The Ultimate Test: Customer Profitability

The Ultimate Test: Customer Profitability

Ultimately, marketing is the art of attracting and keeping profitable customers. Yet, companies often discover that between 20 and 40 per cent of their customers

are unprofitable. Further, many companies report that their most profitable customers are not their largest customers, but their mid­size customers. The

490 • Chapter 11 Building Customer Relationships: Customer Satisfaction, Quality, Value and Service

largest customers demand greater service and receive the deepest discounts, thereby reducing the company's profit level. The smallest customers pay full price and receive less service, but the costs of transacting with small customers reduce their profitability. In many cases, mid­size customers that pay close to full price and receive good service are the most profitable. This helps to explain why many large firms that once targeted only large customers are now invading the middle market.

A company should not try to pursue and satisfy every customer. For example, if business customers of Courtyard (Marriott's less expensive motel) start asking for Marriott­level business services, Courtyard should say no. Providing such

service would only confuse the respective positioning of the Marriott and Courtyard systems. Similarly, airlines differentiate between tourist­ and business­ class flyers, and Visa offers more services to gold­card users.

Some organizations ... try to do anything and everything customers suggest. ... Yet, while customers often make many good suggestions, they also suggest many courses of action that are unactionablc or unprofitable. Randomly following these suggestions is fundamentally different from market­focus ­ making a disciplined choice of which customers to serve and which specific combination of benefits and price to deliver to them (and which to deny them).­'"

What makes a customer profitable? We define a profitable customer as a person, household or company whose revenues over time exceed, by an accept­ able amount, the company's costs of attracting, selling and servicing that customer. Note that the definition emphasizes lifetime revenues and costs, not

customer lifetime value profit from a single transaction. Here are some dramatic illustrations of customer The amount by which

lifetime value;

re­venues from a given customer over time

Stew Leonard, who operates a highly profitable single­store supermarket, exceed the company's

costs of attracting, says that he sees $50,000 flying out of his store every time he sees a selling and servicing

sulking customer. Why? Because his average customer spends about $100 that customer.

a week, shops 50 weeks a year and remains in the area for about 10 years. If this customer has an unhappy experience and switches to another supermarket, Stew Leonard has lost S50,000 in revenue. The loss can be much greater if the disappointed customer shares the bud experience with other customers and causes them to defect.

Tom Peters, noted author of several books on managerial excellence, runs

a business that spends 81,500 a month on Federal Express service. His company spends this amount 12 months a year and expects to remain in business for at least another 10 years. Therefore, he expects to spend more than 8180,000 on future Federal Express service. If Federal Express makes a 10 per cent profit margin, Peters' lifetime business will contribute 818,000 to Federal Express's profits. Federal Express risks all of this profit if Peters receives poor service from a Federal Express driver or if a competitor offers better service.

Few companies actively measure individual customer value and profitability, For example, banks claim that this is hard to do because customers use different banking services and transactions are logged in different departments. However,

banks that have managed to link customer transactions and measure customet profitability have been appalled by how many unprofitable customers they find. Some banks report losing money on over 45 per cent of their retail customers. It

Implementing Total Quality Marketing 9 491

European Foundation for Quality Management's model of business

Figure 11.5

excellence

is not surprising that many banks now charge fees for services that they once supplied free.

Implementing Total Quality Marketing

Customer satisfaction and company profitability are linked closely to product and serviee quality. Higher levels of quality result in greater customer satisfaction, while at the same time supporting higher prices and often lower costs. Therefore, quality improvement programmes normally increase profitability. The Profit

Impact of Marketing Strategies studies show similarly high correlations between relative product quality and profitability for Europe and the United States (see Figure 11.6). 31

The task of improving product and service quality should be a company's top priority. Much of the striking global successes of Japanese companies resulted from their building exceptional quality into their products. Most customers will no longer tolerate poor or average quality. Companies today have no choice but to adopt total quality management if they want to stay in the race, let alone be prof­

itable. According to GE's chairman, John F. Welch, Jr: 'Quality is our best assur­ ance of customer allegiance, our strongest defence against foreign competition and the only path to sustained growth and earnings.' 21

Quality has been variously defined as 'fitness for use', 'confonnance to

requirements' and 'freedom from variation'. 2 ' 5 The American Society for Quality

Control defines quality as the totality of features and characteristics of a product

qualify

or service that bear on its ability to satisfy stated or implied needs. This is clearly The totality of features

a customer­centred definition of quality. It suggests that a company has delivered and characteristics of a quality whenever its product and service meets or exceeds customers' needs,

product or service that requirements and expectations. A company that satisfies most of its customers'

bear on its ability to needs most of the time is a quality company.

satisfy stated or implied needs.

It is important to distinguish between performance quality and eonformance quality. Performance quality refers to the level at which a product performs its functions. Compare two German cars: Volkswagen, Europe's leading volume car

maker, and Mercedes, Europe's leading luxury car maker. A Mercedes provides higher performance quality than a VW: it has a smoother ride, handles better and lasts longer. It is more expensive and sells to a market with higher means and requirements. Conformance quality refers to freedom from defects and the

492 • Chapter 11 Braiding Customer Relationships: Customer Satisfaction, Quality, Value and Service

Figure 11.6

Relative qualify boosts rate of return.

consistency with which a product delivers a specified level of performance. Both a Mercedes and a VW could offer equivalent conformance quality to their respective

markets, since each consistently delivers what its market expects. A DM50,000 car that meets all of its requirements is a quality car; so is a DM15,000 car that meets all of its requirements. However, if the Mercedes handles badly or if the VW gives poor fuel efficiency, then both cars have failed to deliver quality, and customer satisfaction suffers accordingly.

The European Foundation for Quality Management's excellence model, in Figure 11.5, is used widely across Europe. Marketing shares with other functions

the responsibility for striving for the highest quality of a company, product or service. Marketing's commitment to the whole process needs to be particularly strong because of the central role of customer satisfaction to both marketing and

total quality total quality management (TQM). Within a quality­centre company, marketing management (TQM)

management has two types of responsibility. First, marketing management partici­ Programmes designed to

pates in formulating the strategies and policies that direct resources and strive continuously improve

for quality excellence. Secondly, marketing has to deliver marketing quality the quality of product,

alongside product quality. It must perform each marketing activity to consistently service and marketing

high standards: marketing research, sales training, advertising, customer services processes.

and others. Much damage can be done to customer satisfaction with an excellent product if it is oversold or is 'supported' by advertising that builds unrealistic expectations.

Within quality programmes, marketing has several distinct roles. Firstly, marketing has responsibility for correctly identifying customers' needs and wants, and for communicating them correctly to aid product design and to

schedule production. Second, marketing has to ensure that customers' orders are filled correctly and on time, and must check to see that customers receive proper instruction, training and technical assistance in the use of their product. Thirdly, marketers must stay in touch with customers after the sale, to make sure that they remain satisfied. Finally, marketers must gather and convey customers' ideas for product and service improvement back to the company.

TQM has played an important role in educating businesses that quality is more than products and services being well produced, but is about what marketing has been saying all the time: customer .satis/action. At the same time, TQM extends marketing's view to realize that the acquisition, retention and satisfaction of good employees is central to the acquisition, retention and satisfaction of customers. 24

Implementing Tbtal Qualify Marketing * 493

Total quality is the key to creating customer vaiue and satisfaction. Total quality is everyone's job, just as marketing is everyone's job:

Marketers who don't learn the language of quality improvement, manufacturing and operations will become as obsolete as buggy whips.

The days of functional marketing are gone. We can no longer afford to think of ourselves as market researchers, advertising people, direct marketers, marketing strategists ­ we have to think of ourselves as

customer satish'ers ­ customer advocates focused on whole processes. 2fr

With TQM's commonality with marketing's aims, it is ironic that one study found that marketing people were responsible for more customer complaints than any other department (35 per cent). Marketing mistakes included eases in which the sales force ordered special product features for customers, but failed to notify manufacturing of the changes; in which incorrect order processing resulted in the wrong product being made and shipped; and in which customer complaints were

not properly handled. 36 The implication here is that marketers must spend time and effort not only to improve external marketing, but also to improve internal marketing. Marketers must be the customer's watchdog or guardian, complaining loudly for the customer when the product or the service is not right. Marketers must constantly uphold the standard of 'giving the customer the best solution*. Marketing Highlight 11.4 presents some important conclusions about total quality marketing

strategy.