Staff Balance Blog

Managing Customer Behaviour

In May 2001, Professor Robert Kaplan and a team from Harvard Business School identified the behaviours of customers who tend to be highly profitable and unprofitable.

The team also discovered that it is impossible for a large customer to be marginally profitable. Large customers tend to be either highly profitable or very unprofitable.

So what are the behaviours of profitable and unprofitable customers. It comes down to the cost-to–serve. High cost-to-serve tend to be less profitable, low cost-to-serve tend to be more profitable.

High cost-to-serve customers
  • Order customer products
  • Small order quantities
  • Unpredictable order arrivals
  • Customised delivery
  • Change delivery requirements
  • Manual processing
  • Large amounts of pre-sales support
  • Large amounts of post-sales support
    (installation, warranty, field service, training)
  • Require company to hold inventory
  • Pay slowly (high accounts receivable)
Low cost-to-serve customers
  • Order standard products
  • High order quantities
  • Predictable order arrivals
  • Standard delivery
  • No changes in delivery requirements
  • Electronic processing, zero defects
  • Little or no pre-sales support (standard pricing and ordering)
  • No post-sales support
  • Replenish as produced
  • Pay on time

You can determine and manage customer profitability by drilling down into your data to understand which customer
behaviours or internal processes are costing the company and negatively impacting the bottom line.
Once you have the data in front of you, there are three components that you can use to improve customer

  • Process – improving how you deliver to your customers
  • Pricing – appropriate price levels to ensure profitability
  • Relationship – developing more transparent relationships with customers