A Loyal Customer is a Good Customer!

A Loyal Customer is a Good Customer!

(... Or is he? A brief look at the Customer Profitability Whale Curve)

Companies are spending so much effort and money trying to create loyal customers that any dissenter to the assertion made above runs the risk of being ridiculed, labeled an ignorant and of having her voice being quickly smothered before infecting anyone else with that heretic thought.

In my training program, "Customer Loyalty: Measurement and Strategies", I contend that the main criteria of a "good" customer is profitability. Customer loyalty is something companies strive for hoping it would translate indubitably into fatter profits. The idea, it is hoped, is to transform as many of our customers as possible into loyal customers assuming they would become more profitable in the process. Oh, the disappointment when wider and brighter customer smiles do not necessarily mean more black ink on the P&L. What could have possibly gone wrong? Didn't our talented managers see that in the mad rush to maximize customer loyalty many of the expenses they assumed would remain fixed, or semi-fixed, spiraled out of control negating all the benefits of the higher revenue figures?

Well, how can they? To be fair to these managers, traditional accounting reporting methods provide no tool to measure and track the real costs of enticing an individual prospect or customer. GAAP methodology does not provide for aligning actual sales and promotional costs by customer. This becomes the realm of Activity Based Costing and CRM, and is a more complex and creative analysis and reporting process than many companies realize.

What's more, who could have suspected that this huge and very loyal customer that we've been catering to for the past decades was the single largest loss making account we ever had? Research indicates that, due to the inability to track real costs per customer, loss making accounts are more common than previously thought. In addition, if one is to graph the cumulative net profit (or loss) generated by a company's customers (listed from most profitable to least profitable), the resulting curve (the "Whale Curve", see below) would show that:

• a few customers generate most of the profits,
• most customers hover around a neutral zone, not really affecting the overall profitability of the company,
• and a few more customers ... the bad ones ... are actually a drain on profitability, actually causing the company to lose money.

To make things even more interesting, it was found that those that lost the most money were among the largest accounts a company had. But, in a twisted kind of way it actually makes sense: to really affect the profitability of the company, whether positively or negatively, an account has to be big! Actually, the larger the account, the more likely a company is to give in, allowing it special treatments and prices reserved only to the "loyal" customers and, literally, spoiling it.

Before closing this article let me make one thing clear: I am not advocating a war on customer loyalty. What I am advocating though is marrying customer loyalty intelligently to the perennial concept of customer profitability in order to create one of the most powerful elements of a company's success. These concepts and more are covered in my customer loyalty training program. However you are also welcome to comment and discuss this article right here on this blog.