth. We know from our own experience that the characteristics of a referred prospect are different from other types of marketing leads in that:

  • They are more likely to buy
  • They are more likely to stay
  • They are more likely to refer
So for us, building relationships through personalised quality service is fundamental to our business strategy. We find that if you delight your customers they will generally refer you to others, either on a reactive basis or, if you're lucky, proactively. Not all clients behave in the same way of course, but it's true to say that we tend to know who will create opportunities for us – and we will always go the extra mile for them.

So we were very intrigued by the reaction of this particular client when we fed back their results at segment level. Their segments are based around product lines and our feedback presented the customer scores (out of ten) for each of the segments:

The slide was met with a slightly furrowed brow. By way of explanation, it appears that the chart mirrored the profitability profile – but the wrong way round ie. Category 1 is the least profitable yet most satisfied and Category 5 is the most profitable but the least satisfied with the service.

One interpretation is that the business is delivering service excellence to the 'wrong' customers. In discussion it was easy to see why this was. Category 1 includes their corporate clients, their big accounts and well-known names, while Category 5 are personal consumers.

Not only are larger corporates generally more demanding, staff also tend to react because of their understandable perception that the client is 'valuable' because of who they are. This is clearly reflected in the above average customer scores for Category 1.

Arguably there is absolutely nothing wrong with providing high standards of service for these clients and in fact the challenge is to improve the customer experience for more profitable segments and bring them up to that level, and beyond.

The risk in not focusing on the service being delivered to Categories 3, 4 and 5 is that the business will alienate those profitable customers and potentially lose not just their business but also damage the referral income stream derived from those customers as well.

It will be interesting to see what happens next year when we run their 2012 IIC assessment for them. Hopefully we will find the kind of pattern that we encountered with a different client last year:

Here the client has developed different service propositions based on customer value and the impact of that is reflected in the different customer views of the service experience.

For the client, this suggests the strategy is working – their profitable 'Gold' customers are receiving a premium level service and are recording 'Gold' level scores.