The Skinny on ‘Fattening up’ Customers
- by Peter S. Fader
Customer development, along with acquisition and retention, is one of the primary firm activities that drive customer value. It describes the tactics that a firm employs to create the maximum value for its existing customers over the lifetime of their relationship. My students can now recite by heart what I casually label the Great American Question: “Would you like fries with that?” It’s a classic example of cross-selling, one of a range of activities at the heart of customer development.
For companies considering adopting a customer-centric strategy, customer development is often one of the most visible and alluring selling points. If a firm knows its individual customers better, it can better tailor its product/service offerings to their needs—and thus capture a greater share of their total dollars. Indeed, a recent study from Forrester Research suggests that nearly 90 percent of managers in large North American financial services firms identified increased cross-selling as “very important” or “critical.”
But how important is customer development, really? It’s a question with huge implications for resource-allocation decisions. Given an additional dollar to spend on growing your firm’s overall customer equity, where are you going to get the biggest bang for your buck: from new customer acquisition, customer retention, or customer development?
It turns out that there is a range of inconclusive (and sometimes contradictory) evidence about the relative importance of customer development. Some suggests that there is real value in these activities: for example, reduced churn or greater value-per-transaction among customers who purchase more of a firm’s products or services.
Yet in most cases, customer acquisition seems to roundly trump customer development as a strategy for driving firm growth. In industries from financial services to consumer packaged goods, researchers have observed that increases in penetration (i.e., acquisition) are often associated with much larger increases in profitability and market-share growth than increases in the size or complexity of customers’ baskets.
So what’s the bottom line on customer development? While development is perhaps one of the most appealing applications of customer centricity, it helps to maintain a balanced perspective. When all is said and done, acquiring and retaining great customers are probably the two most important things a firm can do to increase the long-term value of its customer base.
That being said, companies can see some incremental value by “fattening up” their existing customers—especially if they do it in a truly customer-centric way. Asking if they’d like fries would certainly be a start.