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The More Things Change…

Over the past American Idol season, my colleague, Brad Linville, wrote two blogs about plotting each Idol contestants’ probability of winning the season 8 crown. The corollary to customer management is the benefit of accurately determining the future value of customers by using something like Walker’s Value Mapping process. You can read Brad’s first blog describing the Idol Map and the value of strategically mapping your key accounts here, it’s a good read.

But it’s his second blog on the topic, that inspired my current post. In that post, after the season finale of Idol, Brad shows how the Idol Map changed over the course of the season and discusses why businesses also need to periodically update their customer value segmentation.

The idea of changing your customer value segmentation got me thinking about a number of things, but I want to focus on one of them here. The underlying tenet of segmenting customers by their value is that higher value customers should get more resources/services than lower value customers.

But what happens when a customer’s value decreases to a point that you have to take away those resources or services?

The common sense answer is they will not be happy. But how unhappy will they be? What happens to their future behavior with your company? Can anything help offset the "demotion"?

Luckily a recent article in the Journal of Marketing has taken a step toward empirically answering these questions. The article, titled "Does Customer Demotion Jeopardize Loyalty?", provides these conclusions:

  • Demoted customers have significantly lower loyalty intentions, lower revenue, and fewer transactions after the demotion. All the empirical evidence points to these outcomes being affected by the demotion, not the reason why they were demoted.
  • The negative effects of demotion far outweighs the positive effects of being promoted to a higher value segment in the first place. Demoted customers end up with significantly lower performance than similar customers who were never promoted.
  • Clearly outlining the criteria for promotions/demotions reduces the negative impact of a demotion. This is achieved by shifting the locus of control to the customer ("you are being demoted because your actions did not meet the criteria, not because we wanted to"), but it does not fully offset the negative effect of the demotion.
  • Treating the demotion with sensitivity and sympathy also helps reduce the negative impact but does not fully offset it.

We are now left with two somewhat conflicting facts: 1) It is important, even necessary, to segment your customers based on their future value and to update that segmentation at regular intervals; and 2) The process of demoting a customer to a lower value segment can have a significant negative impact on their attitudes and behaviors toward your company.

Is there a way to structure an account valuation system in a business-to-business environment that minimizes the downside – the negative impact of demotion?

There are probably a host of ways to do this, but here are a few I’ve been thinking of:

  1. Develop a valuation method that accurately predicts a customer’s long-term value. Value segments based on things like revenue or the number of product lines purchased will be inherently unstable over time and result in a constant flow of promotions and demotions. A more stable segmentation scheme will include things like customer potential and the level of partnership between your company and the customer.
  2. Determine if it’s even necessary to tell the customer what segment they are in. Another colleague of mine has a post addressing this point that you can read here.
  3. Create a value proposition for each customer segment that is perceived as a win-win scenario. If you segment your customers correctly, and fully understand the segments and their unique needs, then you can create a service package that meets your customers’ needs and ensures that you are maximizing your profitability on those accounts. For instance, a large account that is already giving you a large portion of their share of wallet will not mind that you do not assign an extra resource to expand your penetration of the account like you have with a similar large account and a low share of wallet.

Like I mentioned above, I’m sure there are many more ways to minimize the prevalence of customer demotions but these are good ones to start with. Whatever strategies you employ make sure you’re taking a long-term view of your customers’ value so the more things change, the more you’re able to provide value to, and get value from, your customers.

Troy Powell, Ph.D.
Vice President, Statistical Solutions
Walker Information

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