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The previous article addressed the subject of customer profitability. This article, which will begin with Figure 2 below, shows the basic customer segments into which an organization can place its customer base.
There is real value in making this customer segmentation.
However, the customer segments suggested by figure 2 are only the starting point. There is another important category, which is not suggested, and that category is unprofitable customers.
Figure 3 below, shows the category of unprofitable customers.
Unprofitable customers are fundamentally different from entry customers. Entry customers are those who have been enticed to be a customer. Oftentimes, an entry customer has been enticed to make a purchase. The company may have created a loss leader. Or, the company may have made a conscious decision to attract market share. Perhaps the company an introductory deal.
Many customers are initially attracted by a purchase that loses money for the company. Are these early customers unprofitable? The company hopes not. The company hopes that it can convert many of the entry customers to be regular or sustaining customers. By retaining them as a regular customer, the company hopes to sell products and services at a higher margin of profitability. In other words, the company hopes that by introducing them to the quality of its services and its products, the entry-level customer become a regular or sustaining customer.
There are several reasons why an unprofitable customer may have become unprofitable. Some of those reasons are:
- The customer is “high maintenance.” The demands the customer makes are unusual or unreasonable. These special requirements and service demands greatly reduce or eliminate the margin of profitability.
- The customer requires more advertising and marketing to get new orders. The cost of providing the advertising and marketing is more than the profit margin made on the orders placed by the customer.
- The customer only orders low-margin products and services.
- The customer orders so infrequently that there is very little profit margin in any case.
These reasons for a customer being unprofitable are merely the tip of the iceberg.
Therefore, there is a difference between an entry customer and an unprofitable customer. With an entry customer there is hope that the customer will start to become profitable. With an unprofitable customer there is little or no hope that the customer will become profitable.
The data warehouse provides the foundation for distinguishing between an entry-level customer and an unprofitable customer. The data warehouse contains the detail and the history to make this distinction. Using the detail and history in the data warehouse the organization can look at such things as:
- How long has the customer been a customer? An entry customer will have been a customer for only a short while. An unprofitable customer will have been a customer for a longer period of time.
- How was the customer initially attracted into making a purchase? An entry customer may have been attracted by a loss leader promotion or some other type of incentive. The unprofitable customer could have been attracted into making a purchase by other means.
- How difficult has it been to do business with the customer? As a rule, an entry customer will not have been troublesome. Most likely, there won’t be a track record for the entry customer. An unprofitable customer will be one that has caused a notable amount of extra work in the processing of its orders for products or services.
There are undoubtedly other criteria for the determination of an entry customer and an unprofitable customer. The granularity of data in the data warehouse and the history in the data warehouse provide a corporation’s best opportunity to sift the different categories of customers.
Next week’s article will be about segmenting customers into basic categories based on profitability cycles.
Bill is universally recognized as the father of the data warehouse. He has more than 36 years of database technology management experience and data warehouse design expertise. He has published more than 40 books and 1,000 articles on data warehousing and data management, and his books have been translated into nine languages. He is known globally for his data warehouse development seminars and has been a keynote speaker for many major computing associations. Bill can be reached at 303-681-6772.
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