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Seven Mistakes in Managing Customer Profitability
Taking the right approach can lead to a sustainable competitive advantage.
For the rest of the February 2005 issue of CRM magazine please click here
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Using IT systems to gain a deeper and more comprehensive understanding of how to maximize profits from customer interactions is still in its infancy. There is a lot of theory out there, but not enough experience. Companies have made, and continue to make, a wide range of mistakes in their attempts to manage customer profitability. Here are some of the most common mistakes to avoid: The project is too complicated One of the promises of large CRM systems was their ability to gather and organize large amounts of customer information. Trying to cover all the bases may be counterproductive, because it introduces too much complexity, which can overwhelm a project and make it fail. Focus on what is important in a specific area that is likely to produce a quick win. The project is too simple At the other extreme, projects have failed because they tried to do too little. Although the attempt was focused, it did not accomplish enough to become a worthwhile undertaking outside of the group using it. It may have been a very tactical approach that was impossible to use in other parts of the company. It may have been useful, but only to a specific channel, product, or customer's industry. Quick wins are important, but there must be follow-through in applying the experience to other parts of the company. Missing data Even well-thought-out plans can founder if critical information is not collected or is inaccessible. Most corporations have plenty of accounting data, but they lack operational information. Figuring out how to make the data available or determining a feasible workaround is a must. Bad data Even when companies have data, it is not always trustworthy or trusted by everyone who needs to use it. Problems can stem from how data is collected, or the use of vague definitions to classify the data. The data may have been derived from accurate information, but not in a way that means the same thing to everyone in the organization (e.g., business units do not calculate gross profit the same way). Understand the source of the data and its quality before you bet your project's outcome on it.
Asking the wrong question "Who are our most profitable customers?" is the obvious first question to ask. Yet if your analysis shows 5 percent of your customers contribute 150 percent of your profits, you probably asked the wrong question--the answer does not lend itself to a useful course of action. Ask, instead, Why are our least attractive customers costing us so much? Identifying the customers or customer types that are unprofitable and addressing this issue may be the most useful approach to a fatter bottom line. Using the wrong analysis Avoid relying on accounting measures only. Using the right decision model is critical. A customer may be unprofitable today, but attractive from a life-cycle standpoint. Developing the loyalty of an unprofitable 20-year-old bank customer can produce a fabulously profitable customer in 10 years. Make certain the model you use fits the organization's strategy and objectives. Make sure people in the organization understand what the analysis can and cannot do. Missing the organizational issues Since the solution to customer profitability issues usually requires some amount of organizational change, there is almost no end to the landmines one can step on when it comes time to implement a project. Having full executive buy-in at the appropriate level is a prerequisite for success. Without it, the chance of failure is high regardless of how well you execute the other parts of the effort. Robert Kugel is vice president and research director of Ventana Research, an IT advisory and consulting services firm
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