Is the customer right - for you?

Roger Trapp looks at the benefits of detailed strategic targeting

OVER THE years, many businesses have claimed that the customer is king. Some have even gone so far as to act as if they really mean it - by introducing loyalty cards, special discounts, better service and the like.

But this misses the point. As the saying goes, not all customers are equal. Which is short-hand for not all customers being of equal value to the business. Indeed, it is widely acknowledged that many banks obtain as much as 130 per cent of their profits from 20 per cent of their customers.

So, how do you ensure you get the profitable customers and not those that cost you money?

According to a new book, Customer Connections (Harvard Business School Press) by Robert Wayland and Paul Cole, the key is not the customer but the relationship with him or her.

A business's strategy should be "customer-based, not customer-driven or customer-led", they write. "Being obsequious to customers is not a strategy. However, recognising that customers are ultimately the only sustainable source of shareholder value and rigorously working out the implications of this fact can provide useful strategic insights. Thus, we see the customer relationship not as an end in itself but rather as a fundamental building block of business value."

The problem for the average business is that it does not know which relationships to develop and which to abandon. In their book, Mr Wayland, head of corporate strategy firm Robert E Wayland & Associates, and Mr Cole, national director of Ernst & Young's "customer connections solutions" practice in Boston, Massachusetts, point to research showing that fewer than a third of Fortune 1000 companies have a clear view of exactly what their most valuable customer relationships are. "Not surprisingly," they write, "the manufacturers of consumer packaged goods have the lowest level of customer-specific knowledge, although many have extensive statistical representations of typical customers."

Banks, too, have traditionally been regarded as being poor learners about their customers, because - although they have a lot of data - it is tied to account numbers and provides no clear picture of customers who might, after all, have several separate relationships with them.

Mr Cole, who was in London last week to talk about the ideas set out in the book, points out that one organisation that has gone some way towards breaking this mould is Wachovia, a regional bank based in the south-eastern United States.

Having seen their customer base eroded by increasing competition from a variety of sources, banks have tended to respond by extending the range of services they offer - beyond merely supplying safe, relatively low- return savings opportunities - and cross-selling between them. This means that customers are liable to receive direct mail urging them to take out mortgages or start pension plans just after they have done so.

Wachovia, though, has gone about it differently, creating a strategy that builds on trust-based relationships that keep customers' best interests in mind by developing personalised solutions. "Achieving this goal requires that systems be built to evaluate the needs of individual customers," Mr Cole and his co-author write in the book. "In addition, it requires that the company move beyond treating each customer roughly the same and that it engage customers with the right professional resources and channels."

Above all, the bank's experience "demonstrates the importance of aligning knowledge management, connecting technologies and customer economics to focus on the right customer with the right product at the right time".

But deciding which are the "right" customers is more easily said than done. As one of the bank's executives says: "We're as likely to find doctors as factory workers in our lowest or highest deciles."

This realisation led the bank to profile or score its entire customer base rather than, as is usual, assuming that one group, typically professionals, is the most promising target.

But Wachovia does not stop there. It classifies individual accounts according to their potential profitability rather than current value. And it has begun to create "predictive knowledge" by developing analyses of customer life cycles and using them to align customer development efforts more closely with customers' current and potential needs.

Nor is Wachovia the only organisation adopting such an approach. MCI, the US telecommunications company in the throes of linking up with World Com, realised some time ago that it did not have much future in its then strategy of being a low-cost provider of long-distance telephone calls. So it set about being a supplier of extended value to certain customers - hence the creation of the "Friends and Family" initiative that has also been adopted as a way of rewarding callers who dial the same group of numbers regularly by MCI's former suitor, BT.

The idea, explains Mr Cole, is to get away from customer dealings exclusively as transactions and towards making them relationships. "The more potential there is for a relationship rather than a transaction the more potential there is," he adds.