| Customer Portfolio Management Framework
The CPM framework begins with the recognition that relationships vary in strength and evolve over time. In some relationships there is relatively little interaction between the customer and the supplier, whereas in other relationships the level of interaction can be very high. We capture the evolving nature of relationships using a simple typology: strangers, acquaintances, friends, and partners. Over time, some population of strangers become acquaintances, a smaller population of acquaintances become friends, and an even smaller population of friends become partners. These relationship segments are the building blocks of a company´s customer portfolio. As strangers are just that, customers who are yet to be part of a particular company´s portfolio, we focus for now on acquaintances, friends and partners. In Table 1, we capture the main characteristics of the three relationships using three criteria: (1) what do sellers 5 have to offer, (2) what drives buyer behavior, and (3) what is the seller´s objective?
| Relationship Characteristics |
Relationship Types |
| Acquaintances |
Friends |
Partners |
| What does the seller offer? |
A relative commodity or form of industry standard. |
A differentiated offering adapted to specific market segments. |
A customized offering adapted to an individual customer or buying organization. |
| What drives buyer behavior? |
A minimum level of customer satisfaction reinforces inclusion of the seller amongst a customer´s options. |
An elevated level of customer satisfaction creates a level of trust and brand equity that reinforces repeat buying. |
Satisfaction and trust evolve to a level of relationship commitment. |
| What is the seller´s objective? |
To capture value through standardization, economies of scale and scope. |
To capture value through the premium customers pay for differentiated offerings. |
To capture value through the premium customers pay for customized experiences and solutions. |
Table 1: Relationship Typology and Characteristics
Acquaintance customers are most likely when sellers offer similar alternatives and switching costs are low. When a seller has achieved some degree of product or service differentiation, be it the quality of a restaurant´s cuisine or the reliability of a financial advisor´s predictions, the relationship grows. Friends become more likely to frequent the seller´s establishment, reuse their service, or pull their product off the shelf. The brand itself becomes an important source of information and equity. Once the level of differentiation reaches a point where sellers have completely customized an offering to solve problems or provide experiences that are unique to a particular customer, a partnership or form of exclusive relationship forms.
As a seller´s offerings range from relative commodities to customized solutions, so varies the customers´ decision making and behavior. For acquaintances, some minimum level of quality and customer satisfaction is required for customers to purchase your products or services. The frequency or volume of purchase will be more directly driven by such factors as price and convenience. As the level of product and service differentiation among offerings increases, and one or more brands do a better job of meeting customer needs, friendships form. Increases in customer satisfaction reinforce repeat purchases and loyalty increases. When differentiation evolves to a level of customized solution, satisfaction and trust evolve to a level of partnership.
How does a seller create value by forming different types of relationships with customers? For acquaintances, clearly the goal is to capture the value created through some degree of standardization in a company´s operations, and the economies of scale and scope that follow. At the other end of the relationship spectrum, creating value through partnerships requires an understanding of a customer´s idiosyncratic needs, and thus a deeper level of interaction. Through a combination of the inherent value of a more customized offering and the costs of switching, the probability of the relationship continuing from period to period grows with the strength of the relationship.
As the nature of value creation differs substantially across the three types of relationships, so should the strategic objectives. For the acquaintances, customer value is maximized through lower costs. For the friends, value is created through products with attractive product benefits and through informative 7 and effective customer service. Profit is achieved through developing attractive benefits in products and services for which the customer is willing to pay a price premium. For the partners, value is created through the customization of products and service activities. Profit is achieved through effective utilization of resources across the relationship, as through increasing the range of service activities performed.
The key strategic question facing companies today is how to optimize investments in these relationships over time to maximize profits. Which strangers, acquaintances, friends, and partners belong in the portfolio, and which require an investment to grow the relationships? Skewing a portfolio toward weaker relationships (acquaintances) rests on the assumption that the size of the portfolio and accompanying economies of scale will drive profitability. Skewing a portfolio toward stronger relationships (friends and partners) rests on the assumption that economies of scale are minimal or already achieved, and that future cash flows are more dependent on customer satisfaction and loyalty.
The CPLV Model
Professor Selnes and I have developed a model we call the Customer Portfolio Lifetime Value (CPLV) model (for details see Johnson and Selnes 2004). Conceptually the CPLV model calculates the contribution, over time, of acquaintances, friends, and partners in a portfolio taking into account: (1) unit cost per customer, which is a function of market diffusion and associated economies of scale, (2) a base revenue per customer across relationship types, (3) a price premium gained from creating closer customer relationships, (4) a 8 cost associated with converting customers from one relationship level to another (as from strangers to acquaintances or from acquaintances to friends), and (5) a cost associated with customer churn (as from gaining acquaintances, friends, or partners directly from competitors). Investments in relationships are associated with some probability of converting customers from one relationship level to another, and the costs of customer churn are captured by some probability that customers at a given relationship level are lost to competitors. The model has proven very useful in helping us to understand how market conditions and competitive dynamics affect the value of a company´s portfolio and the strategy implications. I will use the model today to explore how customer portfolios should be managed in the Asian hospitality industry.
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