Leveraging the Customer Base: Creating Competitive Advantage and the Impact on the Financial Performance of the Business

Posted: 6 Aug 2008 Last revised: 29 Jul 2010

Date Written: August 8, 2008

Abstract

Assessing customer profitability is integral to the functioning of many firms, especially from the standpoint of customer relationship management (CRM). Understanding the equity of individual customers enables firms to focus their marketing efforts in a more targeted manner, and hence boost the company's bottom-line. Therefore, the challenge for any marketer is to identify and separate the 'gold' customers from the 'silver' customers and the 'lead' customers, so that they can cut down wasteful marketing expenditures incurred by contacting 'lead' customers, and instead channel these expenditures at better serving their 'gold' and 'silver' customers over time. This principle of 'weeding out the losers and hanging on to the winners' is the cornerstone of database marketing. More generally, understanding the link between customer satisfaction and profitability is important for another reason as well. A large and growing literature in marketing, strategy, and accounting advocates the use of both financial and non-financial variables in managerial performance evaluation. The evidence on the link between satisfaction and profitability is decidedly mixed. A recent article published by Booz, Allen and Hamilton (Klien and Einstein 2003), provocatively titled 'The Myth of Customer Satisfaction,' concludes that unless satisfaction leads to loyalty, it may not lead to profitability.

Researchers and business thought leaders have emphasized that, towards maximizing the lifetime value of customers, firms must manage customer relationships for the long term. In contrast to this recommendation, I firmly emphasize that profits being in competitive environments are maximized when managers focus on the short term with respect to the customers. Intuitively, while a long term focus yields more loyal customers, it sharpens short term competition to gain and keep customers to such an extent that overall firm profits are lower than when managers focus on the short term. Further, a short term focus continues to deliver higher profits even when customer loyalty yields a higher share-of wallet or reduced costs of service from the perspective of the firm. Intuitively, while such revenue enhancement or cost reduction effects enhance the proverbial pot of gold at the end of the rainbow, they lead to even more intense competition to gain and keep customers in the short term. This suggests that the competitive implications of a switch to a long term customer focus must be carefully examined before such a switch is advocated or implemented. Paradoxically, customer lifetime value may be maximized when managers focus on the short term.

Keywords: Telecommunications, Customer Competitive Advantage, Business Leverage, Financial Performance, Virtual Mobile Carrier

Suggested Citation

Jomadar, Dinesh K., Leveraging the Customer Base: Creating Competitive Advantage and the Impact on the Financial Performance of the Business (August 8, 2008). Available at SSRN: https://ssrn.com/abstract=1197142

Dinesh K. Jomadar (Contact Author)

affiliation not provided to SSRN ( email )

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