Loyal or lucrative customers may not be the most profitable customers

Research shows only about 20% of customers are truly profitable. And they may not be the most obvious prospects.
Written by Joe McKendrick, Contributing Writer

A few years back, the head of a business intelligence tools vendor that served the banking sector made an interesting revelation to me about what some of his banking customers were learning. While they all had chased the high-income, high-deposit customers to increase profits, analysis of their revenue streams showed an entirely different picture: that their most profitable customers came from the lower-income, lower-deposit end of the scale. How is this so? Because these people had to pony up fees for overdrafts and not meeting minimum balances and so forth.

That's an example of one piece of conventional wisdom that needs to be re-examined before companies -- in this case, banks -- lay out their marketing dollars. In a new study summarized in MIT Sloan Business Review, Tim Keiningham, Lerzan Aksoy, Alexander Buoye and Luke Williams shatter another cherished piece of conventional wisdom -- that loyal customers are the most profitable customers.

If you think about it, most corporate measures of customer loyalty focus only on feelings, the authors point out. "But our research shows that knowing how customers feel about a company is a poor predictor of how they will behave toward the company." The authors suggest that solid analytical data about actual buying behaviors be looked to to determine actual profitability.

The research also finds a majority of "loyal" customers—often more than 50%—are not profitable for most companies, "because their loyalty is driven largely by expectations of great deals." The research finds that profitable customers tend to make up only around 20% of a company’s customers, while another 60% could be considered "break-even customers" at best.

The lesson here is that it's smart to do a good analysis at the data coming in from customer segments before investing in marketing or sales pushes. Those seemingly unengaged customers could be your bread and butter.

This post was originally published on Smartplanet.com

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