Customer Prioritization: Does It Pay Off, and How Should It Be Implemented?
Published 9/1/2008
Author: Christian Homburg, Mathias Droll and Dirk Totzek
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Executive Summary
In business practice, it seems to be commonsense that firms should focus their marketing efforts on the most important customers to increase profits. Marketing efforts are supposed to become more effective and efficient when concentrated on the top-tier customers. However, such a prioritization of customers might have substantial negative effects on the relationships with customers treated at a low priority level. In particular, these bottom-tier customers might be substantially dissatisfied, spread negative word of mouth, and finally defect. Thus, it is not necessarily the case that customer prioritization automatically leads to higher firm profits. Moreover, although customer prioritization is strongly present in firms’ marketing strategies, many firms fail to implement such a strategy and thus fail to actually treat customers differently in their daily business.
In a large empirical study involving 310 firms of different industries from business-to-consumer and business-to-business contexts, the authors address the issues of whether customer prioritization pays off and how firms should facilitate its implementation. The results indicate that managers should strive for customer prioritization because this has an overall positive effect on customer profitability and, ultimately, return on sales. In particular, two mechanisms lead to this effect. First, customer prioritization has a positive effect on the relationships with top-tier customers but no negative effect on the relationships with bottom-tier customers or the entire customer portfolio occurs. Therefore, customer prioritization enables the firm to develop important relationships that drive sales and profitability without substantially hurting less important customer relationships. Second, customer prioritization enhances customer profitability and return on sales through efficiencies with respect to marketing and sales costs. With regard to proper implementation of customer prioritization, this study shows that a firm’s strategic objective to treat customers differently does not necessarily mean that it will be implemented thoroughly. In particular, whereas approximately 80% of the firms in the study intended to prioritize their customers to a high extent, only approximately 40% actually implemented customer prioritization to a high extent. The results of the empirical study show that firms should meet important prerequisites for achieving the implementation of a prioritization strategy in their day-to-day business. In particular, strong emphasis should be placed on planning and control on a customer (segment) level for the most valuable customers and on the assessment of customer profitability. In addition, firms should assist prioritization efforts by aligning their organizational structure, for example, by creating customer-responsive units for the most valuable customers. Furthermore, senior-level management should especially be involved in customer relationship management for the most valuable customers. Thus study also shows that firms need to have broad and up-to-date customer-based information to be able to address their most important customers’ needs appropriately. Finally, incorporating performance outcomes of customer prioritization in a variable compensation scheme facilitates implementation. However, cultural aspects do not turn out to play a major role in the context of customer prioritization. To summarize, managers should place a strong emphasis on the alignment of “hard factors” when implementing a prioritization strategy.
Biography
Christian Homburg is Professor of Marketing and Chair of the Marketing Department at the University of Mannheim, Germany. He also serves as director of this university’s Institute for Market-Oriented Management. Furthermore, Christian Homburg is Professorial Fellow in the Department of Management and Marketing at the University of Melbourne, Australia. He holds a master’s degree in Business Administration and Mathematics; a PhD in Business Administration from the University of Karlsruhe, Germany; and a PhD honoris causa from the Copenhagen Business School, Denmark. He also holds a habilitation degree from the University of Mainz, Germany. His research interests include market-oriented management, buyer–seller relationships, and business-to-business marketing. He has published in Journal of Marketing, Journal of Marketing Research, Strategic Management Journal, Journal of the Academy of Marketing Science, and International Journal of Research in Marketing. He is also the founder of Professor Homburg & Partners, an internationally operating management consulting firm.
Mathias Droll is assistant to the Executive Board Member Marketing & Sales of the Phoenix Group, Germany—a leading European pharmaceutical distribution company. He studied business administration in Germany and the United States. Between 2004 and 2007, he was a doctoral student at the University of Mannheim, Germany, and worked as a freelance marketing and sales consultant for Professor Homburg & Partners. He holds a master’s degree in Business Administration from the Ingolstadt School of Management, Germany, and a PhD in Business Administration from the University of Mannheim. His research interests include customer relationship management, customer valuation, and sales management. Mathias Droll has won several awards for his research, among them the overall Best Paper Award at the 2007 American Marketing Association Winter Educators’ Conference.
Dirk Totzek is a doctoral student in the Marketing Department at the University of Mannheim, Germany. He holds master’s degrees in Business Administration From the University of Mannheim, Germany, and from ESSEC Business School Paris, France. His research interests include customer relationship management, pricing, and behavioral decision theory.
Journal of Marketing, Volume 72, Number 5, September 2008
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