MANAGING CUSTOMERS FOR PROFIT
by V. Kumar

This book is aimed at top/mid-level management of small, medium, and large business-to-business (B2B) and business-to-consumer (B2C) enterprises that have the power and resources to change customer management strategies in their organization. This book also serves as a guide for executives-on-the-rise to understand the importance of customeroriented strategies.

What constitutes an effective customer management strategy? Is it
enhancing customer loyalty,widening the customer base, or maximizing
customer profitability? Although conventional wisdom suggests that
enhancing customer loyalty and widening the customer base are effective
strategies, this book focuses on the profitability angle and establishes
that managing customers based on their profitability is the most effective
approach to customer management.

This book identifies three paths to profitability a firm can undertake:
operational excellence, brand equity, and relationship marketing. If relationship marketing is selected as a path to profitability, managing customer loyalty becomes crucial. While managing loyalty programs, companies have traditionally placed undue emphasis on maximizing customer loyalty. This book adopts a fundamentally different approach toward customer management and demonstrates that stable healthy growth of a company is built on the profitability of customers, not just on their numbers or loyalty. This book also shows that loyal customers are
not always profitable, and not all profitable customers are loyal. Therefore, when firms are developing a customer management strategy, they must adopt an approach that closely links loyalty with profitability.

To effectively manage loyalty programs, firms use several customer selection
metrics, such as Recency-Frequency-Monetary value (RFM), Past Customer Value (PCV), Share of Wallet (SOW), and Customer Lifetime Value (CLV). This book concludes that CLV outscores other metrics when it comes to profitable customer management. CLV outscores the other metrics in this regard because it is a forward-looking metric and because it factors future customer behavior into current marketing initiatives.

Empowered with CLV, firms can reevaluate and overhaul their existing customer management strategies. This book offers nine strategies to manage customers profitably. These strategies aim to select the right customers, manage them profitably, and retain them through optimal allocation of resources. Furthermore, these strategies demonstrate the benefit of pitching the right products to the right customers at the right time, holding on to profitable customers, encouraging multichannel shopping, increasing brand value for customers, acquiring potentially
profitable customers, and identifying customers who provide value through referrals. The knowledge obtained through implementing these strategies can then be leveraged to acquire prospective customers with a higher profit potential.

Although CLV can be an effective tool to measure and manage direct (transactional) contributions made by customers, it overlooks the indirect (referral, word-of-mouth) contributions toward firm profitability. To maximize profit, the crucial contribution made by customer referral behavior has to be carefully monitored and managed. This book introduces Customer Referral Value (CRV) as a metric that firms can use to maximize the indirect contributions made by customers. CLV, used in conjunction with CRV, will enable marketers to implement strategically designed marketing initiatives to profitably manage customer loyalty.

This book identifies organizational and implementation challenges that firms might encounter when adopting a CLV-based approach and suggests appropriate guidelines to overcome such challenges. Firms need to adopt an “interaction-orientation” approach when dealing with customers. By establishing a strong firm-customer relationship, and by treating customers as a resource, managers can effectively implement the CLV-based strategies. Because CLV is a dynamic approach, marketing strategies have to be constantly updated for sustained profitability. This book recommends a balanced approach, keeping in mind the ethical issues involved in collecting and managing customer-level information. This book also outlines issues that firms might potentially face when implementing a CLV-based approach and suggests the necessary strategies to stay ahead of the competition.

                   Wharton School Publishing, ISBN #0-13-235221-4