Keeping Your Balance With Customers

Using the Balanced Scorecard approach, Robert S. Kaplan, of Harvard Business School, and David P. Norton analyze the four essentials of customer management: customer selection, acquisition, retention, and growth.
by Robert S. Kaplan & David P. Norton

From product push to customer pull, technology has vastly reshaped the business transaction—and in turn, the customer's place in the value chain. Today, managing the customer relationship has become the single most important dimension of enterprise strategy. Here, Kaplan and Norton analyze the four-component processes of the Customer Management theme—customer selection, acquisition, retention, and growth—demonstrating their importance in maximizing customer value and, ultimately, in value creation itself.

Customer management (CM) reflects much of what is new in modern business strategy. In the Industrial Era, product innovation and operations management predominated. Product innovation ensured the continuous flow of new products that would sustain growth or market share or both. Operations management ensured that costs and quality were managed so that competition could be based on price and profits could be derived from scale. Customer management was relegated to selling and promoting the company's products. The customer relationship was seldom the issue.

The New Economy has changed all of this. With the evolution of computer and communications technologies, particularly the Internet and database software, the customer can now initiate the business transaction, not simply respond to the salesperson's overture. Instead of being on the end of the value chain ("product push"), the customer is now at the beginning ("customer pull"). Organizations must therefore establish a "relationship" that allows them to maintain contact with their customers over the long term. Recognizing this new reality and dealing with it proactively is the single most important dimension of enterprise strategy. It's within the Customer Management theme that this is accomplished.

It is not possible to be all things to all people, so market segmentation is the way to avoid this temptation.
—Robert S. Kaplan and David P. Norton

The Customer Management theme is made up of four processes—customer selection, customer acquisition, customer retention, and customer growth—all of which, when strategically integrated, maximize the value of the customer, and therefore of value creation in general. Yet, when formulating any CM strategy, organizations must consider each process individually. Each requires a proactive approach.

Historically, organizations have viewed acquisition as the biggest challenge. But lacking a CM strategy and able to respond to only short-term financial pressures, most organizations do an inadequate job of selection, retention, and growth. For many years, Mobil pursued a confused pricing strategy because the company hadn't clearly defined its market segments. Likewise, for many years, Chemical Bank (now Chase) cultivated relationships with unprofitable customers for the same reason. Most organizations view the sale purely as a transaction and then lose touch with the customer, without even knowing if the customer has remained a customer. A successful CM strategy must address each of the following processes. (Typical objectives and measures for customer management are shown in Figure 1.)

1. Customer selection. The customer selection process begins with an understanding of the customer, first by segmenting the market into niches with different requirements, then by selecting target segments for which the company can create unique and defensible value propositions. It is not possible to be all things to all people, so market segmentation is the way to avoid this temptation.

For example, in an attempt to move away from price-based competition, an engineering company identified a market segment built on partnering with the customer, outsourcing and risk sharing. Its challenge was to migrate its customer base in this direction. The company's "customer selection" objective was to "focus only on strategic accounts." It measured its success by the number of such accounts, as well as by the number of opportunities for price-based competition that it did not pursue. In its dynamic, rapidly evolving industry, this company was clearly targeting high-value customers (HVC's). The converse of this approach, generally found in more mature industries, involves identifying and eliminating unprofitable customers. A consumer bank with significant and stable market share had as an objective to "identify, upgrade, or exit unprofitable accounts." Using activity-based management techniques, the bank measured the percentage of customers who were unprofitable.

2. Customer acquisition. Acquiring new customers is the most laborious and expensive part of CM. Once the market has been segmented, analyzed, and targeted, the company communicates its value proposition to target customers through its customer acquisition approach.

Communication programs must be tailored to the desired customer segments. The engineering company, dealing with a relatively small number of customers (twenty to thirty), developed a so-called "education program" designed to show them the benefits of a gain-sharing partnership (in which vendor and customer share cost reductions). The company measured its success rate by the number of requests for proposal it received that sought a sole-source relationship. The consumer bank conducted a major sales campaign narrowly targeted to the HVC segment. It measured the number of leads the program generated and its effectiveness in converting them to active customers (the "lead conversion rate").

3. Customer retention. Once a customer has been acquired, the key is to keep him. A company retains its customers by delivering on its value proposition, so that the customer has no need to look elsewhere. Therefore, ensuring high-quality service is fundamental. The consumer bank monitored the service levels ("request fulfillment time") for its HVCs, surveyed its customers every six months, and monitored its performance in resolving the top ten customer issues. Another company introduced a customer report card whereby its industrial customers could provide feedback on the company's performance. The report card created a dialogue that strengthened the vendor/customer relationship and improved retention. The engineering company measured the strength of its partnership by striving for sole-source relationships. At all of these companies, customer retention strategies were based on providing superior service, listening to customer feedback, and building relations that discouraged defection.

4. Customer growth. Increasing the value of each existing customer is the ultimate objective of any CM strategy. Because new-customer acquisition is difficult and expensive, it only makes sense if the size of the ensuing relationship can dramatically exceed the cost of acquisition. Many organizations think in terms of the "lifetime value" of a customer. Customer growth strategies generally involve striving to expand the share of each customer's spending by expanding the company's range of products or services. This involves cross-selling to and partnering with the customer. The engineering company, for example, created a virtual team with the customer by setting a shared objective to reduce the cost of manufacturing—and then by sharing in those cost reductions. The consumer bank measured the number of HVCs who used more than three of the bank's services. Getting such customers first required establishing a more personal, knowledgeable relationship with them, measured by the number of hours their relationship manager spent with them. The bank attempted to lock the customer into a sole-source relationship by creating an integrated management system. Another company used a similar lock-in strategy by developing knowledgeable account managers who could work, in their words, "seamlessly," with the customer because they understood the customer's business. Their measure: the percentage of sales requiring such expertise.

About the Author

Zvi Bodie is a professor of finance at Boston University's School of Management.

Robert S. Kaplan and Robert C. Merton are professors at Harvard Business School.

Dr. Robert Kaplan is an HBS professor.

Dr. David Norton is president of the Balanced Scorecard Collaborative.