Customer Portfolio
What is a Portfolio?
Graphics courtesy of InvestopediaOpens in new window
The term portfolio is often used in the context of investments to describe the collection of assets owned by an individual or institution. Each asset is managed differently according to its role in the owner’s investment strategy. Portfolio has a parallel meaning in the context of customers. A customer portfolio can be defined as follows: |
A customer portfolio is the collection of mutually exclusive customer groups that comprise a business’s entire customer base.
In other words, a company’s customer portfolio is made up of customers clustered on the basis of one or more strategically important variables. Each customer is assigned to just one cluster in the portfolio.
At one extreme, all customers are assigned to a single cluster and offered the same value proposition; at the other, each customer is a unique “cluster-of-one” and offered a unique value proposition. Most companies are positioned somewhere between these extremes.
Some explanation of the term value proposition may be helpful here.
A value proposition is a company’s promise that customers will experience a specified bundle of benefits from their use or consumption of a company offering.
Value propositions typically vary between different clusters of a company’s customer portfolio. It is common practice for differentiated bundles of product features and service standards to be assembled and offered to different clusters of a company’s customers. We explore customer value in more depth here.Opens in new window
One of the strategic CRM’s fundamental principles is that not all customers can, or should, be managed in the same way — unless its makes strategic sense to do so.
Customers not only have different needs, preferences and expectations, but also different revenue and cost profiles, and therefore should be managed in different ways. For example, in the B2B context, some customers might be offered customized product and face-to-face account management; others might be offered standardized product and web-based self-service.
If the second group were to be offered the same product options and service levels as the first, they might end up being unprofitable customers for the company.
Customer Portfolio Management (CPM) aims to optimize business performance — whether that means sales growth, enhanced customer profitability or something else — across the entire customer base. It does this by offering differentiated value propositions to different segments of customers.
For example, the UK-based NatWest BankOpens in new window manages its business customers on a portfolio basis. It has split customers into three segments based upon their size, lifetime value and creditworthiness. As Case Study I shows, each cluster in the portfolio is treated to a different value proposition. When companies deliver tiered service levels such as these, they face a number of questions.
- Should the tiering be based upon current or future customer value?
- How should the sales and service support vary across tiers?
- How can customer expectations be managed to avoid the problem of low tier customers resenting not being offered high tier service?
- What criteria and rules should be employed when shifting customers up and down the hierarchy?
Finally, does the cost of managing this additional complexity pay off in customer outcomes such as enhanced retention levels, or financial outcomes such as additional revenues and profit?
| Case Study I – Service Levels vary by Customer Tier at NatWest Bank |
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NatWest Bank’s Corporate Banking division has three tiers of clients ranked by size, lifetime value and creditworthiness.
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Who Is the Customer?
The customer in a B2B context different from a customer in the B2C context. The B2C customer is the end consumer — an individual or a household. The B2B customer is an organization — company (producer or reseller) or institution (not-for-profit or government body). CPM practices in the B2B context are very different from those in the B2C context.
The B2B context differs from the B2C context in a number of ways. First, there are fewer customers. In Australia, for example, although there is a population of 24 million people, there are only two million actively trading businesses.
Second, business customers are much larger than household customers. Third, relationships between business customers and their suppliers typically tend to be much closer than between household members and their suppliers.
Often business relationships feature reciprocal trading. Company A buys from company B, and company B buys from company A — this is particularly common amongst small and medium-sized enterprises.
Fourth, the demand for input goods and services by companies is derived from end-user demand. Household demand for bread creates organizational demand for flour. Fifth, organization buying is conducted in a professional way. Unlike household buyers, procurement officers for companies are often professionals with formal training.
Buying processes can be rigorously formal, particularly for mission-critical goods and services, where a decision-making unit composed of interested parties may be formed to define requirements, search for suppliers, evaluate proposals and make a sourcing decision.
Often, the value of a single organizational purchase is huge — buying an airplane, bridge or power station is a massive purchase few households will ever match. Finally, much B2B trading is direct. In other words, there are no channel intermediaries, and suppliers sell direct to customers.
See Also:
- Reichheld, F. F. (1996). The loyalty effect: the hidden force behind growth, profits, and lasting value. Boston, MA: Harvard Business School Press.
- Bolton, R. N. (1998). A dynamic model of the duration of the customer’s relationship with a continuous service provider: the role of satisfaction. Marketing Science, 17(1), 45 – 65.
