What Leaders Still Get Wrong About Customer Portfolio Management

Extractive Summary of the Article | Read | Listen

The image of a large leaky bucket illustrates both the theory and complexity of customer portfolio management or CPM. Consider the choice between two very different buckets, or portfolios, of customers: (1) a smaller, watertight bucket of loyal and profitable customers, or (2) a larger, albeit leaky bucket of customers that includes both stronger and weaker customer relationships.   The authors’ research and applications of CPM have taught us that it is typically more profitable in the long run to pursue a larger, leaky bucket.  In this article, drawn from their book, Customer Portfolio Management: Creating Value With a Large Leaky Bucket of Customers, they explain how companies can understand what types of relationships dominate their customer bases so that they can identify strategies for portfolio growth.

In traditional market segmentation, unique populations of customers are segmented and targeted using differentiated products and services. The segments are based on differences in customer needs, wants, or benefits sought.  The limitation of traditional needs-based segmentation, however, is its focus on a particular product or service category and brand. It is a relatively static approach that presumes customers are in a particular needs-based segment.  The reality is that customer behavior is dynamic, where a company’s or brand’s customers are active in multiple needs-based segments within and across product or service categories. Customers use a portfolio of brands that evolves over time and depends on the context or usage occasion.

In their applications of customer portfolio management, the authors have found that the best place to start understanding customers is to segment them based on the strength of their relationship with a brand.  In the framework of CPM, “acquaintances” provide both a source of future loyal customers and a basis for scale economies, while “friends” and “partners” provide greater margins and future cash flows.

Stronger relationships increase customer expectations, brand preference, usage, and resulting customer satisfaction. As satisfaction and relationship strength grow, so does a customer’s willingness to share knowledge and adapt to a brand’s systems, services, and brand extensions, thus increasing margins and lowering costs per customer.

Categorizing customers into relationship segments is the result of a segmentation process. There are a variety of approaches to sorting existing customers into acquaintances, friends, and partners. The authors recommend using a combination of measures that include customer preference, satisfaction, purchase volume, and gross margins to classify customers into segments.  Another general approach to relationship segmentation is to derive segments through statistical methods.  Loyalty programs can be another basis for relationship segmentation, but with caveats.

The framework of CPM rests on three key building blocks: relationship segmentation, customer portfolio lifetime value, and the management decisions that impact portfolio growth and profitability.