Chapter 3

Not All Customers Are Good Customers

Effective implementation of a customer-focused strategy takes courage to start, persistence to stay the course despite setbacks, and an unyielding drive to achieve Level III’s mutual profitability outcome. It is not for the faint of heart and it’s not the right approach for all of your customers. To put this last comment in perspective, let’s look at three typically held beliefs about customer focus and what’s wrong with each of them.

First of all, customers are not always right. They are just as capable of making a mistake as any supplier is. Whether they agree or not, they are also partly responsible for ensuring the customer–supplier relationship is successful. Part of a sustained successful relationship is continually educating each other on what each side needs from the other to make it work, and how each can continually improve the efficacy of their respective roles. That means—at times—letting each other know when they’ve made a mistake or have caused a misstep in the process.

While most companies totally get it when it comes to getting tough feedback from their customers, most of them are uncomfortable with the reverse—providing tough feedback to the customer. The fact is that periodically a company does have to set the customer straight on some things. Disagreeing with a customer or showing them how they could have done something better is not inherently a bad thing to do. When problems arise, however, they involve the ways in which something is done. The timing, tone, choice of words, communication tool used, and the particular players involved—both on the sending and receiving end—can mean the difference between a productive or destructive communications exchange.

Providing feedback to the customer is something companies need to be (or get) comfortable doing. Each time the company misses or ignores an opportunity to help the customer learn or improve, it makes the next instance even that much harder to effectively address. Before too long, the relationship has become painfully one-sided. They’re always right and you’re always wrong.

The notion of “whatever it takes” is similarly a problem. It denies the very fact of why companies have customers in the first place. Hopefully, that reason is to make money. When companies say, keep the customer satisfied no matter what it takes, it implies they’ll take a loss (tangible or intangible) if they have to—just to keep customers happy. But that approach, as noble and customer-focused as it seems, ignores the company’s need to make a profit. There must be limits on the extent to which a company will bend (or the money it will forgo or spend) to satisfy a customer. It also ignores the fact that there are some customers out there who are bullies—plain and simple. They intimidate, threaten, and criticize a supplier to the point where the supplier’s margins are razor thin or their employees run for cover every time the customer calls or visits. Bully customers can be toxic to a company’s economics and to a company’s employees. We’ve all seen them and we’ve all seen companies tolerate them. You must have a reasonable line that you won’t cross and will effectively tell the customer: Enough is enough. We’ve run out of options. We can’t give in or give up any more and still make sense of this relationship or particular deal. The only way we can continue making this work is if you (our customers) agree to do so and so.

This is also an important message for your customer-facing employees to understand. When employees feel their company will always give in, they lose pride and confidence in the company’s leadership, value, and brand. It shows in their behavior both at work and outside of work. On the other hand, there’s a visible sense of pride, shared purpose, and advocacy in employees who know their company will stand up to unreasonable customers, manage customers’ unrealistic expectations, and enjoy a mutually rewarding relationship with their customers. Again, the ways in which these things are done (through tone, approach, words, timing, and the like) will be the key to taking a firm but successful stand when you need to.

The third and equally important belief is that all customers are important. In many respects this is absolutely true. All customers are important in terms of the continued business they give you, the referral business they send your way, and the way they talk about you in the marketplace. But that doesn’t mean they are all equally important. Some customers cost you more to supply (lower margins), generate smaller revenue streams for you (refer less new business your way, buy relatively less from you, or buy less frequently from you), and create more intangible costs for you (high-maintenance relationships, brand-weakening behaviors).

This is where the lifetime value (LTV) of a customer can come into play. Ideally, you want all customers to be as profitable to you as possible and stay with you forever. So it’s important to look at the total value (revenue from and cost of servicing) of an account over time. For example, it might seem like a customer that buys $250,000 of product or service from you every 5 years is less important to you than a customer who buys $75,000 from you every year for a 10-year period. Add to that the fact that the $75K/year customer is very hard to do business with, entails much higher transaction costs for you, and is constantly threatening to go out for competitive bids. Which customer is more valuable to you in the long run? The answer isn’t always as clear-cut as one might think. Going through this LTV thought process can be helpful.

In sum, the customer is not always right, and a company needs to be comfortable and confident enough to tell them so when appropriate. Keeping customers happy is vital—but within reason. If your company always has to lose so the customer always wins—that’s not a recipe for long-term mutual success. All customers are important, but not all customers are worth keeping. In fact, some customers should be fired. How you go about firing them is the key. A burned bridge creates a lot of smoke that others (customers, prospects, and competitors) will see; and it takes a long time to rebuild. Some customers should be fired, but done so with care.

The rest are customers you want to keep. They are all important, but that doesn’t mean they are all equally important.

Customer Segmentation Is Vital

You’ll recall our discussion in Chapter 1, where we said a company can’t afford to tackle all the strategic goals it wants to at a given point in time. Similarly, you can’t take, and shouldn’t want to take, all customers to Level III relationships and profitability at a given point in time. This is where segmentation becomes increasingly important. It helps direct your attention, investment, and energy (your customer focus) to the segments with the most potential and achievable gain.

Organizations use many different methods and classifications to segment their customer base, and some industries have a generally accepted system for doing so. Typically, we see companies segmenting their customer base using one or more of the following common criteria:

• Industry segments (automotive, construction, aerospace, etc.)
• Geographical segments (states, districts, countries, regions, etc.)
• Channel segments (retail stores, online sales, catalogue sales, distributors, etc.)
• Product segments (different product lines or lines of service)
• Application segments (commercial, industrial, residential, municipal, etc.)

Some companies segment their customer base in terms of the sales process or, more specifically, what it takes to acquire, further penetrate, and retain a customer account. There are a wide range of criteria and labels we’ve seen used, but below are just a sampling of ideas:

• Sales Cycle (long, medium, or short lead time)
• Decision Maker (procurement department, technical buyer, general manager, etc.)
• Purchase Driver (price, convenience, value, brand preference, etc.)
• Competitors (numerous and effective, few but effective, few and ineffective, etc.)

In addition to those more common segmentation criteria, we also like companies to think further about their customer base in terms of the value involved:

• Value customers receive from you (what they need, expect, want, pay, and buy)
• Value they generate for you (sales, referrals, brand advocacy, margin growth, and LTV)
• Effort you expend to give and get that value (sales cycle, fulfillment and service cycle, and related costs)

The way a company chooses to segment its customer base using any of the above examples can vary widely. And, as you have probably surmised, there are benefits to all of them. The chief consideration here is: to which customers do you really want to devote your customer focus? Which ones represent the most potential of untapped value to you, and, with which ones do you have the best chance of successfully reaping that value? The following is a Segment-Priority Tool we often use to help a company segment and prioritize its customers for the specific purpose of determining whether they are a Level I, Level II, or Level III customer and which customers the company wants to advance within a particular level or from one level to the next.

This particular version of the tool uses six different segment characteristics (products, brand, referrals, share of wallet [SOW], potential, and relationship) to define each customer, and three different levels (A, B, and C) to evaluate each customer on each characteristic. (See Figure 3.1.) Some companies actually apply different weights to the various characteristics to reflect different levels of importance to them. While the number, definitions, and weights, if applicable, of the characteristics and levels will vary widely based on the nature and goals of a particular company, here are the definitions for the specific version we illustrate in Figure 3.1:

Figure 3.1 Segment Evaluation Tool for Prioritizing Your Customer Base

With those definitions in mind, this tool can then be used to evaluate and prioritize the various customers in a particular segment or in general. In this example, each customer (1, 2, 3, 4, 5, etc.) would get an A, B, or C rating for each of the six characteristics. Then using a formula where A = 10, B = 5, and C = 1, each customer gets a total score that ranges between 6 and 60.

Applying a scale we often use, any customer with an overall evaluation score over 50 is considered a low-risk customer with whom you’re probably already enjoying a relationship somewhere between Level II and Level III of the Customer Focus Maturity Model® (CFMM). There’s still significant progress to be made with them, but clearly no burning platform to address. Any customer with an overall evaluation score of less than 30 is considered an at-risk customer (retention, margin, penetration, or brand risks) and would be a viable candidate to start with or intensify a Level I focus.

But the real economic gain for you, generally speaking, will most likely come from focusing sharply on the middle group of customers—those with an overall evaluation score between 30 and 50. These are the customers who would value most from increasing your focus on them from Level I to Level II, or moving deeper into a Level II focus with them, or transitioning them from a Level II to a Level III focus. Accordingly, as they receive more value from your increasing focus, you’re going to receive more value from their loyalty to you as a result. That is the heart of what the CFMM is all about. The ultimate goal is a loyalty relationship that improves to increasing and more sustained levels of mutual value or profitability. Let’s look a bit more closely at this notion of loyalty.

Loyalty Generates Mutual Profitability

The ultimate goal of our customer focus journey is to get a company to the point where they are enjoying the mutual profitability that comes from a Level III relationship with their selected customers. That profitability is only possible when the customer–supplier relationship is characterized by a real sense of loyalty to each other. We’ll define and refine what loyalty means to both sides more specifically as we proceed, but for now just think of it as being the optimal alignment of your customer’s view of value, your brand promise, and your capability to deliver that customer’s value and your promise, as shown in Figure 3.2.

Figure 3.2 Loyalty Is the Target—Profit Is the Prize

Getting your customers to a point of loyalty requires first that you understand clearly what they value. As we discussed earlier, that value differs from one customer segment to the next. It can vary from one customer to the next within a given segment, and it will vary from one touch point to the next touch point within a given customer’s organization. In addition, your customers’ view of value can change just as their respective markets and customer needs will change. So, customer value is a multifaceted, dynamic target—continually evolving and morphing.

Next, you have to clearly pledge or declare your commitment to providing that value to them. Your brand promise must answer their value need and do so in a way that makes them come to you instead of going to a competitor for that value. It must answer these questions: Why must I buy this value from you when there are other suppliers around who can also give me what I need? What makes you so different, and your value better than theirs?

Finally, you have to make good on your pledge and deliver that value just as you said you would—just the way they requested it. That brand promise must be the common thread that connects your marketing and sales capabilities or activities to your design and production activities and in turn connects them to your fulfillment, distribution, billing, and service activities. You must have the capabilities within and throughout your company that enable you to make that promise real. In effect, that brand promise must pervade every aspect, every process, position, and person, every system, skill set, policy, and procedure—literally, every nook and cranny of your organization. It must be a shaper and core driver of your company’s culture. Ultimately, it must be your company’s culture!

We hope you’re beginning to form a much clearer picture of the close linkage that exists between your customer focus (loyalty) and your business goals (profitability). That linkage is there whether you choose to recognize and leverage it or you choose to ignore it. If you ignore it, the disconnect between your strategy and customer focus will forever be a speed bump to your growth and success. If you chose to recognize and leverage it, you’re in for a great ride.

Mutual Profitability Starts the Customer Focus Journey

Let’s introduce and start building the Customer Focus Maturity Model® by recapping some of our key discussion points thus far. (See Figure 3.3.) First, realize that you’re in business to make money by creating and delivering value to your customers. Your goal is a win–win relationship or mutual profitability (A).

Figure 3.3 The Customer Focus Maturity Model

As a supplier, you further realize that customer behavior and satisfaction are only part of the picture and that the real gains you seek come from your customers’ loyalty (B). You build that loyalty by delivering customers value that goes beyond the transaction and adds value at every touch point of the customers’ total experience (C). Any number of suppliers can give your customers the value they get in the standard business deal or transaction. The competitive differentiator is to be able to identify what is important to the customers beyond that standard transaction. What do they view as a differentiator at each touch point of the entire customer experience, and how can you turn each touch point into an opportunity to deliver added value (beyond what your competitors can provide) consistently, over time? Just as important, how can you turn each touch point into a barrier to entry for any competitor?