Manage Your Customer Portfolio for Maximum Lifetime Value
How converting customers to closer relationships, leveraging them, and defending them can drive future revenue and lower costs.
Many companies have embraced the importance of creating closer, more valuable relationships with customers. But most do little to actively manage their portfolios of weaker and stronger relationships, other than keeping them diversified. They’re missing significant opportunities.
When we wrote about customer portfolio management (CPM) and our research into customer portfolio lifetime value (CPLV) for this publication in 2005, we emphasized the need to balance a “large, leaky bucket” of weaker customer relationships alongside closer and higher-value customer relationships.1 But according to our latest research, there is much more that businesses can and should be doing to drive future revenue. These actions depend on both market conditions and a company’s resources.
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Growing a company’s customer portfolio requires continual investments across a range of weaker to stronger relationships. Our updated CPLV model shows that a clear understanding of when and how much to invest in, leverage, and defend different customer relationships is an essential determinant of both current and future revenues and costs.
Most companies lack a basis for developing this understanding. Business leaders seeking to optimally manage the ecosystem of customer relationships face a complex problem — and for most, de facto CPM practices are more likely to focus myopically on either current sales or their most valuable customers. However, our model shows that what’s really required is to integrate multiple dimensions (not just scale, but also variances in customers’ needs and wants) and tactics (relationship conversion, leverage, and defense) across the whole customer portfolio.
1. M.D. Johnson and F. Selnes, “Diversifying Your Customer Portfolio,” MIT Sloan Management Review 46, no. 3 (spring 2005): 11-14.
2. M.D. Johnson and F. Selnes, “Customer Portfolio Management: Toward a Dynamic Theory of Exchange Relationships,” Journal of Marketing 68, no. 2 (April 2004): 1-17.
3. A.S. Otto, D.M. Szymanski, and R. Varadarajan, “Customer Satisfaction and Firm Performance: Insights From Over a Quarter Century of Empirical Research,” Journal of the Academy of Marketing Science 48, no. 4 (May 2019): 543-564.
4. Johnson and Selnes, “Customer Portfolio Management,” 1-17.
5. The parameters set for the CPLV model affect its estimates, but the estimates are consistent with results realized when applying the CPM framework in companies. Details regarding the model’s parameters are available from the authors.
6. M.D. Johnson and A. Gustafsson, “Improving Customer Satisfaction, Loyalty, and Profit: An Integrated Measurement and Management System” (San Francisco: Jossey-Bass, 2000).