You’d think I’d be writing about when suppliers value and love their customers. But I’m thinking more literally than that. I’m talking about what happens when suppliers actually place a monetary value on the amount a customer could potentially spend with them (or how much a group of customers could spend on average). It’s usually called Customer Lifetime Value, or CLV. What happens?
We’ve seen this approach with banks and their wealth management divisions. They’ve segmented their customers by their assets or wealth (and therefore value to them). Segments include Ultra High Net Worth, High Net Worth and Mass Affluent. There are broadly three different types of segmentation. You can segment customers by:
- value, i.e. the amount of revenue or margin you can earn from those customers
- characteristics, i.e. the features of each customer (in this case including the source of someone’s wealth)
- behaviours i.e. their attitude to the service and how they use it (in wealth, they could be disinterested, self-directed, demanding etc)
When suppliers consider the features and characteristics of their customers, you often see this empathetic approach being reflected in the service provided. If they focus on behaviours, they can provide service that respects those customer wants and habits. And I’d argue that focusing purely on value leads to certain customer segments being ignored or marginalised. In a world where suppliers are competing fiercely for the best customers (people with “ultra high net worth” and “high net worth”), you can see what’s happening to those in the “mass affluent” segment. There are few suppliers willing to provide quality service, leading to customers self-directing their investment decisions (the DIY approach).
Now, I have some sympathy for banks on this point. The sheer weight of legislation, and the impact of the Retail Distribution Review (launched in June 2006 and still having a huge impact) has meant that suppliers can’t make enough profit with those less-wealthy segments, unless brilliant technology and slick interactions make their process efficient and service valuable.
What seems to be happening is that fewer people are getting good financial advice. This is a societal risk. If people fail to get advice, too many will make mistakes with their investments and pensions. They may, for example, take additional risk to try and bolster their shrinking pension pot. Mistakes mean loss and potential hardship. If hardship means relying on others for financial support, that’ll be a burden on all the central and local government services. So it’s down to reputable firms to find a way to service these customers, and still make money, before this situation becomes societal. That will require systematic innovation.
Now I’ve focused on wealth management, where arguably the effect of segmentation is most dramatic. But the same principles apply elsewhere. When I worked in risk, I was involved in a huge change programme led by a “big-four” consultancy. On the face of it, we segmented our customers using buying characteristics. We actually used only their “book value” i.e. their spend with us. We moved the least-valuable customers to a new division, set-up to service these customers in a different way. And we lost all but two of those customers within twelve months. That’s what happens when suppliers value their customers. Segmentation requires something more intuitive. Segmenting by value, characteristics and behaviours is a much more intelligent approach.