Manage Your Customer Portfolio for Maximum Lifetime Value

Learned a lot lending an editorial hand here:

MIT Sloan Management Review, September 13, 2022

by Fred Selnes and Michael D. Johnson


Traci Daberko/theispot.com

Many companies have embraced the importance of creating closer, more valuable relationships with customers. But most do little to actively manage their portfolios of weaker and stronger relationships, other than keeping them diversified. They’re missing significant opportunities.

When we wrote about customer portfolio management (CPM) and our research into customer portfolio lifetime value (CPLV) for this publication in 2005, we emphasized the need to balance a “large, leaky bucket” of weaker customer relationships alongside closer and higher-value customer relationships. But according to our latest research, there is much more that businesses can and should be doing to drive future revenue. These actions depend on both market conditions and a company’s resources.

Growing a company’s customer portfolio requires continual investments across a range of weaker to stronger relationships. Our updated CPLV model shows that a clear understanding of when and how much to invest in, leverage, and defend different customer relationships is an essential determinant of both current and future revenues and costs.

Most companies lack a basis for developing this understanding. Business leaders seeking to optimally manage the ecosystem of customer relationships face a complex problem — and for most, de facto CPM practices are more likely to focus myopically on either current sales or their most valuable customers. However, our model shows that what’s really required is to integrate multiple dimensions (not just scale, but also variances in customers’ needs and wants) and tactics (relationship conversion, leverage, and defense) across the whole customer portfolio.

Our CPM framework and CPLV model enable executives to answer the following key questions as they seek to grow and optimize their company’s customer portfolio:

• How central is developing customer relationship strength to our strategy and competitive advantage? More specifically, when and how much should we invest in converting weaker relationships to stronger relationships?
• How do we leverage these investments once relationships are created?
• How do we protect the relationships we have created to minimize customer churn?

The CPM framework we’ve constructed and applied over the past two decades rests on a fundamental principle: It’s in a company’s best interest to view its market strategy as a long-term investment in the strength of relationships over an entire portfolio of current and future customers. Its core element is the segmentation of customers by their relationship with a brand — progressing from strangers to acquaintances to friends and, finally, to partners.

Our CPLV model illuminates how these relationships relate to the value proposition of a company by predicting a seller’s future revenues from and costs associated with the different relationship segments. These predictions are based on a set of parameters that includes market growth over the course of a product life cycle, unit cost over time, the cost and probability of deepening relationships, relationship premiums, and switching costs and probabilities. By running extensive simulations within the model, we have identified three explicit goals for an effective CPM growth strategy: relationship conversion, relationship leverage, and relationship defense. Read the rest here

The Transformational Power of Recommendation

Learned a lot lending an editorial hand here:

MIT Sloan Management Review, November 24, 2020

by Michael Schrage




Image courtesy of Paul Giovanopoulos/theispot.com

Wikipedia defines recommendation engines (and platforms and systems) as “a subclass of information filtering system that seeks to predict the ‘rating’ or ‘preference’ a user would give to an item.” But as a tool, technology, and digital platform, recommendation engines are far more intriguing and important than this definition suggests.

In data-driven markets, the most effective competitors reliably offer the most effective advice. When predictive analytics are repackaged and repurposed as recommendations, they transform how people perceive, experience, and exercise choice. The most powerful — and empowering — engines of commerce are recommendation engines.

Recommendation engines have been essential to the success of digital platforms Alibaba, Amazon, Netflix, and Spotify, according to their founders and CEOs. For companies such as these, recommendation engines aren’t merely marketing or sales tools but drivers of insight, innovation, and engagement. Superior recommendations measurably build superior loyalty and growth; they amplify customer lifetime value. Computing compelling recommendations profitably reshapes human behavior.

The influence and purpose of recommendation engines are not limited to customers or consumption. Large employers, most notably Google, have adopted and adapted recommendation engines as internal productivity platforms to nudge workers to their best decision options. Indeed, in late 2016, Laszlo Bock, the senior vice president of people operations at Google, left the company to launch Humu, a recommendation-engine startup for advising workforce behavior change.

While data remains the essential advisory ingredient, the global recommendations revolution reflects profound and ongoing algorithmic innovation, enabling machine learning and AI to power improvements in deep learning and generative adversarial networks. Successful recommendation engines learn how to learn. The more people use them, the smarter they become; the smarter they become, the more people use them. Done right, recommendation engines enable virtuous cycles of value creation.

The networked nudges and prompts of recommendation engines increasingly influence people’s choices in clothing, entertainment, food, and medicine; they also influence the texts we send, which friends we contact, the customers and prospects we prioritize, the experts we seek, the job candidates we hire, the investments we choose, the memos we edit, and the schedules we follow.

But prompts and nudges shouldn’t obscure the subtle but vital design principle that makes the recommendation-engine value cycle more virtuous: Recommendation is about ensuring better options and choices, not obedience or compliance. Recommendation engines don’t seek to impose optimal, best, or right answers on their users. To the contrary, their point and purpose are greater empowerment and agency. Influence, not control, is the algorithmic aspiration. In this, successful recommendation-engine design depends more on how recommenders seek to influence than on how much they know.

Recommendation engines transform human choice. Much as the steam engine energetically launched an industrial revolution, recommendation engines redefine insight and influence in an algorithmic age. Wherever choice matters, recommenders flourish, and this profound digital transformation of choice will only become more pervasive as recommenders become smarter. Better recommenders invariably mean better choices. Read the rest here.

To Cut Costs, Know Your Customer

Learned a lot lending an editorial hand here:

Sloan Management Review, November 4, 2020

by Vikas Mittal, Shrihari Sridhar, and Roger Best




Image courtesy of Robert Neubecker/theispot.com

The economic disruptions caused by the ongoing pandemic are forcing myriad decisions on CEOs of B2B companies. Often, the most pressing decisions are whether and how to cut costs.

As in business downturns past, some CEOs are implementing across-the-board salary cuts and widespread furloughs, while others are taking a more piecemeal approach — renegotiating vendor contracts; trimming underperforming products, regions, and divisions; and shifting to lower-cost sales channels. Our research shows that both of these approaches can be misguided.

A more effective cost-cutting strategy should begin — and end — with customer focus.

Customer focus tends to be overlooked during cost cutting because it is usually seen as a revenue enhancement strategy. This is a mistake: B2B companies that ignore what customers value when they are cutting costs leave a lot of money on the table.

In our benchmark assessment of 626 publicly traded B2B companies and 4,105 of their customers, we found that companies with high levels of cost cutting and low levels of customer value — as measured by customer satisfaction — had the worst gross margins, while companies with high levels of both cost cutting and customer value had the highest margins. In other words, cost cutting that is devoid of customer value sank margins.

B2B companies can pursue cost reduction with a customer focus in three ways: by reducing value-added waste to deliver more compelling customer value, by improving the effectiveness of customer acquisition and retention, and by narrowing focus to those strategic initiatives best aligned with customer value. Read the rest here.

Competing on Customer Outcomes

Learned a lot lending an editorial hand here:

MIT Sloan Management Review, September 2, 2020

by Marco Bertini and Oded Koenigsberg




Image courtesy of Richard Borge/theispot.com

In his 1969 book The Marketing Mode, Harvard Business School professor Theodore Levitt immortalized a gentleman named Leo McGivena, who reportedly said: “Last year 1 million quarter-inch drill bits were sold — not because people wanted quarter-inch drill bits but because they wanted quarter-inch holes.” A half-century later, this insight is as compelling as it ever was — customers still want to buy meaningful outcomes (a particular sensation, a tangible benefit, or some combination of the two), not products and services. What’s changing is companies’ ability to become more accountable for those outcomes by helping customers navigate three critical checkpoints: accessing the solution, consuming (that is, experiencing or using) it, and getting it to perform as expected or above expectation.

Even so, most companies do not stake their success on these checkpoints. Instead, they sell quarter-inch drills and promise customers that the quarter-inch holes they desire will follow. Indeed, a revenue model focused on transferring the ownership of a product or service to the buyer may appear prudent because revenue accrues up front, and any risk associated with access, consumption, and performance is passed on to customers. But in reality it places an unnecessary burden on customers and ultimately shrinks the opportunity in the market. This contraction occurs when, for instance, customers are priced out or forgo a purchase because it is inconvenient, when they perceive ownership as too risky and decide not to buy, and when they resolve to pay less to account for the possibility that they will not make sufficient use of their purchase or that it will not perform as advertised.

Technological advances are enabling companies to rewrite the rules of commerce. Mobile communication, cloud computing, the internet of things, advanced analytics, and microtransactions offer sharper, more timely information that can illuminate when and how customers access and consume their products and services, and whether and how well those products and services perform. We call this information impact data — it enables companies to track and understand what happens to their solutions beyond the moment of purchase.

The way we see it, impact data — and the technologies that deliver and analyze it — is transforming corporate accountability for customer outcomes from a fashionable marketing slogan into a strategic imperative. Some organizations dismiss this imperative, hoping that it is another passing trend. Others (often intentionally) make their prices more ambiguous and thus less comparable across competitors, which impedes sound purchasing decisions on the customer side. These will not be winning plays in the long run. Instead, companies should start to embrace accountability for outcomes and change their revenue models accordingly before they are forced to do so by more enlightened competitors and disruptive startups.

In this article, we’ll describe three types of revenue models that can help companies win customers and drive growth in today’s increasingly transparent markets. The framework draws on insights from our respective academic areas of behavioral economics and operations, our research, and our ongoing interactions with companies. We’ll also provide guidance on developing and implementing the right revenue model for your company, unlocking the untapped market potential of your solutions, and capturing the lion’s share of the resulting value... Read the rest here

How to build a great experience

strategy+business, November 15, 2019

by Theodore Kinni



Illustration by Paula Daniëlse

In 2017, the Marriott School of Business at Brigham Young University announced that henceforth the Department of Recreational Management would be known as the Department of Experience Design and Management. The idea that immersive and engaging experiences produce value and deliver competitive advantage has come a long way in the 20 years since Joe Pine and Jim Gilmore welcomed us to something they called the “experience economy.”

Designing Experiences is the latest in a long line of books that have appeared on the subject. In it, J. Robert Rossman, a professor at Illinois State University, and Mathew Duerden, an associate professor in the aforementioned department at the Marriott School, touch on many of its predecessors (including one in which I had a hand, Be Our Guest) in a concise textbook that serves as both a theoretical foundation and a how-to guide for experience design.

The theoretical foundation, which appears mostly in the first two chapters, bogs down a bit in explaining what constitutes an experience. This murk stems from Pine and Gilmore’s positioning of experiences as an economic activity unique from products and services. Rossman and Duerden carry this forward by arguing that experiences differ from products and services because the person on the receiving end of an experience must be actively co-creating it. “Experience demands conscious attention, engagement, and action — in a word, participation,” they write.

This distinction isn’t clear to me. Is there any product or service we can buy and consume that doesn’t require our participation in some form or other? And even if it were possible not to participate in the acquisition and use of certain products or services (say, buying groceries or cutting the lawn), mightn’t that count as a very good experience for some of us? Read the rest here.

The Greatest Showman on Earth

strategy+business, August 14, 2019

by Theodore Kinni
Phineas Taylor Barnum’s future was bright. He believed from the age of 4 that his grandfather, pleased to have his grandson as his namesake, had purchased the most valuable farm in Connecticut in Barnum's name. For years, the boy’s grandfather talked about the farm and his neighbors congratulated him on being the richest child in the town of Bethel. At the age of 12, Barnum was taken to see his farm. It was five worthless, inaccessible acres in a large swamp. Everyone had a great laugh.

Robert Wilson, editor of the American Scholar and author of Barnum, sees the roots of the 19th-century American showman’s outsized pecuniary drive in “this strangely cruel and astonishingly drawn-out joke.” But it’s hard to judge whether the story is true — the only citation Wilson offers is Barnum’s autobiography, which should give the reader pause, considering its author’s reputation for humbug and penchant for spinning his own life story.

If Barnum didn’t stretch the story (or invent it outright), it also may reveal the roots of his preternatural talent for hucksterism. Certainly, he elevated the joke to unprecedented heights with a series of frauds so entertaining to American and European audiences of every social class that instead of shunning him, they rewarded him with riches that beggared the promise of the farm that never was. He also provided an early and, sadly, enduring lesson in the use of brazen hype, shameless self-promotion, and fake news as the basis of a successful business. Read the rest here. 

A new view of the fortune at the bottom of the digital pyramid

strategy+business, July 24, 2019

by Theodore Kinni




Photograph by code6d

The benefits of digitization and Internet connections in developing nations — and the opportunities awaiting companies that can provide them — have been much lauded in the past couple of decades. But as Payal Arora, a professor at Erasmus University Rotterdam, clearly demonstrates in her new book, The Next Billion Users, the conventional storyline around the transformative effect of technology on people’s lives often doesn’t ring true.

Arora, who has been studying how the global poor outside the West use computers and the Internet for nearly 20 years, discovered this for herself during her first development project in a rural region of southern India. “The goal,” she explains, “was to infuse this town with new digital technologies to help the poorer members of the community leapfrog their way out of poverty.”

The project team set up computer kiosks and funded cybercafes. It sent computer-equipped vans to remote villages to promote Internet awareness. “We envisioned women seeking health information, farmers checking crop prices, and children teaching themselves English,” Arora writes. The reality was the polar opposite: The kiosks became Pac-Man gaming stations, social networking sites dominated computer usage in the cybercafes, and the free movies used to attract people to the vans became their primary draw.

“Many of the technology development projects I have worked with since have yielded similar results,” Arora writes. “Play dominates work, and leisure overtakes labor, defying the productivity goals set by development organizations.” (Imagine the sniffing among Western do-gooders.)

This is the source of what Arora defines as the third digital divide between the developed and developing worlds. The first digital divide is access to technology. The second divide is the ability to use the technology — to read and write, for instance. And the third divide, which Arora labels “the leisure divide,” is rooted in motivation. “The leisure divide is about understanding what the global poor want from their digital life and why it matters to them,” she writes. “It reminds us that fulfillment is not necessarily a matter of efficiency or economic benefit but can involve a more elusive, personal, and emotive drive.” Read the rest here.

Your Customers May Be the Weakest Link in Your Data Privacy Defenses

Learned a lot lending an editorial hand here:

MIT Sloan Management Review, May 22, 2018

by Bernadette Kamleitner, Vincent W. Mitchell, Andrew Stephen, and Ardi Kolah

Does your company have consumer data it isn’t legally authorized to possess?

Don’t be too quick to answer. Many ethical, lawfully managed businesses do have such data — and it comes from a surprising source: their customers, who inadvertently share the personal data of their family, friends, and colleagues.

The lack of awareness regarding peer-dependent privacy is one way that London-based Cambridge Analytica Ltd. was able to collect the personal information of more than 71 million Facebook users, even though only 270,000 of them agreed to take the now-bankrupt company’s app-based personality quiz. Cambridge Analytica reportedly knew what it was doing, but any company that accesses customer data, such as contacts, call logs, and files, can unknowingly breach peer privacy.

Blame apps. Virtually all large companies offer apps to their customers, and most of those apps access and collect customer data. Often, that includes peer data, which also is collected even though the app’s owner may have no direct relationship with the user’s peers.

Consider a typical scenario: John installs a customer club membership app on his smartphone. During this process, the app requests permission to access core services on his device, including his contacts. John agrees. This opens a Pandora’s box of potential problems. John has given a third party — the company owning the app — permission to access not only his personal data, but also the personally identifiable information of the hundreds of contacts saved in his phone. None of those people, including Rachel, whose name, phone number, email address, photo, and date of birth are stored in John’s phone, agreed to share their information with the company. They have no idea that they have been caught up in a peer-dependent privacy breach.

Company executives may be no more aware of the privacy breaches built into their apps than John and his contacts. Yet, it could cost them as dearly. Under the EU General Data Protection Regulation (GDPR), any company can incur fines of up to 4% of global annual revenue or 20 million euros, whichever is greater, for failing to respect the sovereignty of EU citizens over their personal data. Notably, these fines are not limited to customer data: As of May 25, 2018, the personal data of EU citizens, including data on other people’s devices, must be obtained lawfully, fairly, and transparently in accordance with the principles of the GDPR. This implies that the fully informed consent of peers is needed prior to taking possession of their personal data (barring some other legal basis). In most cases and subject to a balancing test, companies also need to provide peers with access to their personal data and, in some cases, delete that data on demand.

In short, peer-dependent privacy has become a significant exposure for companies that want to ensure the highest standards of data protection, privacy, and regulatory compliance....read the rest here

The Power of a Free Popsicle

Insights by Stanford Business, Feb 19, 2018

by Theodore Kinni

Los Angeles boasts plenty of terrific hotels. At this writing, the top three on TripAdvisor are the Beverly Hills Hotel, Hotel Bel-Air, and the Peninsula Beverly Hills. If you can get a room at any of them for under $700 per night, TripAdvisor says you’re getting a “great value.”

The fourth name on the list is the Magic Castle Hotel. You can snag a room there for $199, but TripAdvisor doesn’t call that out as a great rate. The Magic Castle Hotel, as Chip Heath, the Thrive Foundation for Youth Professor of Organizational Behavior at Stanford Graduate School of Business, describes it, “is actually a converted two-story apartment complex from the 1950s, painted canary yellow … [with] a pool that might qualify as Olympic size, if the Olympics were being held in your backyard.”

How does the Magic Castle Hotel maintain such an enviable TripAdvisor ranking among the 355 hostelries it lists in LA? In their new book, The Power of Moments, Heath and his brother, Dan Heath, a senior fellow at Duke University’s CASE Center, trace it to the hotel’s ability to create “defining moments.” These moments, they say, are ones that bring meaning to our lives and provide fond memories.

One of those defining moments is the Popsicle Hotline. Visitors at the hotel’s pool can pick up a red phone on a poolside wall to hear, “Hello, Popsicle Hotline.” They request an ice-pop in their favorite flavor, and a few minutes later, an employee wearing white gloves delivers it on a silver platter, no charge. It’s a small defining moment that doesn’t cost much to produce, but has paid off for the Magic Castle Hotel.

In The Power of Moments, the Heath brothers identify four metatypical defining moments. Elevation moments transcend ordinary experience, like the arrival of an ice-pop on a silver platter. Insight moments rewire our understanding of the world, like George de Mestral pulling burrs from his clothes after a hike and getting the idea for a new kind of fastener that he named Velcro. Moments of pride accompany achievement, which is why employee recognition is such a powerful tool. And moments of connection — like weddings, graduations, and retirements — strengthen relationships. Read the rest here.

Seeking Scale? Think Old

MIT Sloan Management Review, December 14, 2017

by Theodore Kinni

These days, scale is a top-of-mind issue among leaders of tech companies. Yet many of these leaders are missing the biggest and most obvious scaling opportunity they’ll ever encounter: old people.

The worldwide population of older adults — people age 65 and up — reached 617 million in 2015 (almost twice the total population of the United States); in the U.S. alone, older adults represent an $8 trillion consumer market. Thanks to longer life expectancies, there will be 1 billion people age 65+ by 2030, and 1.6 billion of them by 2050.

The problem — which Joseph F. Coughlin, director of MIT’s AgeLab and the author of The Longevity Economy, lays out in the excerpt below — is that most tech companies simply don’t get this deep-pocketed, growth market. Worse, because of the relative youthfulness of tech companies, their leaders are not only missing the biggest market they’re likely to see before they become old folks themselves, they’re also overlooking the job candidates who could help them tap it as well.

If your company is seeking scale, read the excerpt here.

Creating Positive Moments for Your Customers

strategy + business, November 22, 2017

by Theodore Kinni


Quick question. Customers rank their interactions with your company on a scale of 1 (very negative) to 7 (very positive). Should you invest more resources in improving the experiences of customers who rank their interactions at a 1, 2, or 3, or those who rank them at a 4, 5, or 6?

When brothers Chip and Dan Heath, a professor at Stanford Graduate School of Business and a senior fellow at Duke University’s CASE Center, respectively, asked executives how they invest their resources, the executives estimated that, on average, their companies spend 80 percent of their resources trying to improve the experiences of their unhappiest customers. Yet, report the Heaths, in 2016, when Forrester Research tabulated its annual U.S. Customer Experience Index and modeled the financial results in 16 industries, it discovered that “there’s nine times more to gain by elevating positive customers than by eliminating negative ones.”

This finding supports the main point in The Power of Moments, the latest in a series of formulaic but insightful books by the Heaths that seek to illuminate questions with important business ramifications, such as how to make ideas sticky and how to create change successfully. The point in this case is that “positive defining moments” can produce extraordinary effects in both individuals and organizations. The book explains how such moments are created. Read the rest here.