The Customer is Always Right But is the Customer Always Worth It?
Phil Kenkel
Bill Fitzwater Cooperative Chair
A large producer tells you that you can get his fertilizer business but only by offering a deep
discount. Common wisdom tells us that the customer is always right. Additional customers
drive scale economies and asset utilization. This leads to the logical conclusion that cooperatives
should work to attract new customers and members. Customer focus is a great concept which
leads into discussions of customer segmentation and strategies for specific customer group. The
discussion is not complete without considering if there could be customers not worth attracting.
Studies of customer profitability confirm the 80-20 rule. A minority of customers provide the
majority of profits. They also suggest that the rule ought to be 20-70-10. Twenty percent of the
customers are highly profitable, 70% are only moderately profitable and 10% are a net loss. The
unprofitable segment can be small customers (a necessary part of doing business) or large
accounts where the firm has discounted too deeply to win the business.
How far should a cooperative go to attract customers? Cooperatives create value when they
generate profits. Investing in a potential customer is no different from investing in an asset.
Time, effort and even discounts are justified when the long term profit is sufficient to recap the
investment. The business term is “customer lifetime value” which represents the forecasted
profits from a potential customer. Since future buying patterns (customer loyalty) can’t be
guaranteed, the forecasted future profits must also cover a risk premium. This concept helps to
explain why a bank might work to recruit students as customers. In the short term they are
unprofitable but they have the potential to develop into high earning, profitable depositors.
This concept has some practical considerations for cooperatives. Just like students, young
producers have a high customer lifetime value and efforts to attract them to the cooperative can
have a high payoff. Attracting a customer by explaining the entire cooperative value package
can be a good investment because their future buying patterns may be stable. Investing time,
efforts and incentives to attract a customer solely on the basis of price is a more risky investment
because their future buying patterns are less certain.
Cooperative customers are both member-owners and customers. From an ownership lens every
member is important and equally valuable. From the customer lens some customers have more
value than others. Concentrate on attracting customers with a high lifetime value to the
cooperative.
11-1-2012