On Tuesday, I took a look at the Apostle Model, which segments customers by their ratings to two survey questions: overall satisfaction and likelihood to repurchase. Today I look at another approach to segmenting customers in a meaningful way that was presented in “The Mismanagement of Customer Loyalty” (Werner Reinartz, V. Kumar, Harvard Business Review July 2002).
In this article, Reinartz and Kumar outline their research and their approach to looking at customers segmented by profitability and loyalty; this is an important exercise to help you understand which customers to wine-and-dine and which to “ignore.” I won’t regurgitate the article here, but if you get a moment, read it to get the background on how they came to these segments.
Similar to the Apostle Model, this Loyalty-Profitability Model is depicted in a quadrant chart that segments customers four ways. The chart below shows the segments and the appropriate actions to be taken for each one, according to Reinartz and Kumar.
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Segmenting your customers like this is a very enlightening exercise, and you can very clearly see where to focus your efforts and resources.
As you can also see, True Friends are the best fit. In the article, they note that companies need to focus on growing the True Believers, which are not shown in the quadrant above but are your True Friends with the highest levels of loyalty and profitability. (In the Apostle Model, they are equivalent to your Apostles; in NPS, they would be your Promoters.) They are your most-valuable customers. True Believers display high levels of both behavioral and attitudinal loyalty. These are relationships that companies really need to nurture, support, retain, and grow. Continue to delight.
The Butterflies flit in, make a purchase (or purchases) at a nice profit for the company but are not committed to your brand. Efforts to convert these customers to loyal customers are typically a waste of time and resources, despite their high profit potential. But, because of that, they should not be ignored; make the transaction(s) delightful and move on. You won’t be able to convert them.
Barnacles can be, like their namesake, a drag on the ship. They are loyal in name but may take advantage of free services and offerings more than they actually spend money with you. They may purchase one product and call your customer support line daily, exhausting resources there without spending another dime. These require a closer look, and actions toward these customers are based on financial/profit potential, specifically on their size of wallet (i.e., value) or share of wallet (i.e., potential value).
And finally, Strangers are not worth any additional effort. They likely bought an item at a steep discount and won’t be back. Don’t invest any resources in these customers.
As noted by the title of this post, not all customers are created equal; handling the various types of loyal customers with the same approach can lead to wasted resources. It’s not practical or profitable. Looking at loyal customers through the profit lens gives you a better picture of where you should focus and helps you tailor your customer relationship strategies.