Innovative service companies today recognize that they can supercharge
profits by acknowledging that different groups of customers vary widely in
their behavior, desires, and responsiveness to marketing. Federal Express
Corporation, for example, has revolutionized its marketing philosophy by
categorizing its business customers internally as the good, the bad, and the
ugly–based on their profitability. Rather than marketing to all customers in a
similar manner, the company now puts its efforts into the good, tries to move
the bad to the good, and discourages the ugly.(n1) Similarly, the customer
service center at First Union, the sixth-largest bank in the U.S., codes
customers by color squares on computer screens using a database technology
known as “Einstein.” Green customers are profitable and receive extra
customer service support while red customers lose money for the bank and are
not granted special privileges such as waivers for bounced checks. Providing
different service to customers depending on their profitability is becoming an
effective and profitable service strategy for firms like FedEx, U.S. West,
First Union, Hallmark, GE Capital, Bank of America, and The Limited.

These firms have discovered that they need not serve all customers
equally well–many customers are too costly to do business with and have little
potential to become profitable, even in the long term. While companies may want
to treat all customers with superior service, they find it is neither practical
nor profitable to meet (and certainly not to exceed) all customers’
expectations. Further–and probably more objectionable to quality zealots–in
most cases it is desirable for a firm to alienate or even “fire” at
least some of its customers. While quality advocates may be offended by the
notion of serving any customer in less than the best possible way, in many
situations both the company and its customers obtain better value.

Understanding the needs of customers at different levels of
profitability, and adjusting service based on those differences, is more
critical to the enterprise than has been previously held. Specifically, in
examining customers by profitability–and understanding the key elements of the
costs and revenues aspects of the profit equation–it is possible to actually
increase the current and future profitability of all customers in the firm’s
customer portfolio. The Customer Pyramid is a tool that enables the firm to
utilize differences in customer profitability to manage for increased customer
profitability. Firms can utilize this tool to strengthen the link between
service quality and profitability as well as determine optimal allocation of
scarce resources. Companies can develop customized products and services that
are more closely aligned with individual customer’s underlying utility
functions, thereby enabling the firm to capture more value from levels of
customers, resulting in higher overall customer profitability.

Beyond a General Relationship between Service Quality and Profitability

Prior to the 1990s, the general link between service quality and
profitability was still being questioned, but since the early 1990s, it has
been persuasively established.(n2) The evidence to support the linkage came
from a variety of sources and is now convincing enough to lead executives to
believe that a positive relationship does exist. The link was first established
through industry-wide, cross-industry, or cross-facility studies such as the
PIMS (Profit Impact of Market Strategy) project, which demonstrated a
correlation between quality and profits across both manufacturing companies and
service companies.(n3) In more recent studies, quality improvement and customer
satisfaction have been linked to stock price shifts, the market value of the
firm, and overall corporate performance.(n4)

Because firms are managed at the individual level and not the industry
level, executives still clamored for evidence that improved service quality
resulted in increased firm profitability. A growing number of studies bear this
out, showing that:

• service improvement efforts produce increased
levels of customer satisfaction at the process or attribute level,(n5)

• increased customer satisfaction at the process or
attribute level leads to increased overall customer satisfaction,(n6)

• higher overall service quality or customer
satisfaction leads to increased behavioral intentions, such as greater
repurchase intention,(n7)

• increased behavioral intentions lead to behavioral
impact, including repurchase or customer retention, positive word-of-mouth and
increased usage,(n8) and

• behavioral impact then leads to improved
profitability and other financial outcomes.(n9)

What is still missing in this research evidence is the recognition that
the link between service quality and profitability can be stronger if it is
recognized that some customers are more profitable than others. Service
investments across all customer groups will not yield similar returns and are
not equally advantageous to the firm. Different profitability segments are
likely to be sensitive to different service emphases and are likely to deserve
different levels of resources. As a small number of progressive companies have
discovered, they can become more profitable by acknowledging the difference in
profit potential among customer segments, then developing tailored approaches
to serving them.

The Limits of Traditional Segmentation

The idea of identifying homogenous groups of customers, assessing these
segments for size and responsiveness, and then more precisely creating
offerings and marketing mixes to satisfy them is not new. Traditional segmentation
is most effective when it leads to more precise targeting that results in
higher revenues or responsiveness to marketing programs. However, traditional
segmentation is not typically grounded in knowledge of the different
profitability of segments.

To build and improve upon traditional segmentation, businesses have been
trying to identify segments–or, more appropriately, profitability tiers of
customers–that differ in current and/or future profitability to a firm. This
approach goes beyond usage segmentation because it tracks costs and revenues
for groups of customers, thereby capturing their financial worth to companies.
After identifying profitability tiers, the firm offers products, services, and
service levels in line with the identified tiers. The approach has to date been
effectively used predominantly in financial services, retail firms, and
business-to-business firms because of both the amounts of data existing in
those firms and the ability to associate data with individual customers.

One example of an innovator in the field is Bank One, which recognized
that financial institutions were grossly overcharging their best customers to
subsidize others who were not paying their keep. Determined to grow its
top-profit customers, who were vulnerable because they were being under-served,
the Bank implemented a set of measures to focus resources on their most
productive use. The company used the data resulting from the measures to
identify the profit drivers in this top segment and stabilized their relationships
with key customers.(n10)

In another example, First Commerce Corporation knew that customer
segmentation could improve the effectiveness of all of its operations. After
dividing clients into mutually exclusive groups of individuals based on demographics,
the company then identified the reasons for profitability swings (including
balances, product mix, and transaction behavior). The firm then defined three
unique segments: the smart money segment, the small business segment, and the
convenience segment. Tailoring its marketing efforts differentially to those
segments made the company’s programs far more effective.(n11)

Conditions Necessary for Customer Tiers: An Empirical Example

In our view, four conditions are necessary for customer tiers to be used
in a company.

• Tiers have different and identifiable profiles.
Profitability differences in customer tiers are most useful when other
variables can identify the tiers. As with customer segmentation, it is
necessary to find ways in which customers vary across tiers, especially in
terms of demographic characteristics. These descriptions can help understand
the tier’s customers and identify appropriate marketing activities.

• Customers in different tiers view service quality
differently. Customers in different tiers can also have different needs, wants,
perceptions, and experiences. Understanding the factors that affect the
customer’s decision to purchase a new product or service from an existing
provider as well as the factors that affect the decision to increase the volume
of purchases from an existing provider are crucial for managing customers for
profitability. If customers in different tiers have different expectations or
perceptions of service quality, these differences will allow the company to
offer different groups of attributes to the tiers.

• Different factors drive incidence and volume of new
business across tiers. Differences in characteristics, needs, wants, and
definition of service quality are likely to result in different drivers for the
incidence and volume of new business. If this condition is met, a company can
target customers that are likely to end up in higher tiers.

• The profitability impact of improving service
quality varies greatly in different customer tiers. Just as direct marketers
routinely qualify lists to test for potential profitability, companies need to
qualify their customer tiers for potential profitability. If customer tiers are
appropriate, the way customers respond to service and marketing should differ
among tiers. Higher tiers should produce a much higher response to improvements
in service quality that will be evident in increases in new business, volume of
business and average profit per customer. Taken together, the
disproportionately greater response to changes in service quality in each of
these areas will result in an overall greater return on service quality
improvements for the higher tiers of customers.

An Empirical Test of the Conditions in a Two-Tier Situation

Virtually all firms are aware at some level that their customers differ
in profitability, in particular that a minority of their customers accounts for
the highest proportion of sales or profit. This has often been called the
“80/20 rule”–twenty percent of customers produce eighty percent of sales
or value to the company. We recently conducted an empirical study to examine
this simple “80-20” scheme.

A major U.S. bank provided profitability information about retail
products and customer information files with descriptive information including
average account balance, average profit from account, and average age, gender,
and income. Data on a random sample of 796 of these customers were merged with
responses to a service quality survey from the same set of customers. Eight
months later, information regarding the amount of new business, including both
the incidence and volume of new business (revenue from new accounts), was added
to the data file by examining behavior following the survey. In this way,
service quality measures could be used to predict future behavior using a
cross-sectional, time-series approach.

Demographic Differences

We examined differences in customer descriptive statistics, service
quality perceptions, drivers of incidence of new business, and drivers of
volume of new business across tiers using various statistical analyses.(n12) We
also projected both the increase in the percentage of customers who would open
a new account and the increase in the average account balance. Multiplying the
projected average account balance by the average profit per account balance for
each tier yielded an estimate for the projected increase in average profit per
account. Multiplying that by the number of accounts yielded the total projected
new profits from each tier.

We then divided the customer base into two customer tiers: the most
profitable 20% (top 20%) and the least profitable 80% (lowest 20%). The results
met all the conditions described above. First, customers in different
profitability tiers had different customer characteristics. The top tier had a
higher percentage of women than the lower tier, an average account balance
about five times as big, and average profit about 18 times as much. The top 20%
was also older than the lowest 20%, had more upper-income customers, and had
far fewer lower-income customers. The top 20% produced more profit per volume
of business, with an average profit per account balance of 2.53%, versus 0.71%
for the lowest 20%. Finally, the top 20% produced 82% of the bank’s retail
profits, an almost perfect confirmation of the 80/20 rule in this profit
setting.

Views of Service Quality

Second, customers in different tiers viewed quality differently. The top
20% viewed service quality in terms of three factors: attitude, reliability,
and speed. By contrast, the lower 20% had a less sophisticated view of service
quality, viewing service as only two factors, attitude and speed, with slightly
different interpretations of the factors. The reliability factor was not a
driver for the lowest 20%. A particularly compelling finding emerged from these
data. When we combined all customers into a single group, all appear to want
the same factors and the factors meant the same thing to both groups. The
important insight here is that blending customer tiers resulted in an imprecise
view of what service quality meant to the customer base.

Drivers of Incidence and Volume of New Business

Third, we found that different tiers had different drivers of incidence
and volume of new business. Since we measured what customers did after they
reported what was important to them, we captured what actually drove customers
to make purchases, rather than what they thought would make them do so. For the
top 20%, speed was key to driving incidence of new business whereas attitude
was the key driver for the lower tier. As before, analyzing the entire customer
base as a single group would have been misleading. Both the combined attitude/
reliability factor and the speed factor were key drivers for the group as a
whole, but the combined analysis would not reveal the fact that different
strategies should be used for different profitability levels.

Profitability Impact

Finally, the profitability impact of improving service quality varied
greatly in different customer tiers. An across-the-board service quality
improvement of the key drivers (approximated by a 0.1 increase in average
satisfaction with each driver in each tier) resulted in a projected 3.65%
increase in incidence of new accounts in the top 20%, but only a 2.00% increase
in the Lower tier. This result suggests that the Top 20% was almost twice as
responsive to the changes in service quality than the lowest 20%. When
examining the projected increase in average account balance, the results were
even more encouraging. The projected increase in average account balance was
$6.19 in the top 20%, but a meager $0.69 in the Lower tier. Here, the Top 20%
appeared to be almost 10 times as responsive to changes in service quality.
Finally, the projected increase in average profit per customer was 15.7 cents
in the top 20%, but 0.5 cents in the lowest 20%. Again, the top 20% provided a
substantially greater return on the service quality improvement. Of particular
interest was that simultaneous improvement of the key drivers for both tiers
produced a projected 89% of the new profits in the top 20%, while only 11% of
the new profits could be attributed to the lower 20%. This was an even higher
percentage than the current percentage.

The Need for More Tiers

The “80/20” two-tier scheme that many companies use assumes
that consumers within each of the two tiers are similar to each other. We
contend, however, that this “best” and “rest” customer
division is rarely sufficient. Just as we showed above the dangers in combining
data from two tiers–the results were muddied and the average did not represent
either tier well–we contend that the lack of distinction among the
“rest” of the levels misses important differences in consumers.

In the two-tier analysis we conducted and in the strategies of companies
that distinguish only between two groups, the customers in the large lower tier
are indistinguishable from each other. This likely masks differences in
demographics, perceptions and expectations of service quality, drivers of new
business, and the profitability impact of improving service quality.
Specifically, if we had observed the demographic differences across four tiers,
rather than two, we would most likely have seen that the lower the tier, the
younger the customer and the lower the average account balance. Many banks
realize that their least profitable customers are students who have no income
and are expensive to serve because they bounce checks and require extra
handling. In the two-tier scheme above, however, this group was not explicitly
articulated and we therefore cannot tell the difference between them and the
rest of the 80%.

Furthermore, in our example we cannot tell whether this lowest-tier
group views quality differently. Banks are coming to understand that
convenience is the critical factor drawing the youngest customers to banks.
Fortunately, a bank that knows this need focus only on that element of quality
with that segment, thereby reducing costs that would be spent if they were
grouped into the rest of the 80% who also wanted the attitude factor. We might
also have observed differences in drivers and incidence of new business,
and–most importantly–in the profit impact of investing in different tiers.

Most companies realize that their customer set is heterogeneous but
possess neither the data nor the analytic capabilities to distinguish the
differences. We suggest that it is highly worthwhile to do so, and to
distinguish more than just the traditional two levels of customers.

The Customer Pyramid

Large databases and better analytics are likely to reveal greater
distinction among the tiers. Once a system has been established for
categorizing customers, the multiple levels can be identified, motivated,
served, and expected to deliver differential levels of profit. In this section,
we illustrate a framework called the Customer Pyramid (see Figure 1) that
contains (for purposes of illustration) four levels. While different systems
and labels can be useful, our framework includes the following four tiers.

• The Platinum Tier describes the company’s most
profitable customers, typically those who are heavy users of the product, not
overly price sensitive, willing to invest in and try new offerings, and are
committed to the firm.

• The Gold Tier differs from the Platinum Tier in
that profitability levels are not as high, perhaps because the customers want
price discounts that limit margins. They might not be as loyal to the firm even
though they are heavy users in the product category–they might minimize risk
by working with multiple vendors rather than just the focal company.

• The Iron Tier contains customers that provide the
volume needed to utilize the firm’s capacity but whose spending levels,
loyalty, and profitability are not substantial enough for special treatment.

• The Lead Tier consists of customers that are
costing the company money. They demand more attention than they are due given
their spending and profitability, and they are sometimes problem
customers–complaining about the firm to others and tying up the firm’s
resources.

Note that this classification is very different from usage segmentation
done by airlines such as American Airlines because it is based on numerous
variables other than sales that are responsible for profitability of the tiers.
The specific factors vary across industries, but the Customer Pyramid is a rich
and robust concept across most industries and categories. For example, it can
be used successfully by companies selling directly to consumers, to
intermediaries (such as retail, wholesale and professional channels of
distribution), and to other businesses.

Platinum through Lead in the Retail Real Estate Industry

A top-twenty real estate and relocation franchiser has identified the
variables that account for profitability in the retail housing market. In
addition to the cost of the home (for which the franchiser and the broker share
a 6% commission), other variables include:

• the amount of time it takes to buy/sell a home
(which represents the opportunity cost of time and other commissions to the
realtor);

• marketing costs (brochures, open houses,
advertisements);

• customer motivation to purchase/sell (especially
high with relocations);

• price sensitivity of buyers, which may lead them to
negotiate a lower rate with the realtor;

• likelihood of repurchase; and

• referral potential.

Based on these factors, the company defined its Platinum customers as
those who: pay full commission on a home costing $500,000 or more; are
motivated to purchase within the next six months; have purchased more than two
homes in the past; and are members of social or professional networks that make
them candidates to refer other high-end buyers. Gold customers purchase homes
in the $250,000-$600,000 range but are more price sensitive than the top tier.
For example, some Gold customers want to negotiate on the commission or have
the realtors pay points at closing. Notice that some of these customers buy
homes that are in the same price range as Platinum customers but their price
sensitivity reduces their profitability. Gold customers are likely to refer
others, but the types of customers to be referred will are not as valuable to
the firm as those the Platinum customers refer.

Iron customers buy homes in the $100,000-$250,000 range, and include
retirees, young professionals, and families. The company knows that the young
professionals have higher lifetime value potential and therefore market to them
differently than they market to others in this group, who are likely to stay in
the homes they buy. In fact, young professionals who purchase homes at the
upper end are tagged as potential Gold customers and moved to that category
approximately five years after the purchase of a home (U.S. consumers move, on
average, every five years). Many Iron customers are relocations from other areas
and are pressed to buy homes quickly, making them good prospects for the
company despite home prices that are lower than the top two tiers. Lead
customers are high maintenance customers who are shoppers rather than buyers.
Some Lead customers spend as long as two years looking at homes, calling upon
realtors to show them homes when they have free time (many realtors complain
about the “my-husband-is-watching-football” Saturday shopper, who is
merely looking to be entertained rather than to buy). While they might be
looking at homes in all price ranges, the homes they buy are likely to be under
$100,000. These clients are often dissatisfied with what they see, making them
less likely than other tiers to send qualified referrals to the company.

While the real estate company is still refining the criteria for the
tiers. They view the sorting into levels as invaluable in qualifying current
and potential clients, and are developing different programs for reaching and
serving them differentially. They have recently developed an “expectations
assessment tool” that attempts to decide the appropriate customer tier
upon making the contract with the buyer or seller.

Differentiating Business Customers in the Marketing Research Industry

One of the most respected marketing research firms in the country
learned in the mid-nineties that it didn’t pay to treat all clients alike. In
addition to absolute dollar amount clients spent, they could be differentiated
on a number of other factors, notably the willingness to be a research partner
and commit to an annual budget. Firms that were willing to do so required very
low selling costs while firms that bought research on a project-by-project
basis required selling costs as high as 25% of the sales dollars they brought
in.

Platinum customers for this firm were defined as large accounts that
were willing to plan a certain amount of research during the year. The timing
and nature of this research could be anticipated, making it easy for the
research firm to smooth supply and demand. The Platinum clients tended to stay
with the company and were willing to try new services and approaches developed
by the research firm. Therefore, they bought across research service types
(e.g., field and tab services, statistical studies, exploratory studies) and
had minimal sales costs averaging only 2-5%. Best of all, they were willing to
serve as references for the firm, allowing the firm to give their names to new
clients wanting recommendations about the company. They were loyal to the firm
and used other marketing research companies only when they needed something the
firm could not provide.

Gold customers had similar profiles except that they were more price
sensitive, inclined to spread their research budgets across several firms.
While they were large accounts and had been customers for multiple years, they
were not willing to plan for a year in advance even though the marketing
research firm would give them better quality if they did. They provided
referrals but on an ad hoc basis.

Iron customers were moderate spenders and conducted research on a
project basis, sending out requests-for-proposals whenever they were conducting
studies. They were looking for the lowest price and often did not allow
sufficient time to perform the jobs. Because they had no overall plan, projects
came in at any time, sometimes in the off season (which helped the firm use
their capacity) but sometimes during peak season (which created difficulties in
allowing the firm to service its best customers well). Selling costs were high
because the firm continually kept in personal and mail contact hoping to move
these Iron customers up the Pyramid.

Lead customers spent little on research, conducted isolated projects
that were usually of a “quick and dirty” nature. Selling costs were
highest in this group, for most advertising and almost all speculative
presentations were targeted to these accounts and salespeople had to spend
multiple visits to get them. Furthermore, once they became clients, Lead
customers were “high maintenance” clients that cost the firm money
because they didn’t understand the process of research. They often changed
projects mid-stream and expected the firm to absorb the costs.

Recognizing the Differences among Doctors

Pharmaceutical companies depend on doctors to prescribe their branded
drugs over competitive or generic drugs. Rarely do end consumers make these
decisions for themselves. Faced with environmental threats such as HMOs,
hospital purchasing alliances, and pharmacy consortiums–all of which lowered
pharmaceutical profits–a major pharmaceutical firm strove to reduce its costs
and improve the efficiency of its marketing. The first step it took was to
recognize through careful analysis that all doctors were not equally profitable
customers. The company departed from industry practice and began to view
physicians as long-term strategic assets and thereafter targeted them based on
potential profitability across the company’s drug portfolio (rather than on
current sales within a single therapeutic category). In addition to the
cross-product focus, the firm also was able to calculate with some degree of
accuracy the selling costs per physician (e.g., $125 for a call from a sales
representative, $25 for product samples, $5 for share of advertising materials).
The key inputs to their analysis were:

• the volume of prescriptions a particular physician
generated (measured by data from a source called Walsh America, which captures
physician-level prescribing data at the retail pharmacy level);

• value of a prescription (from a source called IMS
Americas);

• cost of a sales call;

• cost of product samples;

• product gross margins, rebates, and discounts.

Market growth rates and share forecasts were provided by the marketing
department. Two other variables perceived by salespeople were also factored
in–the physician’s capability of having an impact on a territory through word
of mouth communication, and the physician’s perceived responsiveness to sales
efforts. Potential profit calculations were made for all physicians, and then
these calculations were used to sort the doctors into tiers.

The top tier consisted of the doctors most likely to give the greatest
return on the company’s sales investment. Contribution margins for the
physicians were highest in this group and costs were low enough that profits
exceeded that of the other groups. Importantly, these were physicians who were
willing to see sales representatives (and thus were “sales
sensitive”). Only 10% of the physicians fell into this top tier. The Gold
physicians were high-profit physicians that were relatively inaccessible,
either because they were unresponsive to sales efforts, at the end of their
careers (hence their potential was not as high) or lived in geographically
distant areas. While this group accounted for almost 35% of physicians, the
company did not allocate salespeople to them because of the low payback;
instead, they handled this group through marketing efforts using the telephone
or mail. Because the marketing approaches were less expensive than personal
selling, the profit margins were sometimes close to those of Platinum doctors
although the sales volumes were lower. Doctors in the Platinum and Gold level
tended to be the influencers/opinion leaders among their peers.

The Iron doctors were new physicians that were vital to the future of
the company. Typically, they were evaluated as such based on judgments of their
sales representatives. If the representatives thought the doctors had potential
to influence others or would be responsive to sales efforts, they were
classified as Iron. If not, they were classified as Lead. Sales managers
reviewed the classification of the two lower groups on an annual basis to
assure that salespeople were accurate in their assessments.

The company’s efforts to target physicians paid off quickly. Salespeople
from territories high in Platinum doctors tended to have bonuses 10-25% higher
than average, while those from territories heavy with Lead customers received
bonuses 4-7% below average. Prior to the targeting, the bonus spread was
significantly smaller–than 2-5% higher in Platinum and less than 1% below
average in the Lead group.

When Should a Firm Use the Customer Pyramid?

From the firm’s point of view, the Customer Pyramid is desirable
whenever the company has customers that differ in profitability but is
delivering the same levels of service to all customers. In these situations,
the firm is using limited resources to stretch across a wide group of
customers, possibly under-serving its best customers. In each of the following
conditions, it makes financial and practical sense to implement the Customer
Pyramid approach.

• When service resources, including employee time,
are limited. One of the most important reasons for ascribing to the Customer
Pyramid is to prevent the undesirable situation in which a company’s best
customers do not obtain the service they require because the company is
expending too much time and effort on its least profitable customers. A
restaurant would not want to fill up all its tables with students purchasing
coffee with endless refills when customers who purchase soup-to-dessert dinners
are kept waiting. Whenever any resource, such as employee time, is limited, a
firm must identify the best use of the limited resource. This situation occurs
frequently in professional services such as consulting, accounting,
advertising, and architectural design. A firm has only so much professional
time available and its allocation must be done carefully so that the best
customers are not kept waiting for their jobs while smaller and less profitable
customers are served.

• When customers want different services or service
levels. In many industries, particularly those with high technology or
information technology offerings, customers have divergent requirements and
aptitudes for service. One telephone company, for example, viewed its business
customers as being comprised of three groups: sophisticated CIOs who wanted to
configure their own systems and needed minimal service assistance from the
vendor; middle managers of large firms who wanted to purchase complex systems
but needed considerable consulting to develop the best configuration; and CEOs
of small firms who wanted sturdy, competent systems that were easy to
understand and that included basic maintenance service. The three decision
makers had completely different requirements; treating them with the same
levels of service at the same high price would not only be inefficient, but
ineffective as well. Serving these different customers involves widely
different costs that are wasted if all customers are treated the same way.

• When customers are willing to pay for different
levels of service. Package delivery services such as Federal Express charge
varying rates based on the type of delivery and the speed with which a package
is delivered. The different types of delivery include express package service
(under 150 pounds), express freight service (over 150 pounds), FedEx Letter,
FedEx Pak, FedEx Box, and FedEx Tube, all of which have different prices
associated with them. Speeds of delivery include FedEx Priority Overnight,
FedEx Standard Overnight, and FedEx 2-day, each with different prices. A
customer can also purchase Saturday delivery and special handling–as
expected–at additional cost. Customer sensitivity to these different services
is high, leading to a willingness to pay considerably more or less depending on
the desired delivery and speed.

• When customers define value in different ways.
Customers define value in one of four ways: value is low price; value is
whatever a customer wants in a product or service; value is quality divided by
price; and value is all that a customer gets for all that he or she gives.(n13)
In addition to monetary price, customers also consider non-monetary prices such
as time, effort, convenience, or psychic costs. When a service company has
customers with all of these definitions of value, tiers of service can be
designed to capture the best financial returns for the company depending on
what the customer expects in terms of value. Perhaps the first value definition
(value is low price) would cover the company’s lowest level or Lead customers;
this segment would be willing to accept less in exchange for paying less.
Customers with the second value definition (value is whatever I want in a
product or service) might be Platinum customers because they are not price
sensitive. If their needs mesh with high-margin services the firm can provide,
both buyer’s and seller’s needs are met. In between these two levels fall the
Gold and Iron segments with value definitions that are both service- and
price-sensitive, leading them to be more profitable than the Lead tier but less
profitable than the Platinum tier.

• When customers can be separated from each other.
Firms are and should be sensitive to the fact that customers in the lower tiers
of the pyramid will be angry if they see other customers receiving better
treatment than they receive. Unless the reason is readily apparent for service
differentials (such as a 15% discount for seniors at a restaurant), the
customers in different categories should not know that those in other tiers are
viewed as different or are receiving different levels of service. As an
example, telephone companies such as AT&T now have state-of-the-art
customer service centers that can immediately identify which tier customers fit
in when their call comes in to the customer service center. These automatic
systems immediately route customer calls to different centers based on the
value of the customer to the company. Once there, service standards such as
length of time spent on a customer call differ depending on the tier of
customer.

• When service differentials can lead to upgrading
customers to another level. On the other hand, there are substantial benefits
in some services for customers clearly seeing what other customers receive. For
example, main cabin airline customers note that the services in the first-class
cabin are better than what they receive but the difference is substantiated by
the obvious fact that those customers paid more for their seats. Another reason
why customers are in first class is that they receive complimentary upgrades
for being frequent travelers. Armed with this knowledge, otherwise non-loyal
airline travelers may be motivated to consolidate their airline trips on a
specific airline to be able to take advantage of these benefits.

• When they can be accessed either as a group or
individually. The traditional marketing strategies of product, price,
promotion, and place need to be adapted for the different tiers. Instead of
viewing the market as a uniform group of customers with similar potential, the
firm needs to view them as distinct groups with differing potential. At its
best, this means developing different marketing strategies for each tier,
especially different strategies for price and offering. To do so, the firm must
be able to access the customers selectively.

Customer Alchemy

Customer alchemy is the art of turning less profitable customers into
more profitable customers. It can take place at any tier along the Customer
Pyramid, but is more difficult at some levels than at others. For example, it
is very difficult to move Lead customers up to Gold or Platinum tiers, and it
is often necessary to “get the Lead out” rather than try to move
those customers up. If the decision is made to keep Lead customers, the
strategies used are typically different than those used at other tiers.

Turning Gold into Platinum

The most important requirement for turning Gold customers into Platinum
customers is to fully understand them and their individual needs. With an
industrial or business-to-business firm and a dedicated sales force, this need
is often met because the salesperson knows the business well enough to stay
constantly in touch with the client and to anticipate his or her needs. This
customer intimacy, when effective, allows the company to move the customer to a
higher tier because the firm can develop offerings that satisfy the client’s
needs, identify existing ways to serve the client better, and communicate in
the right way at the right times to clients.

When a company has a larger number of customers, the process of turning
Gold into Platinum may seem more daunting but still involves the same basic
foundation: building information profiles of customers that form the basis for
becoming a full-service provider of whatever the firm can offer. Building these
profiles may involve collecting and consolidating existing information about
the customer’s history with the firm, including usage and customer satisfaction
information. Alternatively, profiles may involve conducting very individualized
customer research such as personal interviews or customer expectation sessions.
Only when company fully understands its Gold customers can it design strategies
to turn them into Platinum customers.

The following strategies are recommended for turning Gold customers into
Platinum customers.

Become a Full-Service Provider

Home Depot, the U.S. hardware giant, has a strategy for making its good
(Gold) customers into great (Platinum) customers. The highly successful
hardware superstore, which sells to virtually all levels in the Customer
Pyramid, has a new strategy for two groups of high potential
customers–traditional customers who want to make major home renovations and
housing professionals such as managers of apartment and condominium complexes
and hotel chains. Together, these groups spend about $216 billion every year
and Home Depot wants customers to spend all of it in its stores by becoming a
full-service provider, offering everything these customers could possibly need
to do their jobs.

The cornerstone of its strategy is the creation of Expo Design Centers.
The design centers not only show off the expanded line of physical products the
company offers but configure the products into finished and polished showrooms.
Rather than just having row upon row of nails, hammers, and tile, the store is
creating a showplace for upscale renovation, including complete kitchens with
state-of-the-art appliances, finished baths, and antiques.(n14) Expo is a
one-stop-shopping location for major renovations, which usually require
homeowners to assemble a group of contractors and designers, then make separate
trips to buy tiles, materials, drapes, appliances, and the like. All of these
are now available at an Expo, making it unnecessary for a member of their
target segments to buy from any other store to do their renovations.
Industry-certified designers and project managers oversee the entire project from
beginning to end, making even general contractors expendable. With this
strategy, Gold customers become Platinum customers, getting everything they
want from their full-service supplier, Home Depot.

Provide Outsourcing

One of the best examples of moving customers from Gold to Platinum
levels involves outsourcing, taking on an entire function that a customer firm
used to perform for itself and providing it for them. From payroll and
accounting to personnel and even strategy,(n15) outsourcing firms are doing for
their clients what is either too costly or specialized for them to do
themselves. In these situations, the nonmonetary costs to the client firms of
engaging in these activities reduce their ability to perform their core
competencies. The effort involved, for example, in staying abreast of new
information technology, maintaining systems, fixing hardware and software
problems, and keeping qualified staff all become an interference with the
firm’s true purpose. In these and other cases of outsourcing, a supplier firm
can perform these functions for a customer, thereby tying the customer to the
organization and making the customer’s business predictable, increasing their
value to the company.

Increase Brand Impact by Line Extensions

Women’s clothing is an area where few companies “own”
customers in the sense that customers buy predominantly one brand and would
therefore be considered “Platinum” customers. Liz Claiborne, the
world’s largest women’s apparel maker and marketer, however, has changed this
customer behavior in its key segments. The company bonded with the female baby
boom generation, being one the first companies to target them and truly
understand them and their needs. Recognizing that baby boomers were a
physically fit generation that didn’t want to appear to age, the company
created clothing that allowed customers to continue to appear slim despite a
few added pounds. It convinced its target group that it really knew them,
thereby establishing a fit with them both literally and emotionally. Then the
company very successfully extended its product lines: Liz Collection for
professional clothing, Liz Wear for casual clothes, Elizabeth for large women,
Dana Buchman for women who can afford designer clothing. The company was so
successful in its strategy that it extended its lines into pocketbooks, shoes,
belts, jewelry, and even perfume.

Create Structural Bonds

Structural bonds (or learning relationships) are created by providing
services to the client that are frequently designed right into the service
delivery system for that client. Often structural bonds are created by
providing customized services to the client that are technology-based and serve
to make the client more productive. Allegiance Healthcare Corporation, a
spin-off of Baxter Healthcare, provides an example of structural bonds in a
business-to-business context. The company has developed ways to improve
hospital supply ordering, delivery, and billing that have greatly enhanced
their value as a supplier. They created “hospital-specific pallet
architecture” that means that all items arriving at a particular hospital
are shrink-wrapped with labels visible for easy identification. Separate
pallets are assembled to reflect the individual hospital’s storage system, so
that instead of miscellaneous supplies arriving in boxes sorted at the
convenience of Allegiance’s needs (the typical approach used by other hospital
suppliers), they arrive on “client-friendly” pallets designed to suit
the distribution needs of the individual hospital. By linking the hospital
through its ValueLink service into a database ordering system, and providing
enhanced value in the actual delivery, Allegiance has structurally tied itself
to its over 150 acute-care hospitals in the United States. In addition to the
enhanced service ValueLink provides, Allegiance estimates that the system saves
its customers an average of $500,000 or more each year.(n16)

An excellent example of structural bonds in business-to-consumer markets
is Hallmark’s Gold Crown Card program that identifies what each customer values
about his or her relationship with Hallmark as a platform for turning him or
her into a Platinum customer. After enrolling at any Hallmark store, customers
are immediately mailed high-quality plastic cards that can be used within a
month to earn bonus points. Thereafter, for every dollar spent and for every
Hallmark card purchased they earn points that accumulate and turn into dollar
savings. At 300 points per quarter, a customer joins the equivalent of a Gold
tier, receiving a personalized point statement, a newsletter, Reward
Certificate, and individualized news of new products and events at local
stores.

In 1996, Hallmark created its Platinum level for the very top 10% of
customers who buy more cards and ornaments than others. They are sent elaborate
mailing pieces with gold seals and new membership cards clearly identifying
them as preferred members. Along with amenities (such as longer bonus periods
and their own private priority toll-free number), the company communicates with
them individually about the specific products they care about. Buyers of
Christmas Keepsake ornaments receive specialized information about them,
whereas heavy buyers of cards receive free cards to introduce new lines.
Because these communications are not programmed, customers experience surprise
and delight.(n17)

Results have been impressive. In addition to over 50 consecutive months
of share gains since inception of the program, the revenue represented by Gold
Crown Program (in our terminology Platinum) members was more than a billion
dollars in 1997 and over $1.5 billion in 1998. Member sales represent 35
percent of total store transactions and 45 percent of total store sales.(n18)

Offer Service Guarantees

Because service problems and dissatisfaction lead to customer
defections, companies must use the most powerful methods to find out when
service problems occur and then to resolve them quickly and completely.
Possibly the most effective strategy for accomplishing this is the service
guarantee, whereby a company assures customers that they will be satisfied or
else they receive some form of compensation commensurate with their problem.
While many forms of service guarantees exist, and cover different aspects of
service (meeting deadlines, delivering a smile, achieving reliability), the
type of service guarantee most relevant for the very best customers is a
complete satisfaction guarantee. This can take several forms, but the form that
is best for the customer assures satisfaction and, lacking satisfaction,
promises the customer that any problems that occur will be fixed immediately.
Strategies exist for effective guarantees–they should, for example, be easy to
invoke and have a clear payoff–and these should be followed to create the very
best guarantee possible. That way, Gold customers will have no reason to leave
and will want to stay and become Platinum customers.

Turning Iron into Gold

Customer alchemy can also change something ordinary (a less profitable
Iron customer) into something valuable (a more profitable Gold customer). There
are many ways to turn Iron customers into Gold customers. The foundation
involves finding out what is most important to the Iron customers–not assuming
that it is the same thing that is important to Gold customers–and then
attending to the specific factors that drive the Iron customers’ satisfaction
and behavior. With this lower level of customers, it is rarely necessary to
find out what makes each individual customer satisfied. Instead, it is critical
to find the key drivers of the relationships across the customers in the tiers.
In our example, we saw how improving the key driver of the lower 80% (attitude)
could increase both incidence of new business and volume of new business,
thereby turning some lower-tier customers into upper-tier customers. Once we
identify these factors, we can use one of the following strategies to increase
usage and profitability of those customers.

Reduce the Customer’s Nonmonetary Costs of Doing Business

Since the idea in the Customer Pyramid is not to reduce price and
thereby lower profit margins, a company should constantly be looking for ways
to lower the nonmonetary costs of doing business with customers. An excellent
approach to this strategy involves reducing the hassle and search costs that
customers associate with making purchases in many high-technology categories
today. Small businesses, for example, have tremendous difficulty deciding what
forms of communication technology to buy and from which suppliers. So many offerings
and combinations of offerings exist and a plethora of providers constantly
besiege customers with differences that are difficult for them to discern.
Alltel, a full-service high-technology communications firm, offers an answer
that works very well for small businesses and individuals. A customer can
obtain all three components–paging, wireless, and long distance–from the
company, have it all appear on the same bill, and deal with all service
problems easily by having only one customer service department for all three
services. In doing so, the company has also increased its business with the
customer, as it now obtains not just the customer’s paging business or long
distance business or wireless business, but all three. The costs of dealing
with the customer are reduced as well, because handling a single customer with
three services costs less internally than handling three different customers,
each with a single service. The customer is now a Gold customer rather than an
Iron customer and is far more strongly linked into the firm because its
associations cross service categories.

Add Meaningful Brand Names

One of the most effective strategies some discount retailers have used
recently to turn Iron customers into more profitable Gold customers is to create
a brand-within-a-brand image in their stores. Typically, this involves
associating product lines in the stores with more favorable brand images than
those of the store itself. For example, when K-mart was working to improve its
image and profitability, it affiliated with Martha Stewart to manufacture and
market an entire line of household soft goods such as sheets and towels. The
line carried Martha Stewart’s name and was priced considerably higher than
other goods in the same category in K-mart. Rather than making small profit
margins on these items, the company began to make much larger margins. It also
generated loyalty and multiple purchases because the line of products was
color-coordinated. Customers wanted to buy these products not because they were
associated with K-mart but because they were affiliated with a very favorable
and well-known person. By associating with this favorable brand, the store
created a brand personality where none existed in the past and was able to
improve the profitability of that product category in the store. As it became
clear that the branding was successful, the company extended it beyond its
original bounds to include other products.

Become a Customer Expert through Technology

One of the best examples of turning Iron customers into Gold customers
involves the battery of strategies used by Amazon.com, the online bookstore.
Initially, the company focused on being able to get virtually any book that the
customer wanted. Once it established this ability, it recognized that
developing profiles of individual customers was a winning strategy. Once a
customer had purchased something from Amazon.com, the company started to build
its information database about the customers’ preferences. Whenever a customer
ordered a book, the database produced a list of books from the same author and
on similar topics that could expand the purchase. These suggestions were often
very welcome to the customer, who might not have been aware of the other books.
After multiple purchases, the database was designed to make suggestions as soon
as the customer signed on, again increasing purchases. Before long, the company
discovered that customers who bought books also bought CDs and movies, and it
expanded its product lines to satisfy these other needs of its customers. To
top the strategy off, the company asked customers if they wanted to receive
information about products that were new and dealt with their interests. Using
the customer’s e-mail address, Amazon.com thereby created ongoing communication
with customers about their personal interests, making it so easy to deal with
the company that customers began spending all their book dollars–as well as CD
and movie dollars–at Amazon.

Become a Customer Expert by Leveraging Intermediaries

Caterpillar, the world’s largest manufacturer of mining, construction,
and agriculture heavy equipment, owes part of its superiority and success to
its strong dealer network and product support services offered throughout the
world. Knowledge of its local markets and close relationships with customers
built up by Caterpillar’s dealers are invaluable. “Our dealers tend to be
prominent business leaders in their service territories who are deeply involved
in community activities and who are committed to living in the area. Their
reputations and long-term relationships are important because selling our
products is a personal business.”(n19)

Develop Frequency Programs

Most retail firms can benefit from frequency programs that encourage
customers to spend more with the company in order to receive special benefits.
Convenience-item retailers like VCR rental companies can effectively use
frequency programs. Blockbuster, for example, developed a program called
Blockbuster Rewards. For a one-time payment of $9.95, a customer is able to get
benefits that include: rent five videos, get one free every month; two free
video rentals a month just for joining; and one free video rental with each
paid movie or game rental every Monday through Wednesday. Notice that it is not
the one-time fee that makes the Blockbuster Rewards customer a Gold
customer–it is the frequent use of the service. The firm is motivating the use
of capacity that it cannot otherwise sell, and encourages customers to turn to
Blockbuster for all their video rental needs. Blockbuster did not drop the
price on its video rentals, which would lower its profits. In fact, the company
increased prices and reduced the number of days a new video could be rented
from two to one.

Create Strong Service Recovery Programs

A strong service recovery system–one that catches all possible service
errors and corrects them promptly and appropriately–is critical to turning
Iron into Gold. The best recovery systems proactively identify when customers
who make purchases are let down by a company’s product or an interaction with
someone from the company. A company must have processes in place to rectify
these situations, whether they involve billing, delivery, or any other
company-customer interface.

Getting the Lead Out

Allocating more effort to customers that are more valuable implies
allocating less effort to customers that are less valuable. In particular, Lead
customers weigh the company down. They are the customers who don’t pay their
bills. They are the college students who bounce checks. They are the telephone
customers who run up large long distance bills that require the company to pay
agencies to collect. They are the industrial firms who make purchases and then,
in disputes over deliveries or quality, let their invoices go 60 or 90 days or
longer.

Lead customers are also those who buy so little that dealing with them
costs more than they are worth. Marketing and personal selling expenses may
exceed the profit on small business accounts. Transaction costs for customers
who place orders for one or two items in a year make them unprofitable. As is
sometimes the case, the smallest customers also expect the most in terms of
service, making the cost of handling them far higher than the profits received
from them.

Attempting to move customers from Lead to higher categories is not an
easy task, and it is not always recommended. Only if the future potential of a
Lead customer is known to be high (for example, the MBA student who is
currently an unprofitable banking customer) is enduring a period of customer
unprofitability justified. During this time, the firm could attempt to make
these customers more profitable, something that can be accomplished in two
basic ways: prices can be raised or costs to serve the customers can be
reduced.

Raise Prices

One effective approach is to increase prices to Lead customers by
charging for services they have been receiving but not paying for. A software
company that has been giving free technical help to Lead customers (who, by
definition, typically abuse the privilege) can begin to charge for the service.
True Lead customers will leave rather than pay; others may choose to stay and
thereby join the Iron category because of the added revenue they contribute to
the firm.

An excellent example of this strategy is being used by a number of both
large and small telephone companies with customers who don’t pay their bills.
Typically, this segment of customers owes one of the larger companies a
considerable amount of money (greater than $300) in long distance charges and
has not made progress in paying it off. Their phone service has been cancelled
and they no longer can get even local service. Enter companies like E-Z Tel of
Dallas and Annox of Pleasant View, Tennessee, who offer pre-paid local service.
To get the service, a customer has to go to a local pawnshop and plunk down $49
in cash plus $2 for a money order (compared to $17 for a regular customer). The
customer then receives local phone and 911 service for the next month, despite
owing a debt to a long distance company. This niche market, consisting of about
6 million households that go unserved because of unpaid phone bills, offers
considerable profit at these higher prices. The small companies that serve this
market buy service from a local phone company at a 20% discount and resell it
at a 300% premium. To these customers, giving up more in terms of price is not
the issue–having the telephone service is of most value to them. While the
examples we provide here are small independent companies, many large telephone
companies are starting to offer the service to compete in this market because
it is profitable. In most cases, they are changing the brand name that they
sell the service under to avoid undermining their image in other tiers.(n20)

Reduce Costs

The alternative to raising prices among Lead customers is to reduce
costs and find ways to serve the segment more efficiently. Banks have
accomplished this by reducing the number of full-service branches with tellers
and staff and replacing them with ATMs that are able to service customers for
far less money. Many banks have identified the customer group that is on the
bottom tier of the Customer Pyramid as college students. These customers have
very little money of their own, cannot afford savings accounts, and often shop
for and obtain free checking accounts. While banks realize that these customers
may someday be good customers–and therefore do not want to alienate them–they
also recognize that serving them is expensive. They therefore are developing
strategies for dealing with these customers in inexpensive ways. For example,
they encourage the students to bank by telephone, ATM, or the Web, sometimes
going so far as to require a fee if they visit tellers more than two or three
times a month. They require the students to have overdraft checking, a money
maker for banks, to avoid the high cost and inconvenience (to the bank) of
bounced checks. They charge high fees when monthly payments are not on time.

Many business-to-business firms that previously served all customers
with personal salespeople now handle only Platinum or Gold customers that way,
serving Iron and Lead customers with inside salespeople. IBM made a
revolutionary switch from its historical way of dealing with customers when it
realized in the early 1990s that it was highly inefficient to serve all small
customers with the personal service that had characterized the firm in the
past. Rather than have customer engineers personally fix old machines for
unprofitable customers for free, the company started to charge for these
repairs as well as develop ways to fix machines remotely, thereby saving money.

Get the Lead Out

It is very difficult to move most Lead customers from the low tier to a
higher tier because they have characteristics that make them less desirable
customers. They either don’t pay their bills, don’t have much money to spend,
don’t need what the company offers, or don’t have the qualities that make them
loyal to companies. If either or both of the two approaches discussed above are
not effective, then the wisest solution is often for the company to try to free
itself of them. The firm must do this carefully so that customers do not spread
negative word of mouth that could deflect potentially profitable customers from
choosing the firm.

Serving Customers According to Their Tiers

Once the tiers have been established, various elements of service
strategy can be adjusted to the tiers. For example, the need for customer
information varies by tier. With Platinum and Gold customers, it is desirable
to know individually what each customer wants so as to develop a custom profile
of each customer’s history, preferences, usage, and expectations. For Iron
customers, on the other hand, segment preferences and perceptions are usually
adequate. Lead customers may be studied for different purposes altogether, such
as to examine ways that they may be served more efficiently and with less cost.

The most important marketing task implied by the Customer Pyramid is to
serve the most profitable customers in ways that extend and enrich their
relationships with the company. Careful consideration should be given to the
product and service needs of these customers and to their value propositions.
However, if the firm is to maintain profitability among these tiers, it must be
careful not to focus on improving the value proposition mainly by discounting
and other price-related strategies. Lowering prices reduces the profitability
of the segment, often unnecessarily, for price may not be high on the list of
requirements for this segment.

Profit Implications of Moving Customers Up the Pyramid

The use of the Customer Pyramid can supercharge a company’s profits as
it eliminates unprofitable customers and converts lower-tiered customers to
higher-tiered customers using targeted and efficient strategies. A major
automotive manufacturer has used a four-tier Customer Pyramid approach to
identify its dealers’ best customers, their average number of service visits,
and their spending per visit. In one of its major dealerships, the service
revenue differences across these groups (when number of visits and average
amount spent/visit are considered) are striking: $3,743 for Platinum (6,554
customers), $2,713 for Gold (2,609 customers), $620 for Iron (2,720 customers) and
$263 for Lead (19,549 customers). In speaking to the CRM manager at this global
automotive company we have learned that they are still working on the profit
and CLV implications of this analysis, but have not achieved it yet. However,
even examining revenue shifts provides insight into the power of the model. The
implication of moving even 20% of the Lead customers to the Iron category is an
improvement of $697,899 in revenue. Moving 10% of the Iron to Gold improves
revenue by $565,110.

This same manufacturer has also examined the gross profit (at another
dealership) from distinct profit tiers of customers–those customers who have
no service performed at the dealership (Iron), those who have some service
(Gold) and those who have all of their service performed at the dealership
(Platinum). In a comparison of their Gold and Platinum customers, the company
found that Gold customers generate $1674 in gross profit to the dealership,
while Platinum customers generate $2,259. We can see that each Gold customer who
is motivated to have all of his/her service performed at the dealership (moved
to Platinum) results in an additional $585 in gross profit to the dealership.
If we can motivate 10-20% of such customers to change their behavior in this
way, we have the opportunity to increase gross profit by almost $1 million–not
a trivial amount for an automobile dealership. As these real-life examples
illustrate, there is a tangible benefit to understanding what motivates
customers at each tier of the pyramid and to crafting marketing strategies to
motivate customers to move “up the Pyramid.”

Summary

Customer profitability can be increased and managed. By sorting
customers into profitability tiers (a Customer Pyramid), service can be
tailored to achieve even higher profitability levels. Highly profitable
customers can be pampered appropriately, customers of average profitability can
be cultivated to yield higher profitability, and unprofitable customers can be
either made more profitable or weeded out. Tailoring service to the customer’s
profitability level can make a company’s customer base more profitable,
increasing its chances for success in the marketplace.

Notes

(n1.) R. Brooks, “Alienating Customers Isn’t Always a Bad Idea,
Many Firms Discover,” Wall Street Journal, January 7, 1999, pp. A1 and
A12.

(n2.) V. Zeithaml, “Service Quality, Profitability, and the
Economic Worth of Customers,” Journal of the Academy of Marketing Science,
28/1 (Winter 2000): 67-85.

(n3.) R. Buzzell and B.Gale, The PIMS Principles: Linking Strategy to
Performance (New York, NY: The Free Press, 1987).

(n4.) Zeithaml, op. cit.

(n5.) R.N. Bolton and J. Drew, “A Longitudinal Analysis of the
Impact of Service Changes on Customer Attitudes,” Journal of Marketing,
55/1 (January 1991): 1-9.

(n6.) R.T. Rust, A.J. Zahorik, and T.L. Keiningham, Return on Quality:
Measuring the Financial Impact of Your Company’s Quest for Quality (Burr Ridge,
IL: Irwin, 1994).

(n7.) V.A. Zeithaml, L.L. Berry, and A. Parasuraman, “The
Behavioral Consequences of Service Quality,” Journal of Marketing, 60/2
(April 1996): 31-46.

(n8.) R.N. Bolton, “A Dynamic Model of the Duration of the
Customer’s Relationship with a Continuous Service Provider: The Role of
Satisfaction,” Marketing Science, 17/1 (Winter 1998): 45-65.

(n9.) A.J. Zahorik and R.T. Rust, “Modeling the Impact of Service
Quality on Profitability: A Review,” in Terri Swartz et al., eds.,
Advances in Services Marketing and Management (Greenwich, CT: JAI Press, 1992),
pp. 247-276.

(n10.) G. Hartfeil, “Bank One Measures Profitability of Customers,
Not Just Products,” Journal of Retail Banking Services, 18/2 (1996):
24-31.

(n11.) D. Connelly, “First Commerce Segments Customers by Behavior,
Enhancing Profitability,” Journal of Retail Banking Services, 19/1 (1997):
23-27.

(n12.) R. Rust, V. Zeithaml, and K. Lemon, Driving Customer Equity: How
Customer Lifetime Value is Reshaping Corporate Strategy (New York, NY: The Free
Press, 2000).

(n13.) V. Zeithaml, “Consumer Perceptions of Price, Quality and
Value: A Means-End Model and Synthesis of Evidence,” Journal of Marketing,
52/3 (July 1988): 2-22.

(n14.) J.S. Johnson, “Home Depot Renovates,” Fortune, November
23, 1998, pp. 200-204+.

(n15.) James Brian Quinn, “Strategic Outsourcing: Leveraging
Knowledge Capabilities,” Sloan Management Review, 40/4 (Summer 1999):
9-22.

(n16.) Robert Hiebeler, Thomas B. Kelly, and Charles Ketteman, Best
Practices: Building Your Business with Customer-Focused Solutions (New York,
NY: Simon and Schuster, 1998), pp. 125-27. Discussed in V. A. Zeithaml and M.
J. Bitner, Services Marketing and Management (New York, NY: McGraw-Hill, 2000).

(n17.) F. Newell, Loyalty.com: Customer Relationship Management in the
New Era of Internet Marketing (New York, NY: McGraw-Hill, 2000), pp. 232-236.

(n18.) Ibid., p. 236.

(n19.) D.V. Fites, “Make Your Dealers Your Partners,” Harvard
Business Review, 74/2 (March/April 1996): 84-95.

(n20.) K. Schill, “Dial-a-Deal,” The News and Observer,
January 31, 1999, p. E1-3.

California Management Review Summer2001, Vol. 43
Issue 4, p118