I often use the metaphor of fishing as a way to explain new customer acquisition. From the firm’s perspective, there is a great big ocean out there full of prospective customers of all different shapes and sizes. First we have to decide how we want to catch them: do we want to cast our nets far and wide (a broad acquisition strategy), or throw spears at individual fish that we believe to be particularly juicy and plump (a targeted acquisition strategy)? That’s a tough decision and worthy of two full lectures in my MBA elective course, “Managing the Value of Customer Relationships”
But let’s focus on what happens after we catch the fish: once we have acquired our newest batch of customers, how do we fatten them up as much as possible, i.e., enhance their long-term value to the firm?
Customer development—along with acquisition and retention—is one of the primary firm activities that drive customer value. It describes the tactics that a firm employs to create the maximum value for its existing customers over the lifetime of their relationship. My students can now recite by heart what I casually label the Great American Question: “Would you like fries with that?” It’s a classic example of cross-selling, one of a range of activities at the heart of customer development.
For companies considering adopting a customer-centric strategy, customer development is often one of the most visible and alluring selling points: if a firm knows its individual customers better, it can better tailor its product/service offerings to their needs—and thus capture a greater share of their total dollars. Indeed, a recent study from Forrester Research suggests that nearly 90% of managers in large North American financial services firms identified increased cross-selling as “very important” or “critical.”
So how does it work? In my book Customer Centricity: What It Is, What It Isn’t, and Why It Matters, I outline four ways in which companies typically “develop” their customers:
- Cross-selling: getting customers to purchase additional products or services
- Increasing the frequency/volume of purchases of current products
- Up-selling: moving customers up to higher level products/services
- Premium pricing: increasing the mark-up for existing customers
The metric that companies typically use to measure the success of their customer development efforts is “share of wallet,” also known as “share of requirements” in some settings. This is essentially the firm’s market share amongst its existing customers.
Where’s the Value?
But how important is customer development, really? It’s a question with huge implications for firm resource allocation decisions. Given an additional dollar to spend on growing your firm’s overall customer equity, where are you going to get the biggest bang for your buck: from new customer acquisition, customer retention, or customer development?
It turns out that there is a range of inconclusive (and sometimes contradictory) evidence about the relative importance of customer development. Some of it suggests that there is real value in these activities: for example, reduced churn or greater value per transaction among customers who purchase more of a firm’s products or services.
Wells Fargo is a great example of a company whose relatively robust success through the recession seems due, at least in part, to its customer development efforts. The average Wells Fargo household has over five different bank products, roughly twice the industry average, while about 20% have an impressive eight or more products from the bank. And Wells Fargo credits cross-selling with lowering its selling and advertising costs, given that it’s cheaper to target existing customers than new customers.
But this pattern is far from universal. In fact, in most cases customer acquisition seems to roundly trump customer development as a strategy for driving firm growth. In industries from financial services to consumer packaged goods, researchers have observed that increases in penetration (i.e., acquisition) are often associated with much larger increases in profitability and market share growth than increases in the size or complexity of customers’ baskets.
So what’s the bottom line on customer development? While development is perhaps one of the most appealing applications of customer centricity—we can make more informed product recommendations! We can offer services targeted to specific customers!—it helps to maintain a balanced perspective. When all is said and done, acquiring and retaining great customers are probably the two most important things a firm can do to increase the long-term value of its customer base.
That being said, companies can absolutely see some incremental value by “fattening up” their existing customers—especially if they do it in a truly customer-centric way. Asking if they’d “like fries” would certainly be a start.
© 2011 Peter Fader, author of Wharton Executive Education Customer Centricity Essentials: What It Is, What It Isn’t, and Why It Matters
For more information please visit http://wdp.wharton.upenn.edu and follow the author on Twitter.
Before I Sell to You, How Valuable Will You be in Three Years? Hmmm. How would that play when asking questions during lead qualification? It can be asked. It should be asked. But it’s rarely asked, because few vendors encourage asking that question, or anything like it.
I’m not throwing stones. In fact, I very much agree with the premise of your blog. But I haven’t worked with many executives who care about fattening up customers as you recommend. In general, salespeople are rewarded–sometimes handsomely–for “closing the deal.” And that predominant model flies squarely in the face of building selling activities around discovering and encouraging value over time.
The “Winner’s Curse”, when it happens, becomes someone else’s problem in the organization. Until companies can build sales systems, service delivery models, compensation and reward systems, around longer-term objectives instead of short-term revenue achievement, the idea of long-term customer value will remain only an idea.
Peter –
Your article is, pardon the pun, right on the money. Many, if not most, companies are overly leveraged and focused on customer acquisition. As I wrote in a piece (“The Preoccupation With Pre-Customers”) for another marketing and customer experience portal several years ago:
“Many companies devote considerably more energy and resources to winning or capturing customers than they do on keeping them. The word 'conquest' is a frequently used surrogate term for new customers, especially among automotive retailers. Consultant and author Robert Tucker has stated, "Companies are often so concerned about attracting new customers that they denigrate their unique value proposition to loyal customers.” They focus instead on chasing down the next sale, competing on price, and compensating employees more for winning new accounts than for keeping existing customers happy and loyal.
A multi-industry continental Europe study by Professor Adrian Payne, visiting academic (from Australia) at Cranfield University in the U.K. showed that 80% of companies spend too much of their marketing budget on customer acquisition. He calls these companies 'Acquirers'. Parenthetically, his study found that 10% spend too much on retention; and 10%, whom he calls 'Profit Maximizers', seem to get the mix right.
Why does this overemphasis and preoccupation happen? There are five reasons, according to Professor Payne:
1. Belief that existing customers will be retained; company needs to focus resources on building acquisition
2. Companies experience high churn rates, the 'leaky bucket' syndrome
3. Customer acquisition is reported regularly to analysts, share holders and senior management; but churn rate may or may not be reported
4. The lifetime value profit impact of lost customers is not reviewed
5. Sales force and senior management compensation is often based on acquisition, not retention
The acquisition mindset of marketers and senior management isn't likely to change anytime soon. We can preach and preach about the advantages of a balanced, or profit maximization, approach to customers and optimizing value over life cycle, striving to "change the basis of their thinking”; but we had also better be prepared to help acquisition-obsessed companies in the real world.
This drive to acquire customers often leads to the twin challenges associated with bringing new purchasers into the fold. These challenges are the superficial approaches to customer targeting and qualifying, and also to understanding the factors impacting perceived value and behavior for the prospect, who has yet to make an initial purchase.”
In thinking about strategic customer value, there is another element of the customer life cycle that many companies miss. It is the lost, or defected customer, who may become highly profitable if recovered. My colleague Jill Griffin and I covered this in our 2001 book, Customer Winback
(http://www.amazon.com/Customer-Winback-Recapture-Customers-Loyal/dp/0787946672). With case study examples, we were able to demonstrate that it is possible to generate up to ten times the net return on customer investment (ROCI) of won-back former customers compared to newly converted customers.
Regards.
Michael Lowenstein, Ph.D., CMC
Executive Vice President
Market Probe (www.marketprobe.com)
Great post, Peter. I agree; knowing what your customers want will help you identify up-sell and cross-sell opportunities that drive sustainable and profitable growth. I would add that businesses should ask customers a series of simple questions. For instance, don't just ask if your customer wishes to receive information about your products or services, ask:
• What kind of information would you like to receive? Be specific, if the customer wants information about food, does she want food coupons, recipes, advance notice of grocery store specials, restaurant news and discounts, or healthy eating tips?
• Do you want to receive this information via email, mail, or do you prefer to have it texted to you?
• How often would you like to receive information?
• What time of day do you prefer to receive communications?
It's also important to track your customers' purchasing behavior – number and types of products purchased, level of spending, and timing of purchases. When you combine what customers are doing with what they are saying, you can cater to the specific interests and needs of individual customers.
Keep in mind, today's customers expect—and in many cases demand—that information be tailored to their ever-changing needs and interests. Companies that pay attention to what customers do and listen to what they say can deliver precise and intuitive recommendations that result in more sales and shorter purchase times.
I look forward to your feedback,
Scott Zimmerman, president, http://www.televox.com
Pete,
Thanks for a very instructive note and congratulations on your new book!
With respect to customer development, I certainly agree with your conceptual framework, but I am reluctant to embrace the “Fattening Up” and “Would you like fries with that?” framing. This framing could produce the unintended [effect] perception that customer development is inconsiderate of the customer’s best interest.
With respect to the relative effectiveness of customer acquisition, development, and retention, I propose each company experiment its way to a conclusion.
Thanks again,
Arie. [Your former student]
@ariegoldshlager