The customer is no longer king

The customer is cash, not king. Instead of investing more in customer relations we have to choose which relations we should invest in and which we should not invest in, suggests Fred Selnes, Professor in Marketing.

For ages now, marketing consultants have been pushing the slogan: the customer is king. That is why firms have invested considerable sums in developing good customer relations in order to keep them. Much of this is wasted effort, claims Fred Selnes, who wants to pull the customer down from the royal throne. He is Professor in Marketing at BI Norwegian School of Management.

“The customer is cash, not king. Instead of investing more in customer relations we have to choose which relations we should invest in and which we should not invest in. We have to find out how we can maximise the value of the customer portfolio, and we have to take into account the potential for future value creation that lies in customer relations,” says Selnes, who with Professor Michael Johnson from the University of Michigan has published a research article on optimal customer portfolios in the Journal of Marketing, the top academic journal in marketing.

In order to get published in the Journal of Marketing you have to compete with the best researchers in the world. Articles are evaluated by internationally recognised scholars. Of the articles evaluated, only one in ten ends up published. The economic rewards for international publication are modest. The reward lies in knowing you have made a mark on international research, and are cited by other researchers. “That is the highest recognition you can get in academic circles. It is also a stimulus to continue working in this area.”

Work on the article started in the summer of 2000 when Selnes and Johnson started questioning the widespread notion that it almost always pays to invest in building relations with existing customers. They philosophised over the idea that firms may profit from having weak relations with their customers and accepting that they will lose customers in the process. Is it true that firms always lose money when customer turnover is high? Maybe it is more about finding the right balance between procuring new customers and developing relations with existing customers? When is it better to follow one course of action over the other?

Fred Selnes draws a picture of a firm which keeps its customers in a pail. There is a hole at the bottom of the pail, where some of the customers leak out. “We’ve been taught to plug up the hole. But it costs money to plug up holes,” explains Selnes. “What if we spent the money on recruiting new customers instead? That means that instead of plugging up the hole in the small pail, we could replace it with a larger pail with holes. What gives the best payoff? This is the point of departure for a theoretical research project that aims to determine the profile of a customer portfolio that maximises the value of customers under different competitive circumstances. Selnes and Johnson apply theories from both psychology and economics. They find not only that strong customer relations create value, but that weak customer relations do so as well. It is important to understand the marketing prerequisites for profitability. “By better understanding how value is created, we are able to develop good strategies and more profitable business models,” claims Selnes.

Fred Selnes and Michael Johnson are in the process of applying these new theoretical insights to practice and have started a large research project in cooperation with European and American firms. They have presented their findings to top management at several firms, and their discoveries and influencing how these firms plan their marketing strategies. “We want to involve firms in our research,” says Fred Selnes. What is more practical than a good theory?