THE CUSTOMER PYRAMID: CREATING AND SERVING PROFITABLE CUSTOMERS

Zeithaml, Valarie A.; Rust, Roland T.; Lemon, Katherine N.

California Management Review Summer2001, Vol. 43 Issue 4, p118

Innovative service companies today recognize that they can supercharge profits by acknowledging
that different groups of customers vary widely in their behavior, desires, and responsiveness to
marketing. Federal Express Corporation, for example, has revolutionized its marketing philosophy
by categorizing its business customers internally as the good, the bad, and the ugly--based on their
profitability. Rather than marketing to all customers in a similar manner, the company now puts its
efforts into the good, tries to move the bad to the good, and discourages the ugly.(n1) Similarly,
the customer service center at First Union, the sixth-largest bank in the U.S., codes customers by
color squares on computer screens using a database technology known as "Einstein." Green
customers are profitable and receive extra customer service support while red customers lose
money for the bank and are not granted special privileges such as waivers for bounced checks.
Providing different service to customers depending on their profitability is becoming an effective
and profitable service strategy for firms like FedEx, U.S. West, First Union, Hallmark, GE Capital,
Bank of America, and The Limited.

These firms have discovered that they need not serve all customers equally well--many customers
are too costly to do business with and have little potential to become profitable, even in the long
term. While companies may want to treat all customers with superior service, they find it is neither
practical nor profitable to meet (and certainly not to exceed) all customers' expectations. Further--
and probably more objectionable to quality zealots--in most cases it is desirable for a firm to
alienate or even "fire" at least some of its customers. While quality advocates may be offended by
the notion of serving any customer in less than the best possible way, in many situations both the
company and its customers obtain better value.

Understanding the needs of customers at different levels of profitability, and adjusting service
based on those differences, is more critical to the enterprise than has been previously held.
Specifically, in examining customers by profitability--and understanding the key elements of the
costs and revenues aspects of the profit equation--it is possible to actually increase the current and
future profitability of all customers in the firm's customer portfolio. The Customer Pyramid is a
tool that enables the firm to utilize differences in customer profitability to manage for increased
customer profitability. Firms can utilize this tool to strengthen the link between service quality and
profitability as well as determine optimal allocation of scarce resources. Companies can develop
customized products and services that are more closely aligned with individual customer's
underlying utility functions, thereby enabling the firm to capture more value from levels of
customers, resulting in higher overall customer profitability.

Beyond a General Relationship between Service Quality and Profitability

Prior to the 1990s, the general link between service quality and profitability was still being
questioned, but since the early 1990s, it has been persuasively established.(n2) The evidence to
support the linkage came from a variety of sources and is now convincing enough to lead
executives to believe that a positive relationship does exist. The link was first established through
industry-wide, cross-industry, or cross-facility studies such as the PIMS (Profit Impact of Market
Strategy) project, which demonstrated a correlation between quality and profits across both
manufacturing companies and service companies.(n3) In more recent studies, quality improvement
and customer satisfaction have been linked to stock price shifts, the market value of the firm, and
overall corporate performance.(n4)

Because firms are managed at the individual level and not the industry level, executives still
clamored for evidence that improved service quality resulted in increased firm profitability. A
growing number of studies bear this out, showing that:

• service improvement efforts produce increased levels of customer satisfaction at the process or
attribute level,(n5)

• increased customer satisfaction at the process or attribute level leads to increased overall
customer satisfaction,(n6)

• higher overall service quality or customer satisfaction leads to increased behavioral intentions,
such as greater repurchase intention,(n7)

• increased behavioral intentions lead to behavioral impact, including repurchase or customer

retention, positive word-of-mouth and increased usage,(n8) and

• behavioral impact then leads to improved profitability and other financial outcomes.(n9)

What is still missing in this research evidence is the recognition that the link between service
quality and profitability can be stronger if it is recognized that some customers are more profitable
than others. Service investments across all customer groups will not yield similar returns and are
not equally advantageous to the firm. Different profitability segments are likely to be sensitive to
different service emphases and are likely to deserve different levels of resources. As a small
number of progressive companies have discovered, they can become more profitable by
acknowledging the difference in profit potential among customer segments, then developing
tailored approaches to serving them.

The Limits of Traditional Segmentation

The idea of identifying homogenous groups of customers, assessing these segments for size and
responsiveness, and then more precisely creating offerings and marketing mixes to satisfy them is
not new. Traditional segmentation is most effective when it leads to more precise targeting that
results in higher revenues or responsiveness to marketing programs. However, traditional
segmentation is not typically grounded in knowledge of the different profitability of segments.

To build and improve upon traditional segmentation, businesses have been trying to identify
segments--or, more appropriately, profitability tiers of customers--that differ in current and/or
future profitability to a firm. This approach goes beyond usage segmentation because it tracks
costs and revenues for groups of customers, thereby capturing their financial worth to companies.
After identifying profitability tiers, the firm offers products, services, and service levels in line
with the identified tiers. The approach has to date been effectively used predominantly in financial
services, retail firms, and business-to-business firms because of both the amounts of data existing
in those firms and the ability to associate data with individual customers.
One example of an innovator in the field is Bank One, which recognized that financial institutions
were grossly overcharging their best customers to subsidize others who were not paying their keep.
Determined to grow its top-profit customers, who were vulnerable because they were being under-
served, the Bank implemented a set of measures to focus resources on their most productive use.
The company used the data resulting from the measures to identify the profit drivers in this top
segment and stabilized their relationships with key customers.(n10)

In another example, First Commerce Corporation knew that customer segmentation could improve
the effectiveness of all of its operations. After dividing clients into mutually exclusive groups of
individuals based on demographics, the company then identified the reasons for profitability
swings (including balances, product mix, and transaction behavior). The firm then defined three
unique segments: the smart money segment, the small business segment, and the convenience
segment. Tailoring its marketing efforts differentially to those segments made the company's
programs far more effective.(n11)

Conditions Necessary for Customer Tiers: An Empirical Example

In our view, four conditions are necessary for customer tiers to be used in a company.

• Tiers have different and identifiable profiles. Profitability differences in customer tiers are most
useful when other variables can identify the tiers. As with customer segmentation, it is necessary to
find ways in which customers vary across tiers, especially in terms of demographic characteristics.
These descriptions can help understand the tier's customers and identify appropriate marketing
activities.

• Customers in different tiers view service quality differently. Customers in different tiers can also
have different needs, wants, perceptions, and experiences. Understanding the factors that affect the
customer's decision to purchase a new product or service from an existing provider as well as the
factors that affect the decision to increase the volume of purchases from an existing provider are
crucial for managing customers for profitability. If customers in different tiers have different
expectations or perceptions of service quality, these differences will allow the company to offer
different groups of attributes to the tiers.

• Different factors drive incidence and volume of new business across tiers. Differences in
characteristics, needs, wants, and definition of service quality are likely to result in different
drivers for the incidence and volume of new business. If this condition is met, a company can
target customers that are likely to end up in higher tiers.

• The profitability impact of improving service quality varies greatly in different customer tiers.
Just as direct marketers routinely qualify lists to test for potential profitability, companies need to
qualify their customer tiers for potential profitability. If customer tiers are appropriate, the way
customers respond to service and marketing should differ among tiers. Higher tiers should produce
a much higher response to improvements in service quality that will be evident in increases in new
business, volume of business and average profit per customer. Taken together, the
disproportionately greater response to changes in service quality in each of these areas will result
in an overall greater return on service quality improvements for the higher tiers of customers.

An Empirical Test of the Conditions in a Two-Tier Situation

Virtually all firms are aware at some level that their customers differ in profitability, in particular
that a minority of their customers accounts for the highest proportion of sales or profit. This has
often been called the "80/20 rule"--twenty percent of customers produce eighty percent of sales or
value to the company. We recently conducted an empirical study to examine this simple "80-20"
scheme.

A major U.S. bank provided profitability information about retail products and customer
information files with descriptive information including average account balance, average profit
from account, and average age, gender, and income. Data on a random sample of 796 of these
customers were merged with responses to a service quality survey from the same set of customers.
Eight months later, information regarding the amount of new business, including both the
incidence and volume of new business (revenue from new accounts), was added to the data file by
examining behavior following the survey. In this way, service quality measures could be used to
predict future behavior using a cross-sectional, time-series approach.

Demographic Differences

We examined differences in customer descriptive statistics, service quality perceptions, drivers of

incidence of new business, and drivers of volume of new business across tiers using various
statistical analyses.(n12) We also projected both the increase in the percentage of customers who
would open a new account and the increase in the average account balance. Multiplying the
projected average account balance by the average profit per account balance for each tier yielded
an estimate for the projected increase in average profit per account. Multiplying that by the number
of accounts yielded the total projected new profits from each tier.

We then divided the customer base into two customer tiers: the most profitable 20% (top 20%) and
the least profitable 80% (lowest 20%). The results met all the conditions described above. First,
customers in different profitability tiers had different customer characteristics. The top tier had a
higher percentage of women than the lower tier, an average account balance about five times as
big, and average profit about 18 times as much. The top 20% was also older than the lowest 20%,
had more upper-income customers, and had far fewer lower-income customers. The top 20%
produced more profit per volume of business, with an average profit per account balance of 2.53%,
versus 0.71% for the lowest 20%. Finally, the top 20% produced 82% of the bank's retail profits,
an almost perfect confirmation of the 80/20 rule in this profit setting.

Views of Service Quality

Second, customers in different tiers viewed quality differently. The top 20% viewed service quality
in terms of three factors: attitude, reliability, and speed. By contrast, the lower 20% had a less
sophisticated view of service quality, viewing service as only two factors, attitude and speed, with
slightly different interpretations of the factors. The reliability factor was not a driver for the lowest
20%. A particularly compelling finding emerged from these data. When we combined all
customers into a single group, all appear to want the same factors and the factors meant the same
thing to both groups. The important insight here is that blending customer tiers resulted in an
imprecise view of what service quality meant to the customer base.

Drivers of Incidence and Volume of New Business

Third, we found that different tiers had different drivers of incidence and volume of new business.
Since we measured what customers did after they reported what was important to them, we
captured what actually drove customers to make purchases, rather than what they thought would
make them do so. For the top 20%, speed was key to driving incidence of new business whereas
attitude was the key driver for the lower tier. As before, analyzing the entire customer base as a
single group would have been misleading. Both the combined attitude/ reliability factor and the
speed factor were key drivers for the group as a whole, but the combined analysis would not reveal
the fact that different strategies should be used for different profitability levels.

Profitability Impact

Finally, the profitability impact of improving service quality varied greatly in different customer
tiers. An across-the-board service quality improvement of the key drivers (approximated by a 0.1
increase in average satisfaction with each driver in each tier) resulted in a projected 3.65% increase
in incidence of new accounts in the top 20%, but only a 2.00% increase in the Lower tier. This
result suggests that the Top 20% was almost twice as responsive to the changes in service quality
than the lowest 20%. When examining the projected increase in average account balance, the
results were even more encouraging. The projected increase in average account balance was $6.19
in the top 20%, but a meager $0.69 in the Lower tier. Here, the Top 20% appeared to be almost 10
times as responsive to changes in service quality. Finally, the projected increase in average profit
per customer was 15.7 cents in the top 20%, but 0.5 cents in the lowest 20%. Again, the top 20%
provided a substantially greater return on the service quality improvement. Of particular interest
was that simultaneous improvement of the key drivers for both tiers produced a projected 89% of
the new profits in the top 20%, while only 11% of the new profits could be attributed to the lower
20%. This was an even higher percentage than the current percentage.

The Need for More Tiers

The "80/20" two-tier scheme that many companies use assumes that consumers within each of the
two tiers are similar to each other. We contend, however, that this "best" and "rest" customer
division is rarely sufficient. Just as we showed above the dangers in combining data from two
tiers--the results were muddied and the average did not represent either tier well--we contend that
the lack of distinction among the "rest" of the levels misses important differences in consumers.

In the two-tier analysis we conducted and in the strategies of companies that distinguish only
between two groups, the customers in the large lower tier are indistinguishable from each other.
This likely masks differences in demographics, perceptions and expectations of service quality,
drivers of new business, and the profitability impact of improving service quality. Specifically, if
we had observed the demographic differences across four tiers, rather than two, we would most
likely have seen that the lower the tier, the younger the customer and the lower the average
account balance. Many banks realize that their least profitable customers are students who have no
income and are expensive to serve because they bounce checks and require extra handling. In the
two-tier scheme above, however, this group was not explicitly articulated and we therefore cannot
tell the difference between them and the rest of the 80%.

Furthermore, in our example we cannot tell whether this lowest-tier group views quality
differently. Banks are coming to understand that convenience is the critical factor drawing the
youngest customers to banks. Fortunately, a bank that knows this need focus only on that element
of quality with that segment, thereby reducing costs that would be spent if they were grouped into
the rest of the 80% who also wanted the attitude factor. We might also have observed differences
in drivers and incidence of new business, and--most importantly--in the profit impact of investing
in different tiers.

Most companies realize that their customer set is heterogeneous but possess neither the data nor
the analytic capabilities to distinguish the differences. We suggest that it is highly worthwhile to
do so, and to distinguish more than just the traditional two levels of customers.

The Customer Pyramid

Large databases and better analytics are likely to reveal greater distinction among the tiers. Once a
system has been established for categorizing customers, the multiple levels can be identified,
motivated, served, and expected to deliver differential levels of profit. In this section, we illustrate
a framework called the Customer Pyramid (see Figure 1) that contains (for purposes of illustration)
four levels. While different systems and labels can be useful, our framework includes the
following four tiers.

• The Platinum Tier describes the company's most profitable customers, typically those who are
heavy users of the product, not overly price sensitive, willing to invest in and try new offerings,
and are committed to the firm.

• The Gold Tier differs from the Platinum Tier in that profitability levels are not as high, perhaps
because the customers want price discounts that limit margins. They might not be as loyal to the
firm even though they are heavy users in the product category--they might minimize risk by
working with multiple vendors rather than just the focal company.

• The Iron Tier contains customers that provide the volume needed to utilize the firm's capacity but
whose spending levels, loyalty, and profitability are not substantial enough for special treatment.

• The Lead Tier consists of customers that are costing the company money. They demand more
attention than they are due given their spending and profitability, and they are sometimes problem
customers--complaining about the firm to others and tying up the firm's resources.

Note that this classification is very different from usage segmentation done by airlines such as
American Airlines because it is based on numerous variables other than sales that are responsible
for profitability of the tiers. The specific factors vary across industries, but the Customer Pyramid
is a rich and robust concept across most industries and categories. For example, it can be used
successfully by companies selling directly to consumers, to intermediaries (such as retail,
wholesale and professional channels of distribution), and to other businesses.

Platinum through Lead in the Retail Real Estate Industry

A top-twenty real estate and relocation franchiser has identified the variables that account for
profitability in the retail housing market. In addition to the cost of the home (for which the
franchiser and the broker share a 6% commission), other variables include:
• the amount of time it takes to buy/sell a home (which represents the opportunity cost of time and
other commissions to the realtor);

• marketing costs (brochures, open houses, advertisements);

• customer motivation to purchase/sell (especially high with relocations);

• price sensitivity of buyers, which may lead them to negotiate a lower rate with the realtor;

• likelihood of repurchase; and

• referral potential.

Based on these factors, the company defined its Platinum customers as those who: pay full
commission on a home costing $500,000 or more; are motivated to purchase within the next six
months; have purchased more than two homes in the past; and are members of social or
professional networks that make them candidates to refer other high-end buyers. Gold customers
purchase homes in the $250,000-$600,000 range but are more price sensitive than the top tier. For
example, some Gold customers want to negotiate on the commission or have the realtors pay
points at closing. Notice that some of these customers buy homes that are in the same price range
as Platinum customers but their price sensitivity reduces their profitability. Gold customers are
likely to refer others, but the types of customers to be referred will are not as valuable to the firm
as those the Platinum customers refer.

Iron customers buy homes in the $100,000-$250,000 range, and include retirees, young
professionals, and families. The company knows that the young professionals have higher lifetime
value potential and therefore market to them differently than they market to others in this group,
who are likely to stay in the homes they buy. In fact, young professionals who purchase homes at
the upper end are tagged as potential Gold customers and moved to that category approximately
five years after the purchase of a home (U.S. consumers move, on average, every five years).
Many Iron customers are relocations from other areas and are pressed to buy homes quickly,
making them good prospects for the company despite home prices that are lower than the top two
tiers. Lead customers are high maintenance customers who are shoppers rather than buyers. Some
Lead customers spend as long as two years looking at homes, calling upon realtors to show them
homes when they have free time (many realtors complain about the "my-husband-is-watching-
football" Saturday shopper, who is merely looking to be entertained rather than to buy). While they
might be looking at homes in all price ranges, the homes they buy are likely to be under $100,000.
These clients are often dissatisfied with what they see, making them less likely than other tiers to
send qualified referrals to the company.

While the real estate company is still refining the criteria for the tiers. They view the sorting into
levels as invaluable in qualifying current and potential clients, and are developing different
programs for reaching and serving them differentially. They have recently developed an
"expectations assessment tool" that attempts to decide the appropriate customer tier upon making
the contract with the buyer or seller.

Differentiating Business Customers in the Marketing Research Industry

One of the most respected marketing research firms in the country learned in the mid-nineties that
it didn't pay to treat all clients alike. In addition to absolute dollar amount clients spent, they could
be differentiated on a number of other factors, notably the willingness to be a research partner and
commit to an annual budget. Firms that were willing to do so required very low selling costs while
firms that bought research on a project-by-project basis required selling costs as high as 25% of the
sales dollars they brought in.

Platinum customers for this firm were defined as large accounts that were willing to plan a certain
amount of research during the year. The timing and nature of this research could be anticipated,
making it easy for the research firm to smooth supply and demand. The Platinum clients tended to
stay with the company and were willing to try new services and approaches developed by the
research firm. Therefore, they bought across research service types (e.g., field and tab services,
statistical studies, exploratory studies) and had minimal sales costs averaging only 2-5%. Best of
all, they were willing to serve as references for the firm, allowing the firm to give their names to
new clients wanting recommendations about the company. They were loyal to the firm and used
other marketing research companies only when they needed something the firm could not provide.

Gold customers had similar profiles except that they were more price sensitive, inclined to spread
their research budgets across several firms. While they were large accounts and had been
customers for multiple years, they were not willing to plan for a year in advance even though the
marketing research firm would give them better quality if they did. They provided referrals but on
an ad hoc basis.

Iron customers were moderate spenders and conducted research on a project basis, sending out
requests-for-proposals whenever they were conducting studies. They were looking for the lowest
price and often did not allow sufficient time to perform the jobs. Because they had no overall plan,
projects came in at any time, sometimes in the off season (which helped the firm use their
capacity) but sometimes during peak season (which created difficulties in allowing the firm to
service its best customers well). Selling costs were high because the firm continually kept in
personal and mail contact hoping to move these Iron customers up the Pyramid.

Lead customers spent little on research, conducted isolated projects that were usually of a "quick
and dirty" nature. Selling costs were highest in this group, for most advertising and almost all
speculative presentations were targeted to these accounts and salespeople had to spend multiple
visits to get them. Furthermore, once they became clients, Lead customers were "high
maintenance" clients that cost the firm money because they didn't understand the process of
research. They often changed projects mid-stream and expected the firm to absorb the costs.

Recognizing the Differences among Doctors

Pharmaceutical companies depend on doctors to prescribe their branded drugs over competitive or
generic drugs. Rarely do end consumers make these decisions for themselves. Faced with
environmental threats such as HMOs, hospital purchasing alliances, and pharmacy consortiums--
all of which lowered pharmaceutical profits--a major pharmaceutical firm strove to reduce its costs
and improve the efficiency of its marketing. The first step it took was to recognize through careful
analysis that all doctors were not equally profitable customers. The company departed from
industry practice and began to view physicians as long-term strategic assets and thereafter targeted
them based on potential profitability across the company's drug portfolio (rather than on current
sales within a single therapeutic category). In addition to the cross-product focus, the firm also was
able to calculate with some degree of accuracy the selling costs per physician (e.g., $125 for a call
from a sales representative, $25 for product samples, $5 for share of advertising materials). The
key inputs to their analysis were:

• the volume of prescriptions a particular physician generated (measured by data from a source
called Walsh America, which captures physician-level prescribing data at the retail pharmacy
level);

• value of a prescription (from a source called IMS Americas);

• cost of a sales call;

• cost of product samples;

• product gross margins, rebates, and discounts.

Market growth rates and share forecasts were provided by the marketing department. Two other
variables perceived by salespeople were also factored in--the physician's capability of having an
impact on a territory through word of mouth communication, and the physician's perceived
responsiveness to sales efforts. Potential profit calculations were made for all physicians, and then
these calculations were used to sort the doctors into tiers.

The top tier consisted of the doctors most likely to give the greatest return on the company's sales
investment. Contribution margins for the physicians were highest in this group and costs were low
enough that profits exceeded that of the other groups. Importantly, these were physicians who were
willing to see sales representatives (and thus were "sales sensitive"). Only 10% of the physicians
fell into this top tier. The Gold physicians were high-profit physicians that were relatively
inaccessible, either because they were unresponsive to sales efforts, at the end of their careers
(hence their potential was not as high) or lived in geographically distant areas. While this group
accounted for almost 35% of physicians, the company did not allocate salespeople to them because
of the low payback; instead, they handled this group through marketing efforts using the telephone
or mail. Because the marketing approaches were less expensive than personal selling, the profit
margins were sometimes close to those of Platinum doctors although the sales volumes were
lower. Doctors in the Platinum and Gold level tended to be the influencers/opinion leaders among
their peers.

The Iron doctors were new physicians that were vital to the future of the company. Typically, they
were evaluated as such based on judgments of their sales representatives. If the representatives
thought the doctors had potential to influence others or would be responsive to sales efforts, they
were classified as Iron. If not, they were classified as Lead. Sales managers reviewed the
classification of the two lower groups on an annual basis to assure that salespeople were accurate
in their assessments.

The company's efforts to target physicians paid off quickly. Salespeople from territories high in
Platinum doctors tended to have bonuses 10-25% higher than average, while those from territories
heavy with Lead customers received bonuses 4-7% below average. Prior to the targeting, the bonus
spread was significantly smaller--than 2-5% higher in Platinum and less than 1% below average in
the Lead group.

When Should a Firm Use the Customer Pyramid?

From the firm's point of view, the Customer Pyramid is desirable whenever the company has
customers that differ in profitability but is delivering the same levels of service to all customers. In
these situations, the firm is using limited resources to stretch across a wide group of customers,
possibly under-serving its best customers. In each of the following conditions, it makes financial
and practical sense to implement the Customer Pyramid approach.

• When service resources, including employee time, are limited. One of the most important reasons
for ascribing to the Customer Pyramid is to prevent the undesirable situation in which a company's
best customers do not obtain the service they require because the company is expending too much
time and effort on its least profitable customers. A restaurant would not want to fill up all its tables
with students purchasing coffee with endless refills when customers who purchase soup-to-dessert
dinners are kept waiting. Whenever any resource, such as employee time, is limited, a firm must
identify the best use of the limited resource. This situation occurs frequently in professional
services such as consulting, accounting, advertising, and architectural design. A firm has only so
much professional time available and its allocation must be done carefully so that the best
customers are not kept waiting for their jobs while smaller and less profitable customers are
served.

• When customers want different services or service levels. In many industries, particularly those
with high technology or information technology offerings, customers have divergent requirements
and aptitudes for service. One telephone company, for example, viewed its business customers as
being comprised of three groups: sophisticated CIOs who wanted to configure their own systems
and needed minimal service assistance from the vendor; middle managers of large firms who
wanted to purchase complex systems but needed considerable consulting to develop the best
configuration; and CEOs of small firms who wanted sturdy, competent systems that were easy to
understand and that included basic maintenance service. The three decision makers had completely
different requirements; treating them with the same levels of service at the same high price would
not only be inefficient, but ineffective as well. Serving these different customers involves widely
different costs that are wasted if all customers are treated the same way.

• When customers are willing to pay for different levels of service. Package delivery services such
as Federal Express charge varying rates based on the type of delivery and the speed with which a
package is delivered. The different types of delivery include express package service (under 150
pounds), express freight service (over 150 pounds), FedEx Letter, FedEx Pak, FedEx Box, and
FedEx Tube, all of which have different prices associated with them. Speeds of delivery include
FedEx Priority Overnight, FedEx Standard Overnight, and FedEx 2-day, each with different prices.
A customer can also purchase Saturday delivery and special handling--as expected--at additional
cost. Customer sensitivity to these different services is high, leading to a willingness to pay
considerably more or less depending on the desired delivery and speed.

• When customers define value in different ways. Customers define value in one of four ways:
value is low price; value is whatever a customer wants in a product or service; value is quality
divided by price; and value is all that a customer gets for all that he or she gives.(n13) In addition
to monetary price, customers also consider non-monetary prices such as time, effort, convenience,
or psychic costs. When a service company has customers with all of these definitions of value,
tiers of service can be designed to capture the best financial returns for the company depending on
what the customer expects in terms of value. Perhaps the first value definition (value is low price)
would cover the company's lowest level or Lead customers; this segment would be willing to
accept less in exchange for paying less. Customers with the second value definition (value is
whatever I want in a product or service) might be Platinum customers because they are not price
sensitive. If their needs mesh with high-margin services the firm can provide, both buyer's and
seller's needs are met. In between these two levels fall the Gold and Iron segments with value
definitions that are both service- and price-sensitive, leading them to be more profitable than the
Lead tier but less profitable than the Platinum tier.

• When customers can be separated from each other. Firms are and should be sensitive to the fact
that customers in the lower tiers of the pyramid will be angry if they see other customers receiving
better treatment than they receive. Unless the reason is readily apparent for service differentials
(such as a 15% discount for seniors at a restaurant), the customers in different categories should
not know that those in other tiers are viewed as different or are receiving different levels of
service. As an example, telephone companies such as AT&T now have state-of-the-art customer
service centers that can immediately identify which tier customers fit in when their call comes in to
the customer service center. These automatic systems immediately route customer calls to different
centers based on the value of the customer to the company. Once there, service standards such as
length of time spent on a customer call differ depending on the tier of customer.

• When service differentials can lead to upgrading customers to another level. On the other hand,
there are substantial benefits in some services for customers clearly seeing what other customers
receive. For example, main cabin airline customers note that the services in the first-class cabin are
better than what they receive but the difference is substantiated by the obvious fact that those
customers paid more for their seats. Another reason why customers are in first class is that they
receive complimentary upgrades for being frequent travelers. Armed with this knowledge,
otherwise non-loyal airline travelers may be motivated to consolidate their airline trips on a
specific airline to be able to take advantage of these benefits.

• When they can be accessed either as a group or individually. The traditional marketing strategies
of product, price, promotion, and place need to be adapted for the different tiers. Instead of
viewing the market as a uniform group of customers with similar potential, the firm needs to view
them as distinct groups with differing potential. At its best, this means developing different
marketing strategies for each tier, especially different strategies for price and offering. To do so,
the firm must be able to access the customers selectively.

Customer Alchemy

Customer alchemy is the art of turning less profitable customers into more profitable customers. It
can take place at any tier along the Customer Pyramid, but is more difficult at some levels than at
others. For example, it is very difficult to move Lead customers up to Gold or Platinum tiers, and it
is often necessary to "get the Lead out" rather than try to move those customers up. If the decision
is made to keep Lead customers, the strategies used are typically different than those used at other
tiers.
Turning Gold into Platinum

The most important requirement for turning Gold customers into Platinum customers is to fully
understand them and their individual needs. With an industrial or business-to-business firm and a
dedicated sales force, this need is often met because the salesperson knows the business well
enough to stay constantly in touch with the client and to anticipate his or her needs. This customer
intimacy, when effective, allows the company to move the customer to a higher tier because the
firm can develop offerings that satisfy the client's needs, identify existing ways to serve the client
better, and communicate in the right way at the right times to clients.

When a company has a larger number of customers, the process of turning Gold into Platinum may
seem more daunting but still involves the same basic foundation: building information profiles of
customers that form the basis for becoming a full-service provider of whatever the firm can offer.
Building these profiles may involve collecting and consolidating existing information about the
customer's history with the firm, including usage and customer satisfaction information.
Alternatively, profiles may involve conducting very individualized customer research such as
personal interviews or customer expectation sessions. Only when company fully understands its
Gold customers can it design strategies to turn them into Platinum customers.

The following strategies are recommended for turning Gold customers into Platinum customers.

Become a Full-Service Provider

Home Depot, the U.S. hardware giant, has a strategy for making its good (Gold) customers into
great (Platinum) customers. The highly successful hardware superstore, which sells to virtually all
levels in the Customer Pyramid, has a new strategy for two groups of high potential customers--
traditional customers who want to make major home renovations and housing professionals such
as managers of apartment and condominium complexes and hotel chains. Together, these groups
spend about $216 billion every year and Home Depot wants customers to spend all of it in its
stores by becoming a full-service provider, offering everything these customers could possibly
need to do their jobs.

The cornerstone of its strategy is the creation of Expo Design Centers. The design centers not only
show off the expanded line of physical products the company offers but configure the products into
finished and polished showrooms. Rather than just having row upon row of nails, hammers, and
tile, the store is creating a showplace for upscale renovation, including complete kitchens with
state-of-the-art appliances, finished baths, and antiques.(n14) Expo is a one-stop-shopping location
for major renovations, which usually require homeowners to assemble a group of contractors and
designers, then make separate trips to buy tiles, materials, drapes, appliances, and the like. All of
these are now available at an Expo, making it unnecessary for a member of their target segments to
buy from any other store to do their renovations. Industry-certified designers and project managers
oversee the entire project from beginning to end, making even general contractors expendable.
With this strategy, Gold customers become Platinum customers, getting everything they want from
their full-service supplier, Home Depot.

Provide Outsourcing
One of the best examples of moving customers from Gold to Platinum levels involves outsourcing,
taking on an entire function that a customer firm used to perform for itself and providing it for
them. From payroll and accounting to personnel and even strategy,(n15) outsourcing firms are
doing for their clients what is either too costly or specialized for them to do themselves. In these
situations, the nonmonetary costs to the client firms of engaging in these activities reduce their
ability to perform their core competencies. The effort involved, for example, in staying abreast of
new information technology, maintaining systems, fixing hardware and software problems, and
keeping qualified staff all become an interference with the firm's true purpose. In these and other
cases of outsourcing, a supplier firm can perform these functions for a customer, thereby tying the
customer to the organization and making the customer's business predictable, increasing their value
to the company.

Increase Brand Impact by Line Extensions

Women's clothing is an area where few companies "own" customers in the sense that customers
buy predominantly one brand and would therefore be considered "Platinum" customers. Liz
Claiborne, the world's largest women's apparel maker and marketer, however, has changed this
customer behavior in its key segments. The company bonded with the female baby boom
generation, being one the first companies to target them and truly understand them and their needs.
Recognizing that baby boomers were a physically fit generation that didn't want to appear to age,
the company created clothing that allowed customers to continue to appear slim despite a few
added pounds. It convinced its target group that it really knew them, thereby establishing a fit with
them both literally and emotionally. Then the company very successfully extended its product
lines: Liz Collection for professional clothing, Liz Wear for casual clothes, Elizabeth for large
women, Dana Buchman for women who can afford designer clothing. The company was so
successful in its strategy that it extended its lines into pocketbooks, shoes, belts, jewelry, and even
perfume.

Create Structural Bonds

Structural bonds (or learning relationships) are created by providing services to the client that are
frequently designed right into the service delivery system for that client. Often structural bonds are
created by providing customized services to the client that are technology-based and serve to make
the client more productive. Allegiance Healthcare Corporation, a spin-off of Baxter Healthcare,
provides an example of structural bonds in a business-to-business context. The company has
developed ways to improve hospital supply ordering, delivery, and billing that have greatly
enhanced their value as a supplier. They created "hospital-specific pallet architecture" that means
that all items arriving at a particular hospital are shrink-wrapped with labels visible for easy
identification. Separate pallets are assembled to reflect the individual hospital's storage system, so
that instead of miscellaneous supplies arriving in boxes sorted at the convenience of Allegiance's
needs (the typical approach used by other hospital suppliers), they arrive on "client-friendly"
pallets designed to suit the distribution needs of the individual hospital. By linking the hospital
through its ValueLink service into a database ordering system, and providing enhanced value in
the actual delivery, Allegiance has structurally tied itself to its over 150 acute-care hospitals in the
United States. In addition to the enhanced service ValueLink provides, Allegiance estimates that
the system saves its customers an average of $500,000 or more each year.(n16)
An excellent example of structural bonds in business-to-consumer markets is Hallmark's Gold
Crown Card program that identifies what each customer values about his or her relationship with
Hallmark as a platform for turning him or her into a Platinum customer. After enrolling at any
Hallmark store, customers are immediately mailed high-quality plastic cards that can be used
within a month to earn bonus points. Thereafter, for every dollar spent and for every Hallmark card
purchased they earn points that accumulate and turn into dollar savings. At 300 points per quarter,
a customer joins the equivalent of a Gold tier, receiving a personalized point statement, a
newsletter, Reward Certificate, and individualized news of new products and events at local stores.

In 1996, Hallmark created its Platinum level for the very top 10% of customers who buy more
cards and ornaments than others. They are sent elaborate mailing pieces with gold seals and new
membership cards clearly identifying them as preferred members. Along with amenities (such as
longer bonus periods and their own private priority toll-free number), the company communicates
with them individually about the specific products they care about. Buyers of Christmas Keepsake
ornaments receive specialized information about them, whereas heavy buyers of cards receive free
cards to introduce new lines. Because these communications are not programmed, customers
experience surprise and delight.(n17)

Results have been impressive. In addition to over 50 consecutive months of share gains since
inception of the program, the revenue represented by Gold Crown Program (in our terminology
Platinum) members was more than a billion dollars in 1997 and over $1.5 billion in 1998. Member
sales represent 35 percent of total store transactions and 45 percent of total store sales.(n18)

Offer Service Guarantees

Because service problems and dissatisfaction lead to customer defections, companies must use the
most powerful methods to find out when service problems occur and then to resolve them quickly
and completely. Possibly the most effective strategy for accomplishing this is the service
guarantee, whereby a company assures customers that they will be satisfied or else they receive
some form of compensation commensurate with their problem. While many forms of service
guarantees exist, and cover different aspects of service (meeting deadlines, delivering a smile,
achieving reliability), the type of service guarantee most relevant for the very best customers is a
complete satisfaction guarantee. This can take several forms, but the form that is best for the
customer assures satisfaction and, lacking satisfaction, promises the customer that any problems
that occur will be fixed immediately. Strategies exist for effective guarantees--they should, for
example, be easy to invoke and have a clear payoff--and these should be followed to create the
very best guarantee possible. That way, Gold customers will have no reason to leave and will want
to stay and become Platinum customers.

Turning Iron into Gold

Customer alchemy can also change something ordinary (a less profitable Iron customer) into
something valuable (a more profitable Gold customer). There are many ways to turn Iron
customers into Gold customers. The foundation involves finding out what is most important to the
Iron customers--not assuming that it is the same thing that is important to Gold customers--and
then attending to the specific factors that drive the Iron customers' satisfaction and behavior. With
this lower level of customers, it is rarely necessary to find out what makes each individual
customer satisfied. Instead, it is critical to find the key drivers of the relationships across the
customers in the tiers. In our example, we saw how improving the key driver of the lower 80%
(attitude) could increase both incidence of new business and volume of new business, thereby
turning some lower-tier customers into upper-tier customers. Once we identify these factors, we
can use one of the following strategies to increase usage and profitability of those customers.

Reduce the Customer's Nonmonetary Costs of Doing Business

Since the idea in the Customer Pyramid is not to reduce price and thereby lower profit margins, a
company should constantly be looking for ways to lower the nonmonetary costs of doing business
with customers. An excellent approach to this strategy involves reducing the hassle and search
costs that customers associate with making purchases in many high-technology categories today.
Small businesses, for example, have tremendous difficulty deciding what forms of communication
technology to buy and from which suppliers. So many offerings and combinations of offerings
exist and a plethora of providers constantly besiege customers with differences that are difficult for
them to discern. Alltel, a full-service high-technology communications firm, offers an answer that
works very well for small businesses and individuals. A customer can obtain all three
components--paging, wireless, and long distance--from the company, have it all appear on the
same bill, and deal with all service problems easily by having only one customer service
department for all three services. In doing so, the company has also increased its business with the
customer, as it now obtains not just the customer's paging business or long distance business or
wireless business, but all three. The costs of dealing with the customer are reduced as well,
because handling a single customer with three services costs less internally than handling three
different customers, each with a single service. The customer is now a Gold customer rather than
an Iron customer and is far more strongly linked into the firm because its associations cross service
categories.

Add Meaningful Brand Names

One of the most effective strategies some discount retailers have used recently to turn Iron
customers into more profitable Gold customers is to create a brand-within-a-brand image in their
stores. Typically, this involves associating product lines in the stores with more favorable brand
images than those of the store itself. For example, when K-mart was working to improve its image
and profitability, it affiliated with Martha Stewart to manufacture and market an entire line of
household soft goods such as sheets and towels. The line carried Martha Stewart's name and was
priced considerably higher than other goods in the same category in K-mart. Rather than making
small profit margins on these items, the company began to make much larger margins. It also
generated loyalty and multiple purchases because the line of products was color-coordinated.
Customers wanted to buy these products not because they were associated with K-mart but
because they were affiliated with a very favorable and well-known person. By associating with this
favorable brand, the store created a brand personality where none existed in the past and was able
to improve the profitability of that product category in the store. As it became clear that the
branding was successful, the company extended it beyond its original bounds to include other
products.

Become a Customer Expert through Technology

One of the best examples of turning Iron customers into Gold customers involves the battery of
strategies used by Amazon.com, the online bookstore. Initially, the company focused on being able
to get virtually any book that the customer wanted. Once it established this ability, it recognized
that developing profiles of individual customers was a winning strategy. Once a customer had
purchased something from Amazon.com, the company started to build its information database
about the customers' preferences. Whenever a customer ordered a book, the database produced a
list of books from the same author and on similar topics that could expand the purchase. These
suggestions were often very welcome to the customer, who might not have been aware of the other
books. After multiple purchases, the database was designed to make suggestions as soon as the
customer signed on, again increasing purchases. Before long, the company discovered that
customers who bought books also bought CDs and movies, and it expanded its product lines to
satisfy these other needs of its customers. To top the strategy off, the company asked customers if
they wanted to receive information about products that were new and dealt with their interests.
Using the customer's e-mail address, Amazon.com thereby created ongoing communication with
customers about their personal interests, making it so easy to deal with the company that customers
began spending all their book dollars--as well as CD and movie dollars--at Amazon.

Become a Customer Expert by Leveraging Intermediaries

Caterpillar, the world's largest manufacturer of mining, construction, and agriculture heavy
equipment, owes part of its superiority and success to its strong dealer network and product
support services offered throughout the world. Knowledge of its local markets and close
relationships with customers built up by Caterpillar's dealers are invaluable. "Our dealers tend to
be prominent business leaders in their service territories who are deeply involved in community
activities and who are committed to living in the area. Their reputations and long-term
relationships are important because selling our products is a personal business."(n19)

Develop Frequency Programs

Most retail firms can benefit from frequency programs that encourage customers to spend more
with the company in order to receive special benefits. Convenience-item retailers like VCR rental
companies can effectively use frequency programs. Blockbuster, for example, developed a
program called Blockbuster Rewards. For a one-time payment of $9.95, a customer is able to get
benefits that include: rent five videos, get one free every month; two free video rentals a month
just for joining; and one free video rental with each paid movie or game rental every Monday
through Wednesday. Notice that it is not the one-time fee that makes the Blockbuster Rewards
customer a Gold customer--it is the frequent use of the service. The firm is motivating the use of
capacity that it cannot otherwise sell, and encourages customers to turn to Blockbuster for all their
video rental needs. Blockbuster did not drop the price on its video rentals, which would lower its
profits. In fact, the company increased prices and reduced the number of days a new video could
be rented from two to one.

Create Strong Service Recovery Programs

A strong service recovery system--one that catches all possible service errors and corrects them
promptly and appropriately--is critical to turning Iron into Gold. The best recovery systems
proactively identify when customers who make purchases are let down by a company's product or
an interaction with someone from the company. A company must have processes in place to rectify
these situations, whether they involve billing, delivery, or any other company-customer interface.
Getting the Lead Out

Allocating more effort to customers that are more valuable implies allocating less effort to
customers that are less valuable. In particular, Lead customers weigh the company down. They are
the customers who don't pay their bills. They are the college students who bounce checks. They are
the telephone customers who run up large long distance bills that require the company to pay
agencies to collect. They are the industrial firms who make purchases and then, in disputes over
deliveries or quality, let their invoices go 60 or 90 days or longer.

Lead customers are also those who buy so little that dealing with them costs more than they are
worth. Marketing and personal selling expenses may exceed the profit on small business accounts.
Transaction costs for customers who place orders for one or two items in a year make them
unprofitable. As is sometimes the case, the smallest customers also expect the most in terms of
service, making the cost of handling them far higher than the profits received from them.

Attempting to move customers from Lead to higher categories is not an easy task, and it is not
always recommended. Only if the future potential of a Lead customer is known to be high (for
example, the MBA student who is currently an unprofitable banking customer) is enduring a
period of customer unprofitability justified. During this time, the firm could attempt to make these
customers more profitable, something that can be accomplished in two basic ways: prices can be
raised or costs to serve the customers can be reduced.

Raise Prices

One effective approach is to increase prices to Lead customers by charging for services they have
been receiving but not paying for. A software company that has been giving free technical help to
Lead customers (who, by definition, typically abuse the privilege) can begin to charge for the
service. True Lead customers will leave rather than pay; others may choose to stay and thereby
join the Iron category because of the added revenue they contribute to the firm.

An excellent example of this strategy is being used by a number of both large and small telephone
companies with customers who don't pay their bills. Typically, this segment of customers owes
one of the larger companies a considerable amount of money (greater than $300) in long distance
charges and has not made progress in paying it off. Their phone service has been cancelled and
they no longer can get even local service. Enter companies like E-Z Tel of Dallas and Annox of
Pleasant View, Tennessee, who offer pre-paid local service. To get the service, a customer has to
go to a local pawnshop and plunk down $49 in cash plus $2 for a money order (compared to $17
for a regular customer). The customer then receives local phone and 911 service for the next
month, despite owing a debt to a long distance company. This niche market, consisting of about 6
million households that go unserved because of unpaid phone bills, offers considerable profit at
these higher prices. The small companies that serve this market buy service from a local phone
company at a 20% discount and resell it at a 300% premium. To these customers, giving up more
in terms of price is not the issue--having the telephone service is of most value to them. While the
examples we provide here are small independent companies, many large telephone companies are
starting to offer the service to compete in this market because it is profitable. In most cases, they
are changing the brand name that they sell the service under to avoid undermining their image in
other tiers.(n20)
Reduce Costs

The alternative to raising prices among Lead customers is to reduce costs and find ways to serve
the segment more efficiently. Banks have accomplished this by reducing the number of full-service
branches with tellers and staff and replacing them with ATMs that are able to service customers
for far less money. Many banks have identified the customer group that is on the bottom tier of the
Customer Pyramid as college students. These customers have very little money of their own,
cannot afford savings accounts, and often shop for and obtain free checking accounts. While banks
realize that these customers may someday be good customers--and therefore do not want to
alienate them--they also recognize that serving them is expensive. They therefore are developing
strategies for dealing with these customers in inexpensive ways. For example, they encourage the
students to bank by telephone, ATM, or the Web, sometimes going so far as to require a fee if they
visit tellers more than two or three times a month. They require the students to have overdraft
checking, a money maker for banks, to avoid the high cost and inconvenience (to the bank) of
bounced checks. They charge high fees when monthly payments are not on time.

Many business-to-business firms that previously served all customers with personal salespeople
now handle only Platinum or Gold customers that way, serving Iron and Lead customers with
inside salespeople. IBM made a revolutionary switch from its historical way of dealing with
customers when it realized in the early 1990s that it was highly inefficient to serve all small
customers with the personal service that had characterized the firm in the past. Rather than have
customer engineers personally fix old machines for unprofitable customers for free, the company
started to charge for these repairs as well as develop ways to fix machines remotely, thereby saving
money.

Get the Lead Out

It is very difficult to move most Lead customers from the low tier to a higher tier because they
have characteristics that make them less desirable customers. They either don't pay their bills, don't
have much money to spend, don't need what the company offers, or don't have the qualities that
make them loyal to companies. If either or both of the two approaches discussed above are not
effective, then the wisest solution is often for the company to try to free itself of them. The firm
must do this carefully so that customers do not spread negative word of mouth that could deflect
potentially profitable customers from choosing the firm.

Serving Customers According to Their Tiers

Once the tiers have been established, various elements of service strategy can be adjusted to the
tiers. For example, the need for customer information varies by tier. With Platinum and Gold
customers, it is desirable to know individually what each customer wants so as to develop a custom
profile of each customer's history, preferences, usage, and expectations. For Iron customers, on the
other hand, segment preferences and perceptions are usually adequate. Lead customers may be
studied for different purposes altogether, such as to examine ways that they may be served more
efficiently and with less cost.

The most important marketing task implied by the Customer Pyramid is to serve the most
profitable customers in ways that extend and enrich their relationships with the company. Careful
consideration should be given to the product and service needs of these customers and to their
value propositions. However, if the firm is to maintain profitability among these tiers, it must be
careful not to focus on improving the value proposition mainly by discounting and other price-
related strategies. Lowering prices reduces the profitability of the segment, often unnecessarily, for
price may not be high on the list of requirements for this segment.

Profit Implications of Moving Customers Up the Pyramid

The use of the Customer Pyramid can supercharge a company's profits as it eliminates unprofitable
customers and converts lower-tiered customers to higher-tiered customers using targeted and
efficient strategies. A major automotive manufacturer has used a four-tier Customer Pyramid
approach to identify its dealers' best customers, their average number of service visits, and their
spending per visit. In one of its major dealerships, the service revenue differences across these
groups (when number of visits and average amount spent/visit are considered) are striking: $3,743
for Platinum (6,554 customers), $2,713 for Gold (2,609 customers), $620 for Iron (2,720
customers) and $263 for Lead (19,549 customers). In speaking to the CRM manager at this global
automotive company we have learned that they are still working on the profit and CLV
implications of this analysis, but have not achieved it yet. However, even examining revenue shifts
provides insight into the power of the model. The implication of moving even 20% of the Lead
customers to the Iron category is an improvement of $697,899 in revenue. Moving 10% of the Iron
to Gold improves revenue by $565,110.

This same manufacturer has also examined the gross profit (at another dealership) from distinct
profit tiers of customers--those customers who have no service performed at the dealership (Iron),
those who have some service (Gold) and those who have all of their service performed at the
dealership (Platinum). In a comparison of their Gold and Platinum customers, the company found
that Gold customers generate $1674 in gross profit to the dealership, while Platinum customers
generate $2,259. We can see that each Gold customer who is motivated to have all of his/her
service performed at the dealership (moved to Platinum) results in an additional $585 in gross
profit to the dealership. If we can motivate 10-20% of such customers to change their behavior in
this way, we have the opportunity to increase gross profit by almost $1 million--not a trivial
amount for an automobile dealership. As these real-life examples illustrate, there is a tangible
benefit to understanding what motivates customers at each tier of the pyramid and to crafting
marketing strategies to motivate customers to move "up the Pyramid."

Summary

Customer profitability can be increased and managed. By sorting customers into profitability tiers
(a Customer Pyramid), service can be tailored to achieve even higher profitability levels. Highly
profitable customers can be pampered appropriately, customers of average profitability can be
cultivated to yield higher profitability, and unprofitable customers can be either made more
profitable or weeded out. Tailoring service to the customer's profitability level can make a
company's customer base more profitable, increasing its chances for success in the marketplace.

Notes

(n1.) R. Brooks, "Alienating Customers Isn't Always a Bad Idea, Many Firms Discover," Wall
Street Journal, January 7, 1999, pp. A1 and A12.
(n2.) V. Zeithaml, "Service Quality, Profitability, and the Economic Worth of Customers," Journal
of the Academy of Marketing Science, 28/1 (Winter 2000): 67-85.

(n3.) R. Buzzell and B.Gale, The PIMS Principles: Linking Strategy to Performance (New York,
NY: The Free Press, 1987).

(n4.) Zeithaml, op. cit.

(n5.) R.N. Bolton and J. Drew, "A Longitudinal Analysis of the Impact of Service Changes on
Customer Attitudes," Journal of Marketing, 55/1 (January 1991): 1-9.

(n6.) R.T. Rust, A.J. Zahorik, and T.L. Keiningham, Return on Quality: Measuring the Financial
Impact of Your Company's Quest for Quality (Burr Ridge, IL: Irwin, 1994).

(n7.) V.A. Zeithaml, L.L. Berry, and A. Parasuraman, "The Behavioral Consequences of Service
Quality," Journal of Marketing, 60/2 (April 1996): 31-46.

(n8.) R.N. Bolton, "A Dynamic Model of the Duration of the Customer's Relationship with a
Continuous Service Provider: The Role of Satisfaction," Marketing Science, 17/1 (Winter 1998):
45-65.

(n9.) A.J. Zahorik and R.T. Rust, "Modeling the Impact of Service Quality on Profitability: A
Review," in Terri Swartz et al., eds., Advances in Services Marketing and Management
(Greenwich, CT: JAI Press, 1992), pp. 247-276.

(n10.) G. Hartfeil, "Bank One Measures Profitability of Customers, Not Just Products," Journal of
Retail Banking Services, 18/2 (1996): 24-31.

(n11.) D. Connelly, "First Commerce Segments Customers by Behavior, Enhancing Profitability,"

Journal of Retail Banking Services, 19/1 (1997): 23-27.

(n12.) R. Rust, V. Zeithaml, and K. Lemon, Driving Customer Equity: How Customer Lifetime
Value is Reshaping Corporate Strategy (New York, NY: The Free Press, 2000).

(n13.) V. Zeithaml, "Consumer Perceptions of Price, Quality and Value: A Means-End Model and
Synthesis of Evidence," Journal of Marketing, 52/3 (July 1988): 2-22.

(n14.) J.S. Johnson, "Home Depot Renovates," Fortune, November 23, 1998, pp. 200-204+.

(n15.) James Brian Quinn, "Strategic Outsourcing: Leveraging Knowledge Capabilities," Sloan
Management Review, 40/4 (Summer 1999): 9-22.

(n16.) Robert Hiebeler, Thomas B. Kelly, and Charles Ketteman, Best Practices: Building Your
Business with Customer-Focused Solutions (New York, NY: Simon and Schuster, 1998), pp. 125-
27. Discussed in V. A. Zeithaml and M. J. Bitner, Services Marketing and Management (New
York, NY: McGraw-Hill, 2000).
(n17.) F. Newell, Loyalty.com: Customer Relationship Management in the New Era of Internet
Marketing (New York, NY: McGraw-Hill, 2000), pp. 232-236.

(n18.) Ibid., p. 236.

(n19.) D.V. Fites, "Make Your Dealers Your Partners," Harvard Business Review, 74/2
(March/April 1996): 84-95.

(n20.) K. Schill, "Dial-a-Deal," The News and Observer, January 31, 1999, p. E1-3.

California Management Review Summer2001, Vol. 43 Issue 4, p118