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Michael Lowenstein, Ph.D., CMC Thought Leadership Principal, Beyond Philosophy

Many companies devote considerably more energy and resources to capturing customers than they do to keeping them. But, all customers are not created equal; some have more potential value than others. It’s extremely important for targeting the best customers that their array of value requirements are well understood and that the resources devoted to getting these customers be well-applied. Companies can achieve a higher, more attractive cost/benefit ratio for customer acquisition and advocacy efforts. The key is to attract high-value customers by identifying high-potential prospects and delivering what they want and need.

Marketing consultant and author Robert Tucker has stated, “Companies are often so concerned about attracting new customers that they denigrate their unique value proposition to loyal customers.” They focus instead on chasing down the next sale, competing on price and compensating employees more for winning new accounts than for keeping existing customers happy, engaged and loyal.

Several years ago, a multi-industry continental Europe study by Professor Adrian Payne (University of New South Wales, and formerly of Cranfield University in the U.K.) showed that 80% of companies spend too much of their marketing budget on customer acquisition. He calls these companies Acquirers. Parenthetically, his study found that 10% spend too much on retention; another 10%, Profit Maximizers, seem to get the mix right.

Why does this overemphasis and preoccupation happen? Professor Payne cites five reasons:

1. Management believes that existing customers will be retained; therefore the company needs to focus on acquisition.
2. Companies experience high churn rates: leaky bucket syndrome.
3. Customer acquisition is reported regularly to analysts, shareholders and senior management; but churn rate may or may not be reported.
4. The lifetime value, i.e. profit, impact of lost customers is not sufficiently reviewed.
5. Sales force and senior management compensation is often based on acquisition, not retention or per customer revenue optimization.

The acquisition mindset of senior management and marketers is not likely to change anytime soon. We can preach and preach about the advantages of a balanced, reasoned, profit maximization approach to customer management and optimizing value over the life cycle. But, as researchers and consultants, we had better be prepared to help acquisition-oriented and acquisition-obsessed companies in the real world

The drive to acquire customers often leads to twin challenges: a) the superficial approaches to customer targeting and qualifying, and b) understanding the factors that impact emotional subtexts of perceived value and behavior for the prospect that has yet to make an initial purchase.

Let us deal with the second challenge first: gaining insight into what represents value for prospective customers. While much attention is given to learning what leverages customer retention, customer loyalty, positive customer relationships, and even customer risk and loss, there is little research around what causes a prospect to become, or not become, a first-time customer.

There are three main applications of customer management systems: selling and sales force automation, informal and formal marketing/communications, and customer service. Implementation relies on integration of multiple sales and communication channels. However for prospective customers, the system is built on outbound contact and streamlined lead management. The enterprise view of customer management is focused on helping sales groups generate customers, and providing seamless support and service once customers are on board. Infrequently, companies attempt to identify 1) what prospective customers really want or need, or 2) how well companies themselves are positioned to address and meet those wants and needs.

As a result, customer management systems tend to be less effective at the front end of a customer’s life cycle. Process-oriented companies focus on creating benefit by keeping customers, optimizing their purchases over time and stemming rates of defection or recovering lost customers. They rarely give enough attention to pre-purchase processes or value creation.

One of my white papers, “Linking Employee Behavior to Customer Advocacy”m points to studies showing that customers who complain to an organization and have their complaints resolved satisfactorily tell an average of five other people about the good treatment they received. But if they received poor treatment, they tell at least 20 people. Surely the same is true with regard to pre-purchase experiences in today’s Internet-connected world.

Everyone can repeat stories of being ignored, treated poorly or given incorrect or insufficient information or service by badly trained, indifferent sales and service staff, thus preventing them from making an initial purchase. Unreturned phone calls, non-response to email messages, or poorly designed web sites are also barriers to initial purchase. These are just some of the pre-customer process breakdowns in both b-to-b and b-to-c worlds that customer management systems could address but rarely do.

The other prospect challenge is that of customer suitability. Stating that all customers are not created equal is hardly an oversimplification. Like the pigs in Orwell’s Animal Farm, some customers are more equal than others. No company has unlimited resources to service or support all their customers equally. Repeat buying power is everything when prospecting for potential customers. Some customers are worth a great deal; some may become more valuable over time; some may be valuable for a brief period but may be easily lured away; some are only seeking a price which would be disadvantageous for the supplier; and some are never likely to become valuable.

At minimum, companies need to segment their customers to determine how long a customer will remain with them, how much revenue and profitability each customer will contribute, how much and what kind of services the customer should receive, and what efforts will be needed to keep them whether they are new, at risk or already lost. Also, if a company is changing product or service focus, i.e. beginning a new communication or frequency marketing program, decisions have to be made about which customers they want to retain.

Companies are becoming smarter about keeping the customers they want or firing less attractive customers through stepped-down or added-charge services. Now they have to invest more up-front to learn which potential customers will be the most valuable over time. This goes beyond segmentation. It is almost pre-segmentation.

Republished with permission from CustomerThink.com