Geoffrey Colvin – Angel Customers and Demon Customers

From the Future of Information Summit:

Angel Customers and Demon Customers by Geoffrey Colvin

Colvin’s book is about how a company can find future profitable growth…

“The growth will come from customers – customers are where the money comes from. So obvious that no one says it. We say Europe had a great year…yogurt was down 10%. That’s not completely accurate. It’s more that Europeans bought more profitable services…less people bought our yogurt.”

“You should think of your portfolio of customers and what each of them is worth. Just think about the concept, not lifetime value of a customer. Most customers don’t have the faintest idea. We ask a couple questions to clients: 1) Do you have any unprofitable customers? Most people say that we have some customers who are more profitable than others, but not that they have unprofitable customers. 2) Who are your best and worst customers? Most people can give us names, but when we do the analysis, most people are wrong.”

“Profitablility = economic profitability = total profit minus cost of all capital used in the business. Economic capital is the closest measure to what effects the stock price.”

“Royal Bank of Canada (a customer of Colvin) calculates the economic profit of each one of its 10m customers each month. You can do it too.”

“What do you find when you do this? The profitability of your customers is distributed in a fairly extreme way. Putting them into deciles (most profitable = decile 1, next most profitable = decile 2, least profitable in decile 10). Example was for a company worth $2500 of economic profit. The top decile had profitability equal to the profitability of the entire company. The last decile had economic profitability of -$2000. The average economic profit per customer = $250. Most people are surprised that some customers can be so profitable and others can be so unprofitable.”

“The questions: Do you know which decile which customers are in? Some companies spend money to bring in customers which are reducing the value of the firm (deciles 8, 9 & 10). But at the same time, it’s not necessarily smart to cut off the last couple deciles. While deciles 9 & 10 might include people who are losing you money, you want to turn them from negative to positive, not just get rid of all of them. Sure, there are customers who you want to get rid of – Fidelity Investments example – a customer who called his broker 3900 in one year…but you first want to understand why customers are profitable or unprofitable. You need to understand the needs of the unprofitable companies.”

“Example = Best Buy. They are competing against WalMart and Dell – obviously tough competition. But they are doing well. Why? Because they are dividing customers in terms of needs” (from CIO Magazine – link below):

* Affluent professionals who want the best technology and entertainment experience
* Active younger males who want the latest technology and entertainment
* Family men who want technology to improve their lives—practical adopters of technology and entertainment
* Busy suburban moms who want to enrich their children’s lives with technology and entertainment
* Small-business customers who can use Best Buy’s products and services to enhance the profitability of their businesses

“Best Buy looked at pilot stores and who lived around a particular store. They then change the stores to serve the particular customers living in the area. During the first year, Best Buy stores had same store sales increases on 9%. The pilot stores had same store sales increases of 30%. Why? Because the stores were designed to meet the needs of their customers and the employees (even the ‘Blue Shirts’ on the floor) were empowered to make changes. See this CIO article for more information.”

Colvin’s began his talk about a high network customer of a bank which had a trading account and depository account; both of which were extremely profitable for the bank. The customer then wanted a mortgage, but when he went to the mortgage department of the bank, they weren’t able to do anything special for the customer as the mortgage department and the other departments weren’t in sync. The customer eventually left for another bank to get his mortgage and later transfered some other money to the new bank.

Bringing this back to his talk, the point is that someone at the bank should have been looking out for that kind of customer – the one in the first decile who is already responsible for much of the profitability. As opposed to having people in charge of certain fiefdoms – in this case, mortgages, banking, trading, insurance, trusts, etc., the focus should be on customer segments.

“Treat different customers differently because they have different needs.”

Related Posts:
Future of Information Summit – January 19, 2006
Conferences/Travel – January 12, 2006

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