Customer Portfolio Management
A company’s marketing strategies ‘should encompass an entire portfolio of customers at different relationship levels’. This process is called ‘customer portfolio management.’
‘Customer portfolio analysis enables managers and researchers to capture a customer’s value contribution to a firm’s portfolio of relationships rather than analyzing a customer’s value to the firm in isolation.’
Creating the right portfolio of customers involves selecting those customers whose spending patterns, i.e. the revenues they bring in and the probability of repeat purchase, fit in with the strategies of the company.
Customers vary in their value to the company. Some are consistent big buyers. Some are erratic big buyers. Some are consistent small buyers whereas some others are erratic small buyers. Customers have been usually ranked in terms of the revenue they generated for the company in previous years, and companies have been willing to spend lavishly on the big spenders to retain them. But companies will have to classify this data in one important way.
Customers will have to be classified in terms of the probability of their buying in future time periods. Therefore the value of a customer to a company would be dependent upon the amount of his future spending and his probability of doing so. The less the probability of his spending, larger would be the risk to the company.
Similarly potential customers would be classified on the basis of their potential spending and their probability of doing so. A company would like to have customers with high revenue potential and low risk. The amount of effort and money that a company would be willing to spend on a customer to acquire or retain him will have relation to his revenue potential and his risk to the company. The higher the revenue potential and lower the risk, the more valued is the customer and more eager would the company be to acquire or retain him.
The process gets complicated by the fact that the big spenders are more risky to the company as they are likely to be repeatedly enticed by competitors. They are also more expensive to acquire and retain, since they understand their own importance to the company and play hard with the company. Small spenders can be pretty consistent as they would not be fervently wooed by competitors and might be easier to acquire and retain.
The existing portfolio of customers of the company would have a particular combination of revenue and risk. The type of customers that the company acquires should be dependent upon the type of portfolio the company wants to build in terms of revenue and risk. If the company’s existing portfolio has low revenues and low risk, and if it wants to increase revenues and is wiling to tolerate a higher level of risk, it can target big spenders with high risk. If the company’s portfolio has high revenue and high risk, but would like to reduce its risk, it should seek customers with low risk even if their spending is low.
The company’s portfolio is fraught with danger if it has preponderance of low revenues and high risk customers. It can go for big spenders with high risk and further aggravate the risk component of the portfolio, or it can play safe by seeking low spenders with low risk. The company is in an enviable position if its portfolio has high revenue and low risk customers. The company can make a decision of further increasing revenue and tolerating a higher amount of risk by going for big spenders or it can be conservative and target small spenders.
While it is always good to have as many customers as a company can get, it is wise to seek customers who will help to create the type of portfolio that the company desires in terms of revenue and risk. But before it can target the right type of customer, it has to gather sufficient information about him to classify his revenue potential and risk. Acquiring and retaining customers would have to be a more deliberate activity if the company has to have the portfolio with the desired level of revenue and risk.
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