managing the customer portfolio to improve service and financial performance
DESCRIPTION
Few firms consider “whether all of their individually desirable customers are, from the standpoint of risk, desirable collectively” (Dhar and Glazer 2003). Dr. Beth Walker, ASU, and Dr. Crina Tarasi, Central Michigan University, present the findings of two papers that highlight the importance of considering the likely variability of revenue streams produced by customers when thinking about who to target with your marketing segmentation efforts. Although risk management is central to financial portfolio theory, and occupies much of the thinking of a CFO, in marketing, researchers have given little attention to thinking about risk as it relates to market segmentation and selecting the portfolio of customers that we choose to serve. In this presentation, Dr. Beth Walker and Dr. Crina Tarasi share their research that demonstrates how the fundamental tools of analysis used by professional investors to manage the risk and variability of a stock portfolio can be effectively applied to managing a firm’s portfolio of customers. Borrowing from financial portfolio theory, the research centers on approaches to reducing the variability or risk associated with a firm’s customer portfolio without sacrificing the level of cash flows.TRANSCRIPT
Managing the Customer Portfolio to Improve Service and Financial Performance
Crina O. Tarasi Central Michigan University
Ruth N. Bolton, Michael Hutt, Beth WalkerArizona State University
Anders GustafssonKarlstad University and Norway School of
Management
Today’s SpeakersBeth Walker, Ph.D.
Department Chair for the W. P. Carey Department of
Marketing and the AT & T Professor of Services Marketing
and Management at Arizona State University
Beth most recently served as the Associate Dean for the W. P.
Carey MBA and Faculty Director for the W. P. Carey Evening MBA Program. Her research interests are centered on cross-functional working relationships in the development of marketing strategy and on isolating the characteristics of high-performance account managers. Beth’s research has been published in a number of scholarly publications including Journal of Marketing, Journal of Marketing Research, Sloan Management Review, Journal of Business Research, Journal of Services Research and other. She is a recipient of a number of prestigious awards in recognition of her thought leadership and teaching excellence. Beth has consulted on strategy issues for State Farm Insurance, IBM Global Services, Lucent Technologies, Yellow Transportation, Honeywell, and AT&T. Beth Walker earned a PhD from Pennsylvania State University.
Crina Tarasi, Ph.D.
Associate Professor of Marketing in the College
of Business at Central Michigan University
Crina’s work revolves around risk reducing
marketing actions, particularly on customer portfolio decisions. Her work has been published among other journals in the Journal of Marketing. Together with her co-authors, Dr. Tarasi was recognized with the Maynard award (most significant contribution to marketing theory and thought, 2011). Dr. Tarasi earned a PhD from Arizona State University and an MBA from Central Michigan University.
PublicationsBalancing Risk and Return in a Customer Portfolio Authors: Crina Tarasi, Ruth Bolton, Michael Hutt and Beth Walker
Journal of Marketing, 75 (May 2011), 1-17. Winner of the Maynard Award 2011.
Relationship Characteristics and Cash Flow Variability: Implications for Satisfaction, Loyalty and Customer Portfolio Management Authors: Crina Tarasi, Ruth Bolton, Anders Gustafsson and Beth
Walker Journal of Services Research 16(2, 2013), 121-137. Finalist for the Journal of Service Research Best Article
Award for 2013. Featured as a “must read for 2013” by Marketing Science
Institute academic trustees.
Am I Diversified?
Cash Flow Patterns of Market Segments
The State of Business Practice:Few companies consider “whether all of their individually desirable customers are, from the standpoint of risk, desirable collectively.” (Dhar and Glazer, 2003, p. 88)
IBM vs. Sun: Late 1990s
A Wall Street analyst aptly observes: “Revenue is not the goal at IBM. Its model is about pursuing higher-margin recurring revenue and reducing volatility” (Lohr, 2010).
vs.
Research Purpose:
To demonstrate how the fundamental tools of analysis that professional investors use in managing the risk and variability of a stock portfolio can be effectively applied to manage a firm’s customer portfolio.
Two Approaches to Manage Risk1. Manage the customer characteristics
that affect (predict)variability What are some ways to lower
individual customers’ cash flows variability without adversely affecting revenues and profits?
2. Combine customers to create a customer mix that reduces overall variability of the portfolio
What are some ways to combine customers so that (in aggregate) their cash flow patterns offset each other?
Three Field Studies – Three Industries – Three Countries
B2C Telecommunications service provider in Sweden (n=2246)
B2C Financial service provider in Netherlands (n=1754)
B2B Logistics service provider in USA (n=516)
Highly competitive marketsRich data: revenues and/or profits
over time for individual customers, plus survey data
Approach 1: Predictors of individual customer cash flow patterns
Customercash flow
Level CustomerWorth
Relationship Characteristics:
SatisfactionLoyalty program, Depth and Breadth
of Relationship
Customer Characteristics:
Age, Income
Market Characteristics Seiders et al. 2005
Variability
Key Findings:
Telecom & Financial ServicesSatisfaction improvement programs have a
"Double whammy"◦ They increase cash flow levels AND decrease in
variability in cash flowsLoyalty programs create a "Sour taste"
◦ They increase variability in cash flows without increasing cash flow levels
Programs that increase the number of products held (breadth or depth) are “Sweet and sour"◦ They increase BOTH the level and variability of
customer cash flows
Key Results10% increase in Satis-
faction
10% increase in Rel. Breadth
10% increase in Share of Customer
-20 -10 0 10 20 30 40 50
Change in Average CF, %
10% increase in Satis-faction
10% increase in Rel. Breadth
-2 0 2 4 6 8 10
Change in Average CF, %
Financial Services
Telecommunication Services
Approach 2: Managing the Customer Portfolio
Study ContextB2B firm with diverse customer
baseMonthly sales and profit data
provided for all customers over a seven-year period
Examined the 516 unique customers that accounted for 98% of sales
0
20
40
60
80
100
120
140
160
180
200
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59 61 63 65 67 69 71
Mill. $
Month
Cluster 1
Cluster 2
Cluster 3
Cluster 4
Cluster 5
Cluster 6
Cash Flow Patterns of Market Segments
2006
The Efficient Frontier
Current Portfolio Efficient Portfolio
The Current Portfolio Compared to the Efficient Portfolio with Identical Return
Forward & Back
Testing
Profit Variability
-
0.020
0.040
0.060
0.080
0.100
0.120
0.140
0.160
2001 2002 2003 2004 2005 2006* 2007
Current Portfolio
Eff icient Portfolio
Profit (Million $)
70.0
120.0
170.0
220.0
270.0
320.0
370.0
2001 2002 2003 2004 2005 2006* 2007
Current Portfolio
Eff icient Portfolio
Current vs. Efficient Portfolio
New Customer MetricsCustomer beta: the degree to
which an individual customer contributes to the risk of the entire portfolio
Customer reward ratio: the rate of return on risk of a customer (i.e., the reward for assuming variability)
Key Insights for Practice
1. The customer beta and customer reward ratio provide a fresh approach for identifying desirable customers and revising the customer portfolio.
2. Firms can layer this information over their existing market segmentation descriptors.
3. The data and methods used for this research are available to most companies:
• purchase transactions (revenues or profitability) of customers over time
• firmographics
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