| October 8, 2001
Turning Customer Knowledge into Profits
Many companies have a huge amount of information about their customers, but have great
difficulty in translating the data into profits. The problem isn't the technology –
there is no question that the technology exists to integrate all the data a company
collects about its customers. Converting customer data into real shareholder value –
a process called customer knowledge management (CKM) – starts with the right
corporate mind-set, organization, accountability, and leadership. Here are some elements
of the process:
- Strategic planning built around customer segments – and a cultural belief that
all customers should not be treated identically
With the tools now available, it's easier than ever for a company to learn a piece of
crucial information: how much money it's making (or losing) on each customer. You'd think
every company would want to segment customers by expected profitability and treat the most
profitable customers best. After all, extensive research proves that retaining current
customers is enormously more profitable than bringing in new ones, a finding that goes
double or triple for the most profitable customers.
Yet many companies resist. Often a key reason is that the corporate culture regards it
as unfair to treat some customers better than others. It's an odd attitude; after all, as
consumers we almost always feel we deserve special treatment if we're loyal customers, and
getting it makes us more inclined to do additional business. In the airline industry, for
example, preferential treatment is quite accepted – customers will go to great
lengths to achieve and maintain their elite frequent flyer status because of the
associated rewards.
It's important to keep that in mind. Because customer loyalty is so valuable, the most
profitable customers should get better treatment.
Applying that principle isn't always easy. To satisfy your best customers, you must be
able to segment not just by profitability but also by needs. For example, a bank might
find that its most profitable customers include young professionals with big mortgages as
well as elderly widows who keep large balances in savings accounts. But only one of those
groups would be a logical prospect for sophisticated investment products.
Nevertheless, many companies remain wary of similar opportunities in their businesses.
Failure to differentiate becomes an even bigger problem when the economy tanks. Companies
cut head count in branches, call centers, and installation centers, reducing customer
service "equitably." Just when it's most essential to keep the most valuable
customers and get more of their business, these undifferentiated cost cutters do exactly
the opposite.
At most companies the world revolves around products or functions or geography.
Customers endure the all-too-familiar experience of contacting different parts of the
organization and finding that each part knows nothing about that customer's experience
with the others. Have you ever called your local phone company and tried to order a new
service like, say, a DSL connection? Depending on where you live, you may be treated like
a total stranger, even if you've been a customer for decades.
For that to change, someone must "own" the customer – and that means
each customer segment must be a business unit run by a manager with profit-and-loss
accountability. This is a radical change at most companies, but it works. Dell is
organized this way, a key element in its knockout performance during the past 15 years.
Why don't more companies follow suit? Corporate politics are a major factor. A
reorganization would take power from today's product-, function-, and territory-based
barons, all of whom command formidable resources with which to kill the new system.
More fundamentally, the problem is one of mind-set -- what the company perceives itself
to be all about. No company uses customer data better than Amazon (AMZN). Ask former CFO
Joy Covey why, and she replies immediately, "It's the mind-set." From day one,
founder Jeff Bezos made clear that Amazon would use its information about customers to
build relationships with them and make them happy. There simply was no other way of
operating.
Sources: Business 2.0, November
2001; Bureau West research
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