Homing in on your best customer

Everyone says that customers are at the center of their business, but few mean it, and fewer still act as if they mean it, say authors Larry Selden and Geoffrey Colvin. Companies that do—like Dell Computers and the Royal Bank of Canada—are perennial winners, though they find that not all customers are created equal. These savvy companies calculate what they earn or lose from their customers and learn that, typically, the best 20% of customers generate 150% of the company’s total economic profit, while the worst 20% can lose 75% of the profits. To boost profitability, these companies retain and grow their most profitable customers and fix, close or sell the others. They’re typically organized around customer segments and establish a firm, clear “value proposition” that best meets the full set of customer needs, including price. That is, write the authors, “Certain critical elements of the experience deliver on the customers’ most important needs better than the competition. This creates differentiation and the potential for superior customer profitability—a mutually beneficial value exchange. Your goal is to create mutually beneficial value exchanges with customer segments that offer the greatest economic profit potential.”

Fortune 23 Jun 2003