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Serbian Journal of Management 2 (1) (2007) 67 - 75 Journal



Usha Kiran Rai*

Faculty of Management Studies, Banaras Hindu University, Varanasi-221005, India

(Received 12 December 2006; accepted 20 March 2007)


Marketing theorists are worried these days about why marketing is in trouble. The image of
marketing has taken a beating, contributing to rising customer resistance and declining confidence
within companies about their marketing departments. Though the last few years have seen some
great marketing successes, the function itself is in trouble[1]. Serious second thoughts over the 4P's
of marketing have begun. Theorists like Jagdish Seth[2] are coming up with the alternative
framework of the 4A's (Acceptability, Affordability, Accessibility and Awareness). Kotler himself has
suggested the 4P's should be converted first to the 4C's (Customer value, customer costs, customer
convenience and customer communications). C K Prahlad and Ramaswamy say that product and
service differentiation are passé. Competitive advantage lies in meaningful customer experiences. We
are moving from the Customer Relationship Management stage in marketing to the Customer
Experience Management stage, where it is not just our relationship with the customer that is to be
managed, but each experience that the customer has with the company should be delightful and that
in turn would lead to a wholesome relationship.

Keywords: Customer, marketing strategy

1. INTRODUCTION there are seven stakeholders according to

Jagdish Seth - customers, employees,
Though Rama Bijapurkar[3] calls to be investors, community within which the
Marketing's mid-life crisis as also mentioned company exists, suppliers, the media, and the
by Mckinsey Quarterly, there is no doubt that government. But are they not the different
there is no longer just one stakeholder for the 'publics' that Kotler already spoke about?
marketing department viz. its customer; The same publics that we as marketers were

* Corresponding author:

68 U. K. Rai / SJM 2 (1) (2007) 67 - 75
supposed to take care of? And still the component -the value of a customer to a
marketing function has taken a beating. company. Effective customer-based
I now put forth a thought that probably strategies should take into consideration the
should be taken into consideration. And this two sides of customer value-the value that a
again goes somehow on lines with Kotler's firm provides to a customer and the value of
alternatives of the four C's. He has taken into a customer to the firm. This approach
consideration the customer cost in this. This recognizes that providing value to a
paper describes how a strategy that focuses customer requires marketing costs to the
on two sides of customer value differs from company, and these costs should be treated
traditional marketing strategy. It is argued as investments that the firm must recover. In
that traditional marketing's focus on other words, this approach combines the
customer satisfaction and market share is traditional marketing view, where the
actually one side of the coin, and this alone customer is king, with the finance view,
may be counterproductive at times. It where cash is king.
demonstrates that the two approaches use
different metrics for measuring success and
frequently lead to quite different insights and 2. THE TRADITIONAL MARKETING
strategic decisions. Finally, it discusses in STRATEGY
detail the three strategic pillars of this new
approach-customer acquisition, customer A longstanding approach to marketing
margin, and customer retention. strategy discussed in almost every marketing
I start with the basic metrics that our management textbook and taught in most
traditional marketing theory was based on. business schools is depicted in Figure 1. This
We propounded a theory that could best be approach can be summed up as consisting of
explained in the two lines of Stew Leonard's, 3 Cs, STP, and 4 Ps.
a unique grocery store on the East Coast of The first component of this framework is
the United States, that has a sign engraved in the analysis of customers, company, and
stone. This sign, which represents the competition (the 3 Cs) to understand
company's philosophy and is meant as much customer needs, company capabilities, and
for its employees as its customers, highlights competitive strength and weaknesses. If a
two rules: "Rule # 1: The Customer Is company can fulfill customer needs better
Always Right; Rule # 2: If the Customer Is than its competitors, it has a market
Ever Wrong, Re-Read Rule # 1." opportunity. The second component is to
For years, managers all over the world formulate the strategy for STP-segmentation,
have reiterated the need to focus on targeting, and positioning. This part
customers, provide them good value, and recognizes that customers are different in
improve customer satisfaction. In fact, terms of their needs for product and services,
metrics such as customer satisfaction and so a firm has to decide which of these
market share have become so predominant customer segments it should target. After
that many companies not only track them selecting a target segment, the firm needs to
regularly but also reward their employees decide on the value proposition or
based on these measures. However, this kind positioning of its products with respect to
of customer focus misses one important competitive offerings. The final component
U. K. Rai / SJM 2 (1) (2007) 67 - 75 69
of this framework designs the 4 Ps-product, completely ignore the key principles of the
price, place (i.e., distribution channels), and traditional marketing approach. Providing
promotion or communication programs. value to customers is still critical. However,

Fig. 1 The Traditional Marketing Framework

This framework is logical and useful. this approach recognizes that marketing
However, implicit in this structure is an investment in customers must be recovered
emphasis on providing value to customers by over the long run. Specifically, this approach
satisfying their needs with little focus on highlights the two sides of customer value-
cost. Metrics used to measure success in this the value a firm provides to a customer and
framework, such as sales, share, or customer the value of a customer to a firm. The first
satisfaction, drive decisions. What is missing part is the investment, and the second part is
is the explicit recognition or measurement of the return on this investment.
return on marketing investment. For
example, it is not uncommon for firms to 3.1. The Two Sides of Customer Value
spend billions of dollars on advertising. For
example, in 2002, GM spent $3.65 billion in
A firm provides value to a customer in
advertising in the United States alone. It also
terms of products and services, and a
offered billions of dollars in discounts to
customer provides value to a firm in terms of
attract customers. What is the return on these
a stream of profits over time. Investment in a
investments? Do they build customer value
customer today may provide benefits to the
in the long run? Do they eventually help the
firm in the future. In that sense, customers
financial health of the company? It is
are assets that a firm needs to invest in. At
difficult, if not impossible, to answer these
the same time, as with any investment, the
questions within the traditional marketing
firm needs to assess the potential return.
framework. Since not all customers are equally
profitable, investment in customers should
vary by their profit potential, as illustrated in
THE CUSTOMER This figure illustrates four scenarios with
different values to and of customers. Star
Customer-based strategy does not Customers get high value from the products
70 U. K. Rai / SJM 2 (1) (2007) 67 - 75

and services of the firm. These customers customers destroyed value! Some insurance
also provide high value to the company by companies found themselves in a similar
way of high margins, strong loyalty, and situation a few years ago when they realized
longer retention time. The relationship is that after several natural disasters in Florida,
balanced, largely equitable, and mutually their zeal to grow and add more customers
beneficial. This is clearly a win-win situation had led them to acquire a large number of
where customers get superior value, which customers in disaster-prone areas. For long-
earns the firm loyalty and higher run profitability, it is imperative for these
profitability. A firm would be well-advised to companies to either convert unprofitable
build this type of customer. customers to a profitable status or "fire"
them. This notion of dropping customers
runs counter to the intuition of managers
who have been trained to think that adding
customers, increasing sales, and gaining
market share are good per se. In many cases,
market share and revenue growth may be the
wrong metrics to gauge success.
The other two cases in Figure.2 show
unbalanced, and hence unstable, relations.
Vulnerable Customers provide high value to
the firm but do not get a lot of value out of
company's services. These may include
newly acquired large customers whose
Figure 2. The Two sides of Customer Value experience is less than stellar and who may
be wondering why they chose your product
In contrast, Lost Cause customers do not in the first place. These may also be long-
get much value from the products and standing customers who, largely through
services of the firm. Generally these inertia, remain loyal. In a sense, they are
customers are marginal for the firm; their exploited, much like overworked cows or
main value, if there are enough of them, is to farmed-out fields. These customers are
provide the economies that come with vulnerable and prone to defect to competitors
greater sales- e.g., reduced production costs unless corrective action is taken.
and promotion efficiencies. Absent A company can invest in these customers
economies of scale, if the company cannot through better product offerings, additional
migrate them to higher levels of profitability, services, and related activities. These
it should consider either reducing its customers may deserve better service than
investment on these customers or even others. The concept of service discrimination
"firing" (dropping, shifting to other is similar to the idea of price discrimination,
suppliers) them. where not all customers pay the same price
One cross-sectional study of U.S. banks for a product (e.g., an airline ticket). Airlines
found that in the early 1990s only 30% of a and casinos have provided preferential
typical bank's customers were profitable over treatment for their best customers for many
the long run. In other words, 70% of years, and more and more companies are
U. K. Rai / SJM 2 (1) (2007) 67 - 75 71
beginning to implement a similar strategy. opening a special line for them? Clearly, care
For example, the call centers of Charles is needed in implementation. In general,
Schwab were configured so that the best however, a firm should either reduce its
customers never waited longer than 15 service level or raise prices for the Free
seconds to get a call answered, while other Riders. Although this will reduce the value to
customers could wait for as long as 10 customers and risk losing them, it will, if
minutes. Even airlines that pioneered loyalty successful, enhance their value to the firm.
programs are now adjusting their frequent As someone once said, "The difference
flier programs on the basis of ticket price between a sales and marketing person is that
(and hence profitability to the firm) rather a good marketing person knows when to
than simply the number of miles flown. walk away from a sale."
Although such service discrimination can In sum, successful customer-based
generate a backlash from customers, it is also strategies require that a company consider
possible that customers will accept the old both the value the firm supplies to the
adage that "you get what you pay for," customer and the value the customer offers
especially if the policy is clear and to the firm.
Free Riders are the mirror image of the
Vulnerable Customers. These customers get 4. KEY MARKETING METRICS
a superior value from using the company's
products and services but are not very How do we "keep score" in marketing?
valuable to the firm. For whatever reason Each of the strategic approaches has its own
(e.g., large size, strong competition), these key metrics. Unsurprisingly, these metrics
customers are "exploiting" the relationship drive decisions. They become goals and are
with the company, appropriating the lion's stated everywhere from annual reports to
share of value. marketing plans as objectives and measures
Consider the case of supermarkets. Every of success.
week, supermarkets promote certain
products at a low price in order to attract 4.1. Traditional Metrics
customers to their store. Several items are
treated as "loss leaders." A supermarket does The key metrics in the traditional
not expect to make money on these items but marketing approach are sales and share.
hopes that their low prices will attract more Ancillary metrics may include customer
customers to the store. Once these customers satisfaction and brand image. Profit is
are in the store, the hope is that they will buy typically measured at a product or brand
other items that are profitable. However, level. As already illustrated, market share or
many customers are cherry-pickers-i.e., they sales may be the wrong metric in many
only buy those few items that are on sale. It cases. A credit card company may acquire a
is somewhat ironic that supermarkets have a lot of low-value customers, which will
special line for customers who buy a few increase its share but not its long-term
items while heavy spenders wait in long profitability. Improving customer
lines. Doesn't it make more sense to treat satisfaction is good in principle but the
your more profitable customers better by benefit of this improvement has to be
72 U. K. Rai / SJM 2 (1) (2007) 67 - 75

weighed against the cost to achieve it. inherently takes a long-term view,
Measuring profit at a product or brand level emphasizing that customers are assets who
is useful but incomplete for at least two provide long-term returns and that marketing
reasons. First, most firms focus on the short- is an investment in these customers. This
term or quarter-by-quarter profits of a brand also shows how to assess the return on this
and treat marketing as an expense. This marketing investment. Second, it recognizes
short-term focus is counter to the very that the value of customers may vary
concept of marketing as investment. Second, substantially. For example, in many
measuring profit at the product level ignores business-to-business situations, it is not
the vast differences in the profitability of uncommon to find that while large customers
customers. A bank may be losing money on are generally the largest revenue generators
its mortgage business. This aggregate profit for a firm, they are not necessarily the most
measure hides the fact that the problem may profitable because of the high cost required
lie with the bank having too many customers to serve them. Note, if a firm keeps track of
who are Free Riders. Adjusting the price and profit at only the product level, it will never
service to customers based on their value to be able to uncover this. A focus on customer
the firm can significantly enhance the profitability may require a major change
profitability of this product. from product-based accounting to customer-
In sum, capturing share, increasing based accounting to keep track of revenues
satisfaction, and enhancing the brand and cost for each individual customer. In
experience are all useful. They also serve as other words, this new metric is more than a
motivators toward measurable goals. mere difference in semantics. It may not only
However, they are neither consistent with drive decisions in a different direction but it
each other nor necessarily good business. may also entail significant changes in
For example, increasing share typically organization structure.
requires bringing in more marginal As illustrated in Figure.3, customer
customers, who inherently are less likely to profitability and the value of customers are
be satisfied. A study of 77 firms across a primarily driven by three major components-
wide range of industries confirmed that customer acquisition (acquisition rate and
increasing share may lower satisfaction. cost), customer margin (dollar margin and
Similarly, increasing average satisfaction growth), and customer retention (retention
ratings doesn't guarantee increased profits, as rate and cost). These three factors are the key
Cadillac discovered in the 1980s, when it metrics of the new approach. They not only
increasingly appealed to a smaller, aging provide tangible and measurable metrics but
customer base. also make clear the inherent tension between
growth and efficiency. For example, it is hard
4.2. Customer Metrics to simultaneously increase customer
acquisition and cut total or average
The customer approach focuses on acquisition cost. Similarly, increasing the
customer value or customer profitability in acquisition rate is likely to draw marginal
contrast to share, satisfaction, or product customers and may negatively impact
profitability. A focus on customer customer retention rates and margin per
profitability has several advantages. First, it customer. Such tradeoffs are the essence of
U. K. Rai / SJM 2 (1) (2007) 67 - 75 73
astute business decisions and the hallmark of acquire customers in the belief that customer
profitable growth. acquisition and rapid growth are critical to
success. This belief was so strong that
several companies had a mandate to acquire
customers regardless of the acquisition cost
Acquiring Customers in Emerging
Markets. India has a population of over 1
billion with a per capita GDP of less than
$2,000. For many years, multinational
companies avoided significant investment in
Figure 3. The drivers of customer India because of its low per capita income.
profitability [4] However, with a population of over a billion
people, if even a small fraction of the
population is wealthy, the raw numbers make
Table1 summarizes and contrasts the India a very large and attractive market.
metrics used by the traditional and the new Some companies are looking at the even
customer-based approach. larger market of low-income consumers.

Table.1. Traditional and Customer Metrics

One leading financial institution in India

This paper indicates the value of is experimenting with a mobile-banking
understanding how marketing rupees affect product for low-income people. Accredited
customer profitability and why this focus bank agents will own a mobile handset that
may lead to very different conclusions than consumers can use with a mobile card they
those obtained from traditional approaches. obtain with their bank application. This will
allow consumers to perform basic bank
transactions. Does it make sense to consider
4.3. Customer Acquisition mobile-banking for low-income consumers
in a developing country or to try to acquire
Growth is critical for all firms. Growing these low-income customers?
revenues, market share, and customers are On the surface, this strategy sounds crazy.
typically considered infallible yardsticks of However, the customer economics show that
success. In recent years, many companies, the idea has a large profit potential. Figure 11
especially the dotcoms, went on a binge to indicates that the bank expects a value of
74 U. K. Rai / SJM 2 (1) (2007) 67 - 75

$6.20 per customer from this operation. With wallet. Two customers who spend the same
millions of low-income customers in India, amount of money on a credit card may have
this could translate into significant profit. vastly different potential for a company
Clearly, the bank needed to do careful depending on how much they spend on other
experimentation to ensure that its cards. In other words, it is important to know
assumptions of revenues and costs per not just the amount of money customers
customer would hold in the field. And that is spend with your company but also the "share
precisely what it did. of wallet" your company has.
Choosing the Right Customer. In his Redefining Your Business and Product
famous book, Animal Farm, George Orwell Line. For years, managers have been advised
said, "All animals are equal but some are to ask themselves, "What business are you
more equal than others." The same is true for in?" This simple but profound question can
customers. All customers are important but often lead to remarkable changes in a
some are more important than others, company's strategy and product line.
because of their greater profitability. A Cosmetic companies follow their customers
customer acquisition strategy that ignores over their life stages and create products that
differences in customers' lifetime value is cover the spectrum from acne to anti-aging
naïve and inferior. cream. Banks do the same by offering
products that meet customers' changing
4.4. Customer Margin [5] needs over their life stages.

While customer acquisition focuses on 4.5. Customer Retention

growing the number of customers, increasing
customer margin focuses on growing the In their zeal to grow, many companies
profit from each existing customer. In the focus almost exclusively on entering new
retailing context, this means increasing markets, introducing new products, and
same-store sales rather than opening new acquiring new customers. However, these
stores. Growth can be achieved through a companies often have a "leaky bucket"-as
variety of methods such as up-selling (e.g., they add new customers, old ones defect
migrating customers to a higher price/ profit from the firm. Some studies report the
product) and cross-selling related products average retention rate for U.S. companies is
(e.g., providing a credit card to a bank about 80%.21 Put differently, on average,
customer). 20% of a company's customers defect every
Share of Wallet. When you open your year. This means that, roughly speaking, the
mailbox, you are likely to find a letter from average company loses the equivalent of its
one of the many credit card companies entire customer base in about five years.
inviting you to become its customer. If you Studies also show that the cost of
sign up, a smart company may subsequently acquisition is generally much higher than the
track your credit card expenditure pattern, cost of retaining existing customers.
probably on a monthly basis, and use it to Therefore, it seems obvious that a firm
make special offers to you. However, this should focus on retaining its existing
data is missing one important component: customers. Unfortunately, many companies
Most customers carry multiple cards in their don't even know their customer retention or
U. K. Rai / SJM 2 (1) (2007) 67 - 75 75
defection rates. Part of this problem lies in Further Readings:
the lack of appreciation for the importance of
1. Customer-Centric Service Vision to Reality
customer retention
2. Weston, Paul, and Murty Srinivas,
Implementing CRM best practices and lessons
5. CONCLUSION Learned, Wipro Website.
3. Customer Experience Management,
It may be concluded that effective customer- 4. Customer Experience Management, http//
based strategies should take into
consideration the two sides of customer 5. B. Schmitt, Customer Experience
value-the value a firm provides to a customer Management, The Free Press, New York, 2001.
and the value of a customer to the firm. This 6. B. Schmitt and A. Simonson, In Marketing
Aesthetics:The strategic management of brands,
view considers the investment in customers identity, and image The Free Press, New York, 1997.
as well as its return. Therefore, it integrates 7. J. Pine and J. Gilmore, The Experience
the marketing world, where the customer is Economy, Harvard Business School Press, Boston,
king, with the finance world, where cash is 1999.
king. Traditional marketing's focus on
customer satisfaction or market share may be
misleading at times. We need to consider the
three key drivers of customer profitability
(acquisition, retention, and margin) and how
they affect marketing decision-making for
long term profitability of the business. For
this it is important that we follow George
Orwell's theory and focus our attention on
the more important customers while at the
same time not neglecting our other


3. M. Neelima, The future of Marketing, Business

World, Mumbai, 1 August 2005, pp. 40 - 45.
2. J.N. Sheth, R.S. Sisodia, Operationalizing
customer - Centric Marketing. Extract published in
Businessworld, 1 Aug. 2005. pg 46.
3. B. Rama, "An inability to market ourselves",
Businessworld, 1 Aug. 2005, pp 50-51.
4. E. W.Anderson, C. Fornell, and D. R. Lehmann,
"Customer Satisfaction,Market Share and
Profitability: Findings from Sweden," Journal of
Marketing, 58 (July 1994), pp. 53-66.
5. Managing Customers_ Customer based
strategy.pdf, source unknown, internet