Significance of Customer Portfolio Management in Modern Business Environment - Essay Example

?Significance Portfolio Management in Modern Business Environment Introduction Today the business world is facing too many challenges when it comes to rapidly changing customer needs and new business practices. In the new business environment, organisations cannot run their business successfully unless they are well informed about the needs of their different customer groups. In order to identify the changing customer preferences, firms are to manage their customer portfolios. Many advanced technologies are available today that can manage customer portfolios and thereby keep in touch with changing customer interests. Keeping well planned customer portfolios can strengthen customer relations and thereby customer retention for a long term. A loyal customer is an invaluable asset of any organisation that contributes to the accomplishment of the firm’s long term goals and objectives. Scholars reflect that efficient customer portfolio management at different levels of an organisation is a fundamental driver of strategic as well as financial success. The concept of customer portfolio can significantly contribute to the firm’s efforts to retain the profitable segments of its customers because customer portfolio is a potential way to achieve enhanced customer satisfaction. According to experts, “in much the same way that we can examine a portfolio of products or brands, the importance of customers as assets and investment centres mandates a similar portfolio analysis” (Hooley, et al. 2008, p.436). This paper will explore the concept of customer portfolio management. The paper will also discuss how a company can apply this concept in its strategic management. Concept of customer portfolio The term portfolio is often used by management professionals in the context of investments to represent the collection of assets owned by a person or an institution. With regard to customers, this term has a parallel meaning. A customer portfolio can be defined as “the collection of mutually exclusive customer groups that comprise a business’s entire customer base” (Buttle, 2009. p.125). In simple words, a customer portfolio encompasses different groups that make up a business’s customer base. For instance, Coca Cola’s customer portfolio comprises grocery stores, amusement parks, and restaurants. Thorough analysis of customer portfolios can assist a company to identify how a specific customer group is performing. To illustrate, customer portfolios can be beneficial for a construction company to evaluate the account receivable of home builder customer group to obtain a clear view of the level of financial risk, in case there is a slowdown in the market for homes. A company’s customer portfolio is comprised of customers who are grouped together based on or more ‘strategically important variables’ (Ibid). Generally each customer is linked to just one particular group in the portfolio. At one point, each customer is treated as unique and at another point all customers can be treated as identical (Ibid, p.125). While observing the corporate world, most of the firms are strategically positioned somewhere between these two points. Referring to various customer management theories, it may not be a good strategy to manage all customers in the same way unless such a policy makes strategic sense for doing so. Customers vary on the grounds of revenues and cost profiles and each customer has different tastes, preferences, and expectations (Yang & Peterson, 2004). As a result, a company has to manage customers in different ways considering their particular needs and wants. To make it more clear, customized product and face to face account management may satisfy the interests of some customers in the B2B context whereas standardized product and web-based self-service would be more effective in meeting the needs of some other customers. Undoubtedly, customers constitute an invaluable asset of any organisation regardless of its size and nature (Conejo, 2013). Unlike what many people think it is not factors like machineries, equipments, plant, building, or furniture that determine the strength of a business but the loyal customers. And, customers would remain loyal to the organisation only as long it meets their tastes and preferences (Ramzi & Mohamed, 2010). Evidences suggest that a company with strong customer base can easily survive market downturns and other unforeseen market contingencies. For instance, Apple is a company with strong customer base. The company has a large group of insanely loyal customers who are excitedly willing to promote the Apple products through online discussion forums and social networking sites, and to defend criticisms against Apple products and services. This strong customer base greatly assists the Apple management to promote its newly launched products and services without spending huge costs on product promotion. Similarly, mouth to mouth publicity is a potential tool of marketing, and this can be executed effectively only if the organisation is able to keep its customers satisfied. Evidently mouth to mouth publicity of products and services is more effective than television Ads or online promotion because here products/services are advertised by people who are satisfied from the shopping experience. This type of business promotion is really inexpensive, and hence it adds to the profitability of the organisation. Today companies cannot remain profitable unless they have a competitive edge over their market rivals. Customer relations can benefit companies to enhance their sales growth and to cut down promotion expenses (Parvatiyar & Sheth, 2001-2002); and, this is possible only by focusing particularly on customer portfolios. Since different customer segments have different needs and expectations, it is important to treat each customer group separately considering their customised needs. Recording of customer data is an effective strategy to be in line with changing customer interests and to ensure improved customer satisfaction (Bitner et al, 1997). Today customers increasingly rely on online trade taking advantages of time feasibility and other conveniences, and therefore it is easy for companies to record purchase trends of different customer groups. In other words, the use of advanced technologies would really benefit organisations to effectively manage their customer portfolio and to meet customer interests in the long run. Portfolio management Considering the relevance and necessity of customer portfolios in the current business context, business managers pay particular attention to customer portfolio management. The key aim of the customer portfolio management is to optimize business performance in terms of sales growth and enhanced customer profitability. Organisations manage their customer portfolios through offering differentiated value propositions to different customer segments. To illustrate, the UK based NatWest Bank follows a portfolio basis to manage its business customers efficiently and thereby improve the overall business performance (Buttle, 2009, p.126). The bank has grouped its customers into three segments on the basis of their size, lifetime value, and creditworthiness (Ibid). The bank’s management treats each cluster in the portfolio to a different value proposition. According NatWest Bank officials, this type of customer portfolio management has greatly assisted the organisation to meet its customer needs timely and adequately. Similarly, Apple uses an extensive mechanism to manage its customer portfolios and hence to meet stakeholder interests in the long run. Apple collects customer feedbacks from various sources like sales points, web, promotions, and various forms of fill up data. The top management gathers these valuable customer feedback and suggestions and analyses them to improve the future operations of the organisation. At the same time, the company pays specific attention to the confidentiality of the customer information. The company effectively uses social networking sites like Facebook and Twitter to reach a wider range of customer segments. Based on the information collected, the company segments its customers and provide them with improved shopping experience in the future. Using the previous customer interactions data, organisations like Amazon.com also give suggestions to its existing customers when they log in for a purchase. Evidently, such innovative customer portfolio management practices can assist firms to meet customer needs efficiently in spite of the fast changing business environment. As scholars point out, customer portfolio management is greatly assistable for organisations to identify profitable and unprofitable customer groups. It is obvious that organisation’s customer relationship managers keep complete and accurate data concerning customer activities over the past years. Such data are extremely beneficial for business managers to predict customer behaviour and to identify potential customer segments. According to Johnson and Selnes (2005), customer portfolio management can be simply referred to a process of creating value in all relationships, ‘from transactional to collaborative’ (cited in Beck, 2011, p.5). Customer portfolio management not only assists the organisation to ensure enhanced customer satisfaction but also improves shareholder values. Generally there are three variables used to construct and manage customer portfolio. The most common variable used in developing customer portfolio management is clearly the value of the customer to the company. The value may be financial or other. Since each customer is valuable to the company, the value created by each customer to the company may vary. The second variable in customer portfolio management is generally the warmth of the relationship, the measure of the value of the firm to the customer. Obviously, the extent to which the firm creates value for its customers would determine the warmth of relationship with the customers. Therefore, companies that pay particular attention to customer relationship management can maintain strong bonds with their customers. The third variable which is often considered in customer portfolio management is risk. The element of risk may be affected by the warmth of the relationship, and hence warmth and risk cannot be considered as fully independent variables. Risk is a very important factor in customer portfolio management because all the customers want to meet their tastes and preferences at minimum risks. Hence, customers would not be ready to bear much risk, and consequently it is a challenging task for managers to deal with customer portfolio management effectively. Customer portfolio management based on customer equity is one of the most commonly used approaches in this regard (Vogal, 2008). This approach is specifically recommendable for a fast growing market or a newly launched company because its primary focus is on customer acquisition (Ibid). In addition, the customer equity approach is really suitable for a market which is largely transactional because the value of customer relationships is relatively less in those market segments. If the company’s market operations include a series of individual projects, then the value of customer relationships would be low, and therefore managing customer portfolio based on customer equity can be the more apt approach. When considering the value of customer groups to the company, customer equity is the most appropriate measure. The customer equity model provides the organisation with a comprehensive framework for managing customers in accordance with their value to the firm. However, both the current value and the potential value have to be considered while following this practice. The main reason for this policy is that a customer’s future potential value may not be the same as the historic value. Generally, future potential value of a customer is measured in today’s money with the help of customer lifetime value or customer equity. Lifetime revenues and lifetime costs constitute the key drivers of customer equity. In many management contexts, lifetime revenues are divided into high revenue and low revenue, and lifetime costs are divided into high costs and low costs. According to one view, there are two types of customers such as “customers where the firm’s share of spend is already high, and customers where it is low” (Ryals, 2009, p.182). The main point of difference is that some customers are providing the company most of their business, and there is little scope for more business by managing these customers differently or designing new products or services for them. This group of customers is called commodity customers. In contrast to this, there may be some other customers whose share of spend is low. This group of customers is called uncommitted customers because most of their business is taken elsewhere. Those customers’ share of spend could be improved by managing them differently or introducing improved products for them. Strategic account management As Hooley and Graham (2008, p. 436) point out, powerful customers can exert greater level of pressure on marketers and it appears to be a potential issue for developing effective operational strategies in business to business contexts. The authors opine that strategic account management is a key approach to address this issue. Under this approach, the organisation partners with dominant or most important customers so as to avoid their resistance to strategy development. At the same time, it is to be noted that every customer may not necessarily provide good partnership prospects. Strategic account management must be supported by effective communications at different levels of the organisation. Evidences suggest that well structured strategic account management would assist the company to improve its customer relations in the long run. According to Hooley and Graham, there are two approaches such as direct channel and middle market to manage customer accounts strategically. The direct channel is generally considered as a potential way to market for smaller accounts having low service requirements. Internet and telemarketing are some prominent examples of direct channels. Here, the customer development strategy is characterised with moving some customer accounts toward the direct channel and moving some others out of the direct channel. Although the middle market addresses varying customer prospects, it specifically represents the customers having moderate service requirements (Ibid). The middle market reflects the most conventional buyer seller relationships. There are major accounts and strategic accounts in order to meet the needs of different customer segments efficiently and adequately (Ibid, p.437). Major accounts are maintained to serve interests of customers with high service requirements. In case of strategic accounts, collaborative and combined problem-solving policies can be effective to win strategic supplier status. It is important to notice that sales force strategies between major accounts and strategic accounts will be different. The BCG Growth-Share Matrix can be helpful for the effective management of customer portfolios. BCG matrix works based on the observation that business units of company can be categorised into four categories on the basis of combinations of market growth and market share. Since market growth is directly related to industry attractiveness, an increase in the market growth rate would contribute to the industry attractiveness. In the same way, relative market share is related to competitive advantage. The four classifications such as dogs, question marks, stars, and cash cows assist an organisation to identify where it stands in terms of market growth rate and relative market share. Obviously, customer is a factor which can have great influence on determining market growth and relative market share. BCG framework can extremely benefit organisations to review their customer management policies and to make appropriate changes on time. While considering the management of customer portfolios, it is better to have a detailed view of the key aspects of the management of marketing. The key elements of marketing management include market analysis, market planning, plan implementation, and market control. For a marketing manager, it is important to give particular focus to customers so as to complete every stage of the marketing campaign successfully. Customer feedbacks during the marketing campaign would assist the marketing manager to make proper amendments to the marketing tools employed. In order to successfully deal with market planning, the marketing manager must be conversant with changing customer interests and emerging market trends. Effective customer portfolio management would give managers an insight into the potential customer service approaches that would fit the changing tastes and expectations of modern customers. Recommendations A company can effectively use the concept of customer portfolio management to strengthen its customer base. This concept can be helpful for organisations to identify positive trends and to provide credit and up-sell and cross-sell offers to profitable customers. This practice in turn assists firms to improve their revenues. Effective application of customer portfolio management may also benefit organisations to reduce operating loss by performing risk trend analysis and scoring the probability of delinquency. In addition, this tool also informs companies when their customers are exposed to negative credit events. Based on this information, firms can develop more profitable business policies to address customer accounts that are performing badly. Above all these, this practice is particularly advisable for firms to identify and to take actions on troubled customer accounts in addition to recognising potential customers suitable for additional offers. Similarly organisations may also rely on consumer credit focused products to manage their customer account portfolios. This type of customer portfolio management may aid the organisation to have greater control over its portfolio by accessing credit based scoring models and relevant consumer information on a daily basis. Another major advantage of this tool is that it provides the management with 24?7 access to critical debt collection information. Finally trend analysis and long term customer retention are some other potential advantages of managing customer portfolios using consumer credit focused products. Data integrity would increase the firm’s confidence in the potentiality of its decisions and strategies. In addition, integrity of customer data is inevitable for the organisation to effectively recognise customer needs. Similarly, duplicate management is extremely important for understanding the true value of each customer. In the modern business environment, retail data systems face a series of intrinsic challenges and produce fragmented and duplicate customer data. Therefore, duplicate management is critical to rationalise the key performance information into a single and unique customer record. The well planned management of customer portfolios can greatly assist organisations to cut down their operating costs and improve the overall profitability. Detailed customer knowledge would benefit the top management to promote relevant and personalised customer interactions so as to increase revenues. In addition, household communication will trim down the costs associated with direct communication. In an organisational context, effective use of customer portfolios can reduce implementation costs and improve operational flexibility on the strength of configurable attributes through the system. Automated data management processes constitute a key feature of customer portfolio management that can reduce direct maintenance costs and improve total ownership costs. Therefore, the management of customer portfolios would assist an organisation to address real life challenges effectively and operate in line with changing customer interests. Conclusions Customer portfolio management is fundamental for a company or a business unit to manage its customer accounts. This approach will help the firm to identify its profitable and unprofitable segments of customers and the actual requirements of various customer groups. In addition, the concept is really effective in assessing the profitability and stability of the business in various account categories. References Buttle, F. 2009. Customer Relationship Management: Concepts and Technologies. UK: Routledge. Beck, T. 2011. The Importance of Customer Relationship Management in Business Markets (B2B). US: GRIN Verlag. Bitner, M.et al. 1997. “Customer contributions and roles in service delivery”. International Journal of Service Industry Management, 8 (3): 193-205. Conejo, F. 2013. "The Hidden Wealth of Customers: Realizing the Untapped Value of your Most Important Asset", Journal of Consumer Marketing, 30 (5): 463 – 464. Hooley, G. et al. 2008. Marketing Strategy and Competitive Positioning. UK: Pearson Education UK. Parvatiyar, A & Sheth, J. N. 2001-2002. “Customer Relationship Management: Emerging Practice, Process, and Discipline”. Journal of Economic and Social Research 3(2): 1-34. Ryals, L. 2009. Managing Customers Profitably. US: John Wiley & Sons. Ramzi, A. M & Mohamed, B. 2010. “Customer Loyalty and the Impacts of Service Quality: The Case of Five Star Hotels in Jordan”. International Journal of Human and Social Sciences, 5 (13). 886-892. Vogel, V. Et al. 2008. “Customer Equity Drivers and Future Sales”. Journal of Marketing, 72, (6): 98-108. Yang, Z & Peterson, R. 2004. “Customer Perceived Value, Satisfaction, and Loyalty:The Role of Switching Costs”. Psychology & Marketing, 21(10):799–822. Read More