Differential Treatment of Customers
S. Shyam Prasad
Abstract
The purpose of business is to create customers and retain them. They are the āall-importantā to any business. If this is so, do businesses treat all customers as important and consequently equally? The answer is simple āNoā. This article focuses on the differential treatment of the customers. In fact the organisations do not treat all the customers equally nor is it advisable to do so. Differential treatment of customers has come to stay and marketers do not shy away from it. However, the awareness of this practice will make us ā the customers more responsible and appreciative in our behaviour.
Introduction
Peter Drucker said that the purpose of business is to create a customer. Customer is the person who decides to buy or use the product. Customer is or at least, should be the primary and the only focus of all businesses. If the customers are so important to business, are they being treated accordingly? Marketers would argue that they accord immense importance to their customers and treat them with great attention. While this may be partly true, the rest of the truth is that the marketers also treat different customers differently. All customers are treated equally is a Universal statement ā a statement that can be falsified whereas, different customers are treated differently is an Existential statement ā a statement that cannot be falsified.
In the Times Small Business section, Jennifer Walzer of Backup My Info! Writes: We love working with all of our clients, especially the smaller ones, but if we find ourselves spending all of our time helping the small customers get started with our service, we will not be able to grow into a $5 million-a-year business ā or even remain profitable.
The management and marketing gurus such as Peter Drucker and Philip Kotler have been emphasizing that business should focus on customers and their needs. The marketing literatures have long advocated that firms should not focus on selling products, but rather on fulfilling customersā needs (Levitt, 2004) . In present times, CRM has become a powerful tool in the hands of the marketers and is being increasingly used to garner more profit for the organisation by indentifying the more profitable customers and satisfy their needs in order to make them loyal to the organisation (Thomas, 2005) . However, in their process of meeting the more profitable customersā needs an organisation treat the chosen customers differently from others. To put it simply, different customers are receiving different treatments. The awareness of these unequal treatments (Cox, 2001) is increasing rapidly with increasing use of social networking websites, blogs, and comparison search engines, which have created a more transparent market.
Some studies show that inequality in treatment may lead to perceptions of unfairness (Campbell, 1999; Xia et al., 2004; Nguyen and Simkin, 2009a). For example, Amazon.comās test use of dynamic pricing has attracted a range of revisited research into the fairness of a price and the rationale for offering a certain price (Xia et al., 2004). As Feinberg et al. (2002, p.227) put it: āFew things stir up a consumer revolt quicker than the notion that someone is getting a better deal. Thatās a lesson Amazon.com has just learnedā¦ Amazon was recently revealed to be selling the same DVD movies for different prices to different customersā.
The knowledge that someone is getting a better offer will undoubtedly cause resentment. Nevertheless, CRM is designed to identify customers varying wants ā different products, even different prices and so on. When CRM is not used judiciously, it may create perceptions of unfairness among the customers. It would, in this case, become counterproductive and may result in dissatisfied customers spreading negative information, or engaging in behaviour that may damage the firm (Campbell, 1999; Xia et al., 2004). According to the distributive justice theory, equal distribution of outcomes may lead to fairness perceptions whereas unequal distribution of outcomes may lead to unfairness.
Based on the principles of relationship marketing, many firms treat customers differently based on customersā value, in other words, their profitability. Even at the risk of being unfair, many organisations continue to treat customers differentially. Those organisations that apply the principle of differential treatment to the customers need to clearly state the equity principle to make sure to treat their best customers preferredāwithout treating other customers badly. However, treating every customer costs to the organization. The cost could be technical or even the opportunity cost of serving a high value customers. Based on the cost to serve the customers and the revenue generated respectively from them, they can be classified as 1. High Priority Customers, 2. Important Customers, 3. Good Customers and 4. Sycophants (See fig.1 )
1. High Priority Customers:These customers provide huge revenue to the organisation without bothering much and so are easy on the cost to serve. All attempts should be made by the organisations to retain them as they are the most profitable customers.
2. Important Customers:Though these customers provide high returns to the organisations by way of purchases, they also demand greater attention and thereby strain the organisations expenses towards them. In other words, it costs to serve them. Yet, it may be worth to retain them as long they do not exceed the limits.
3. Good Customers: Most of the customers may fall in this type. They are less demanding and also give less business. They may still be profitable. Organisations would do well not to neglect them.
4. Sycophants: These are the customers that negatively impact the organisationās profit. They do not provide much business to the firm but are demanding. Organisations should try to convert them either important or high priority customers before they are eased away.
High Priority Customers All efforts should be made to retain them |
Important Customers Watch them closely |
Customers Cost Revenue Grid |
Sycophants Convert them to PC or stop serving them |
Good Customers Donāt neglect them |
High |
Low |
Cost to Serve |
   |
Fig 1
Customer Pyramid: There is another way in which most retailers classify their customers based on their profitability or Customerās Lifetime Value (CLV). In particular, they know that a relatively small number of customers account for the majority of their profits. Applying the Pareto principle, which is often called the 80ā20 ruleā80 percent of the sales or profits come from 20 percent of the customers. Thus, retailers should ideally group their customers into two categories. In practice however, considering other aspects, retailers divide customers into four segments, as illustrated in fig 2 below.
Fig 2
I am not delving on the description of the fig.2 as the same can be had in any standard āService Marketingā text book.
There is yet another method of categorizing the customers. It is known as RFM Analysis. An RFM analysis uses data on the recency, frequency and monetary value of purchases of a customer to calculate his or her lifetime value.
Conclusion
One can easily realize that businesses treat different customers differently. In fact, to serve the customers efficiently, businesses divide them into different categories and fulfill the needs and wants. If they were to treat all the custo
mers equally, not only the organisations will lose but also we as customers stand to lose. It is now clear that differential treatment of customers is a part of business science. George Orwell (in Animal Farm) – “All animals are equal, but some animals are more equal than others.” In the same vain, all customers are equal but some customers are more equal than others i.e all customers are āKingsā, but some are āEmperorsā while others are not.
mers equally, not only the organisations will lose but also we as customers stand to lose. It is now clear that differential treatment of customers is a part of business science. George Orwell (in Animal Farm) – “All animals are equal, but some animals are more equal than others.” In the same vain, all customers are equal but some customers are more equal than others i.e all customers are āKingsā, but some are āEmperorsā while others are not.
Bibliography
Campbell, M. C. (1999). Perceptions of price unfairness: Antecedents and consequences. Journal of Marketing Research , 187-199.
Cox, J. (2001). Can differential price be fair? Journal of Product & Brand Management , 264-275.
Feinberg, F. M. (2002). Do we care what others get? A behaviourist approach to targeted promotions. Journal of Marketing Research , 277-291.
Levitt, T. (2004). Marketing Myopia. HBR , 1- 13.
Nguyen, B. &. (2009a). An examination of the roleof fairness in CRM: A conceptual framework. Proceedings of the British Academy of Management (p. 200). Brighton: University of Brighton.
Thomas, J. S. (2005). Managing Marketing Communications with Multichannel Customers. Journal of Marketing , 231-251.
Xia, L. K. (2004). The price is unfair! A conceptual framework of price fairness perceptions. Journal of Marketing , 1-15.
