Customer Equity Trumps the Law of Diminishing Returns

By John I. Todor, Ph.D., author of Addicted Customers: How to Get Them Hooked on Your Company (www.AddictedCustomers.com)

When companies try to grow by both acquiring new customers and developing existing ones, they often hit a brick wall when it comes to acquisition. As their market matures, their average new customer is more price sensitive, less valuable, less loyal and often less creditworthy than the average existing customers." Merlin Stone.

Why is someone as distinguished as Merlin Stone talking about The Law of Diminishing Customer Returns at the end of 2007? One would think that the concept and consequence are clear, self-evident and well accepted. Yet, I am straining to think of more than a handful of companies that act accordingly. Apparently Merlin Stone takes a similar view.

In his article, Stone focuses on two interrelated issues.

First, as a company's customer base increases in size for a given value proposition, the lower the average value of additional customers.

Second, as the market matures for a product or proposition (i.e., the product move through its lifecycle), the average customer becomes more price sensitive and less valuable.

Few can argue with the general premise. Yet, as Stone points out, most do not adjust their customer acquisition, retention and cross-sell, upsell strategies. Many do, however, voice their concerns about declining profits and weak customer loyalty.

The beginning of 2008 might be a good time for some reflection, strategizing and the unleashing of a new plan.

Here's my suggestion. Replace the terms acquisition and retention with ATTRACT, ENGAGE and CONVERT.

Attract customers your value proposition. Be sure the value proposition is meaningful to customers. When your ability to attract customers diminishes, rethink the value proposition in terms of the new type of customer you are now reaching.

Get customers engaged in the value proposition. By this I mean get them emotionally and intellectually involved in finding and extracting meaning for themselves. Engaged customers are more valuable to you because your offering becomes more valuable to them.

Convert customers from buyers focused on price and convenience to ones who value your relationship not only for what it delivers today, but also for the insights and strategies it can provide tomorrow. This only happens with the growth of trust and openness.

Companies that use this type of strategy to nurture an evolution in their customer relationships don't have to worry about the Law of Diminishing Returns. Rather, they experience a growth in Customer Equity and an increase in sustainable loyalty and profits.

Comments

[Graham Hill]

John

Everyone who has taken Economics 101 recognises the law of diminishing returns, but I can't help but think that the world has moved on. Take Brian Arthur's seminal 1989 paper on 'Positive Feedbacks in the Economy' (available from the SantaFe Institute), which set out how in a networked world positive returns play an important role. Or David Evans 2003 paper on 'Some Empirical Aspects of Multi-sided Platform Industries' (available from Market Platform Dynamics), which set out how in a platform world, network dynamics drive profitability.

The point is this; The world Merlin set out is one of within-industy, known competitors, unchanging value propositions-based competition, quite unlike the hyper-competitive world most businesses operate in today.

What Merlin suggests isn't wrong. But it is an inadequate, out-of-date picture upon which to base customer strategy.

Graham Hill
Independent CRM Consultant
Interim CRM Manager