How do we segment customers for maximizing a firm’s future profits?

by V. Kumar* | Georgia State University

The Wheel of Fortune Strategy@ identifies a dozen ways to maximize CLV where a firm can choose any one or more of the suggested strategies at any given time and realize the benefits of improving the bottom-line. This column describes the segmentation strategies that a firm can adopt using the CLV metric.

Firms need to manage the loyalty and profitability of their customers simultaneously. Typically, managers segmented customers based on their loyalty (e.g., short or long term/tenure) to the firm. We suggest that customers be segmented based on their loyalty as well as their profitability potential (e.g., low or high). High-profitability, short-term customers are termed as “BUTTERFLIES” to the firm. A firm needs to market to these accounts only as long as they are active, and cease investing in them when they no longer contribute to firm’s profits. “STRANGERS” are the firm’s low-profitability, short-term customers. The firm should make no investment in these relationships, and try to make profits on every transaction. High-profitability, long-term customers are a firm’s “TRUE-FRIENDS”. The firm needs to build both attitudinal and behavioral loyalty among these customers, communicate consistently but not too often with them and delight these customers to nurture, defend, and retain them. “BARNACLES” are the firm’s low-profitability, long –term customers who consume higher proportion of the marketing resources. To justify the spending on these customers, firms need to measure both their size and share of wallet. If share of wallet is low, firms need to focus on up- and cross-selling. However, if the size of wallet is small, firms need to impose strict cost control, or get rid of them.

In the next column, we will focus on resource allocation strategies to customers in each of these segments.

*V. Kumar (VK) is the Richard and Susan Lenny Distinguished Chair Professor in Marketing, Executive Director of the Center for Excellence in Brand & Customer Management, and the Director of the Ph.D. program, J. Mack Robinson College of Business, Georgia State University, Atlanta, GA.

@ Managing Customers For Profit (Wharton School Publishing) –  V. Kumar

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