Profitable Customer: The Key to Great Brands

Shift Focus Off Products and Onto the Customer

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For all of the energy, effort and focus that marketers have devoted to the topic of brands, few CFOs and CEOs and even fewer savvy institutional investors are real enthusiasts for the concept. Over the past few years, we've read more than a hundred business plans from companies in industries such as retailing, banking, insurance, consumer goods, consumer and business electronics, and hospitality. In them, the role of brand is far from central.

But three fundamental changes could change this reality. First, the obsessive focus on products needs to be replaced by an even more obsessive focus on the customer. Second, companies need to view themselves not as a portfolio of product brands, but as a portfolio of customer-segment brands. And third, to get the financial types on board, the focus on brands has to measurably help drive the share price. This requires replacing the traditional product-centric concept of brand equity with that of customer equity.

Great companies don't set out to create great brands; instead they strive to thrill their customers far better than their competitors. Two highly visible examples are Best Buy and Royal Bank of Canada. Each has shifted from being product-focused to customer-focused. They've thrilled their customers, and their share-price performances have thrilled investors. In the process, they've created great brands. And this is key. Focusing on product brands is like trying to use a tail to wag the dog. Without a doubt, brands are very important-but they are nevertheless the tail.

There is a way to build a rock-solid customer foundation on which to undertake brand management-something we call customer centricity.

To properly position the idea of brands, it is critical to start correctly. Companies need to be thought of as portfolios of customers and not portfolios of products. The customer generates the revenue and profit and drives the share price-not products or brands. We can hear many marketers whining, "Of course!" But honestly, that is not how most marketing organizations behave. If customers are to be the building blocks, then the company needs to be measuring and analyzing the full profitability of individual customers. How many CMOs are partnering with their CFOs to create comprehensive and regular reporting on customer profitability? Note that we said comprehensive-that is, profitability for each customer based on total revenue and expenses, including capital costs. We also said regular-as in monthly. Search as we may, we can find few companies that are doing this.

Indeed, few CMOs seem to have the insight or courage to lead the charge in partnering with their CFOs. This is surprising because it's a great opportunity for CMOs to broaden and deepen their influence with their CEOs and boards. The CMO-CFO partnership revolves around 1. collaborating on the design of individual customer P&Ls; 2. the detective work analyzing differences in profitability among different customers; and 3. creating action plans to exploit the key learnings.

Understanding customer profitability can unlock enormous insights. Best Buy, RBC and JC Penney have shared with the analysts that follow their stocks a very strong two-tailed distribution of customer profitability. In company after company we work with, we discover the "150-20" rule: The 20% most profitable customers generate as much as 150% of the profits of a company. At the same time, the 20% least profitable lose 100% of the profits. These two tails drive a company's overall financial performance, and hence stock price.

Without even knowing which customers are in the two tails and why, it seems foolhardy for a CMO to be worrying about brand strategies. Shareowners and savvy CEOs don't care if a given product or brand is profitable or unprofitable so long as the full customer relationship is fabulously profitable.

Mutually beneficial value exchange

For a company to really succeed, its customers have to feel they've gotten what they wanted or needed and, in exchange, the company has to have earned an excellent profit. In "Angel Customers & Demon Customers" (Portfolio Penguin Group), co-authored with Geoff Colvin, we introduced this concept of a "mutually beneficial value exchange" between the customers of a company and the company. Not surprisingly, the sustained profitability of a company is a pretty good predictor of the quality of the customer experience. The recent declines in sustained profitability of both Dell and Wal-Mart, for example, have been accompanied by widely reported declines in the quality of the customer experience.

If a company is to be thought of as a portfolio of customers, then the building blocks need to be customer segments. Let's be clear-we are talking about something far more fundamental than some one-time segmentation study based on psychographics or demographics. The segmentation has to be practical and operational. That means the company must be able to tag each customer and put them into a segment. RBC has been doing exactly this for its roughly 11 million clients. While it's more difficult for retailers that don't have loyalty programs or other means of capturing transaction data, a few have made great progress over the past few years.

Data often isn't the issue. It should, for example, be staggeringly simple for our telephone company to create a mutually beneficial value exchange with us-they have tons of data on our behavior over a long period of time. They should know both which segment we're in and our profitability.

But in our experience, there has never been a scintilla of evidence to suggest that we're in any segment unless it is the "give 'em a consistently crappy experience" segment. Creating customer segments and then measuring and managing the customer profitability of these segments seems totally obvious. So why don't companies do it? Because it's hard work. Spending millions on mass advertising mush is easier for management.

Once the segments of homogeneous customers are clearly defined and their current profitability is understood, what's next? The basis for competitive advantage is the creation of competitively superior value propositions tailored to the unique needs and wants of the homogeneous customer segments. It is important to stress that for us a value proposition is the complete customer experience, including every aspect of the interaction of a customer with a company, including price. Imagine staying at a premium hotel for a series of business meetings. Suppose you happen to be in the segment of frequent senior business travelers. Your needs are straightforward: to save time and to have a clean and pleasantly appointed room in which to prepare for your meetings, send and receive e-mails and sometimes dine over your work. The value proposition of the hotel starts with your assistant's ability to get your favorite room. If the hotel has arranged for a car to whisk you from the airport to the hotel, the second element of the experience is whether you are met on time and treated pleasantly by the driver. Are you greeted and acknowledged when you enter the hotel and move to the check-in desk? Are you taken care of promptly? Did they ensure that you got the room type you had requested? Indeed, did they remember and automatically block the room for you? Each one of these elements of the value proposition is part of the full experience as is the checkout process and payment of the bill.

It is through the successful creation, communication and delivery of competitively superior value propositions that a company can thrill its customers and at the same time get rewarded with exceptional levels of profitability.

Avoid brand blur

Marketers need to be leading the charge for a rock-solid foundation of customer profitability, needs/wants-based customer segmentation and uniquely tailored value propositions. These three elements are absolutely necessary requirements for developing "killer brands."

With this solid, customer-centric foundation in place, companies can then begin to differentiate themselves fundamentally from their product-centric competitors. They are positioned to deliver what customers in more and more industries are looking for: a company that understands them and truly seeks to meet their specific needs. Rather than focusing primarily on promoting product brands such as Sony or Hewlett-Packard, consumer-electronics retailers need to understand that different customer segments are looking for other elements in a value proposition, such as receiving help in choosing what is right for them out of many product choices, integrating their purchases into their broader entertainment or work activities, and saving time in going from purchase to enjoyment or productive work. Customers are looking for brands that are relevant to them and specific to their needs. Implicitly they are looking for customer segment-focused brands, rather than product brands. These are what we refer to as "killer brands"-promising a complete experience satisfying far more than product needs. RBC has done this by zeroing in on Canadian "snowbirds"-a subset of Canadians living in Florida during the winter months (see sidebar).

The snowbird example also illustrates the point that companies need to replace traditional notions of brand equity with customer equity. The ability to rigorously measure on a regular basis the profitability of individual customers comprising a customer segment enables firms to estimate the contribution of customer segments to the total market value or share price of a firm. In the end the only brand equity a CEO, CFO and CMO should worry about is that of their customer segments. Most companies are not there yet. But the early customer-equity adopters will gain the investment dollars of leading investors that are looking for transparency and relevance.

Companies need to stop communicating a single brand promise. Doing so creates what we call "brand blur." The messaging is designed to appeal to everyone, yet it appeals to no one.

Best Buy provides an interesting counter-example. They have built the solid foundation we have been discussing. They have multiple customer segments differentiated based on clear needs/wants. They are delivering value propositions to those segments. Their overall corporate message is "Thousands of possibilities-get yours." The message is all about providing customers with the breadth of choice of a mass merchandiser, but with the clear promise of a tailored, total experience of a boutique catering to a specific customer segment.

Great brands don't seem to arise from master brand strategies. They arise from creating a rock-solid foundation of customer profitability, segmentation and compelling value-proposition design and delivery. Remember that the brand is just the tail-not the dog.

About the authors

Larry Selden is a professor emeritus at Columbia Business School, distinguished senior research fellow at the Wharton School and founding managing director of Selden & Associates.

Yoko Sugiura Selden spent many years in investment banking with Citibank in Tokyo and Merrill Lynch in New York. She is a business-consulting-practice partner in Selden & Associates with her husband, Larry Selden.
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