Carolyn Geason-Beissel/MIT SMR
In traditional market segmentation, unique populations of customers are segmented and targeted using differentiated products and services — be it a soup that is thicker or a bank that is friendlier. But in this article, drawn from the book Customer Portfolio Management: Creating Value with a Large Leaky Bucket of Customers, the authors make the case that the best way to start understanding customers is to segment them based on the strength of their relationship with a brand.
The concept of customer portfolio management, or CPM, is intuitive. We are hardly the first to suggest that organizations can improve their financial performance by focusing on all the customers in their portfolio. Yet business literature is replete with strategies that oversimplify the management challenge.
CPM is not just about creating volume through a large customer base. Nor is it just about creating more satisfied and loyal customers. It’s about how to create value with all the customers in a portfolio over time — to view a company’s market strategies as long-term investments in the strength of relationships over an entire portfolio of current and future customers.
The image of a large leaky bucket illustrates both the theory and complexity of CPM. Consider the choice between two very different buckets, or portfolios, of customers: (1) a smaller, watertight bucket of loyal and profitable customers, or (2) a larger, albeit leaky bucket of customers that includes both stronger and weaker customer relationships. Our research and applications of CPM have taught us that it is typically more profitable in the long run to pursue a larger, leaky bucket.
In this article, drawn from our book, Customer Portfolio Management: Creating Value With a Large Leaky Bucket of Customers, we explain how companies can understand what types of relationships dominate their customer bases so that they can identify strategies for portfolio growth.
Looking Beyond Customer Needs
In traditional market segmentation, unique populations of customers are segmented and targeted using differentiated products and services. The segments are based on differences in customer needs, wants, or benefits sought, be it a soup that is thicker and tastier or a bank that is friendlier. This “needs-based segmentation” has been a cornerstone of marketing management for decades and remains an extremely valuable approach and embedded within CPM.
The limitation of traditional needs-based segmentation, however, is its focus on a particular product or service category and brand. It is a relatively static approach that presumes customers are in a particular needs-based segment.
The limitation of traditional needs-based segmentation is its focus on a particular product or service category and brand.
The reality is that customer behavior is dynamic, where a company’s or brand’s customers are active in multiple needs-based segments within and across product or service categories.
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