Diversifying Your Customer Portfolio

RESEARCH BRIEF: A dynamic array of different customer types makes for a stronger business model.

With increased competition and globally maturing markets, relationship marketing has emerged as the new mantra. Although companies are successfully using customer satisfaction to create closer and more profitable relationships with customers, the myopic pursuit of such relationships often backfires. Consider a U.S.-based catalog retailer that recently embarked on a campaign to build closer relationships with its loyal and most profitable customers, only to find that it was not bringing enough new customers into its portfolio to grow the business over time. Similarly, a European financial services company recently shifted its focus to serving larger retail-banking accounts, but after losing a large share of its smaller accounts in the process, economies of scale and productivity suffered.

A new view of relationship marketing is emerging. Customer portfolio management is a process of creating value across a company’s customer relationships — from arm’s-length transactions to strategic partnerships — with an emphasis on balancing closer customer relationships with weaker ones (Johnson and Selnes, 2004). In an economy where only so many customers will ever be truly loyal, churn customers lower a company’s unit costs and provide a basis for future cash flow. How the various perspectives on relationship marketing have evolved into customer portfolio management reveals some early lessons gained from this view and illustrate how companies are implementing this new marketing philosophy.

The Evolution of Relationship Marketing

The exchange relationship between a customer (or buyer) and a supplier (or seller) is central to any marketing effort. As a mechanism for creating value, exchange relationships vary from simple transactions, such as a stop at a convenience store, to highly collaborative and coordinated partnerships, such as the integrated supply-chain relationship between Procter & Gamble Co. and Wal-Mart Stores Inc. Four distinct perspectives among marketing scholars — economic, sociological, psychological and operational — provide context for understanding when different types of customer or supplier relationships make sense.

Economists have long emphasized the need to form relationships beyond simple transactions when short-term contracts are unsatisfactory, as in ongoing services or in labor relations. In relationship marketing, the economic perspective focuses on whether or not the costs saved and/or revenues generated through one type of relationship or another justify the costs or investment over time. This has proved essential in the study of business-to-business relationships.

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