The 80:20 Conundrum Identifying and keeping profitable customers

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The 8020 Conundrum - Identifying and keeping
profitable customers
Vijay Srinivasan, Chief Operarting
Officer Enterprise Services Corporates, West
and Divya Sethi, National Head VSAT
Sales BHARTI AIRTEL

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Session spread

• The Concern Why are we discussing this ?
• The Facts Lets have a closer look !
• The Concept Serving the true friends.with
  profitability
• The other side of the coin
• The Implementation Increasing Customer Lifetime
  Value in services
• CIO as ENABLER at the centre of the Business

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8020 Principle

• In any series of elements to be controlled, a
  selected small fraction in terms of number of
  elements almost always accounts for a large
  fraction in terms of effect - Italian
  economist Vilfredo Pareto

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Interpreting the 8020 Rule

• 20 customers in any market yield 80 of the
  profits
• These are the customers that need to be retained
  by organizations
• On the other hand, the remaining 80 customers
  are relatively under-served and therefore
  represent a huge business opportunity
• Organizations could therefore build a business
  strategy around either of these segments, or
  sometimes Both

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Lets have a closer look !

• Banking
• Credit Card companies data mining for the high
  usage customers and targeting for promotions
• FMCG/Airlines
• Loyalty Programs and Memberships
• Governments
• Attracting Industries for share of pie
• Telecom
• Datamining on usage patterns helps companies
  create innovative promotions for specific users

know your customer.to capture and retain them !
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Mirror Interpretation Unaddressed opportunities

• Telecom
• Expansion (Explosion ?) phenomenon High ARPU
  circles targeted first
• FMCG
• Cavinkare Tried to address the other 80 of the
  market with the small sachet proposition
• Nirma Tried to address the product gap existing
  in the detergent segment
• Travel and Tourism
• Low Cost Airlines
• Budget Hotels

We will never be short of opportunities
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The other side of the coin !
Only 20 of the market is addressed efficiently
20 of the customers get 80 of the business
20 of the customers get 80 of the business
..Fresh look at the addressable markets
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Why are we discussing this ?

• Competitive scenario in most industries
• More than 15 years after liberalization - most
  industries are deregulated
• Exposure to global business environment
• Competition is not just domestic but global
• Acquisition costs on the rise
• Increasing need to grow penetration and have
  efficient distribution
• Huge Pressure on Margins
• Cut throat competition, Efficient regulation

From product centric market.customer centric
markets
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Customer rules

• Buying power of customer on the up
• Open markets
• Global customers
• Multiple substitutes
• Reasons for defection
• Service encounter failures
• Response to failed service
• Pricing
• Competition
• Involuntary switching/other factors

Customer is KING
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But, is every customer equally profitable?
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Contribution to Overall Profitability
Contribute to more than 100 of profits
Break even customers
Customers requiring investments
Customers contributing negatively to profits
Customer Segmentation is a must !
Source R.S Kaplan and S. Anderson , Time Driven
Activity Based Costing
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Customer Groupings
True Friends
Butterflies

• Milk these accounts as
• long as they are active
• The Key is to recognize
• when to stop investing in
• the relationship

• Invest maximum time and
• effort to serve these customers
• Communicate frequently,
• respond promptly in case of
• issues

Customer Profitability
Barnacles
Strangers

• Analyze the size of
• potential business
• Cross sell if potential is
• large else minimize
• investment

• Do not invest in these
• customers
• Maximize the profit on
• each transaction

Period of Association
The Reinartz Kumar Model
Source Harvard Business Review, April 2002
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Serving the True Friends.with profitability

• Aim to .
• Attain new customers and increase the number of
  relationships
• Increase the profitability of those relationships
• Increase the duration of profitable relationships

...Increase the Customer Lifetime Value
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Calculating customer lifetime value

• Calculating a customers lifetime value requires
• The cost of acquiring the customer
• Stream of revenues from customer
• Computations of the recurring costs of delivering
  service to that customer

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Telecom Infrastructure Planning
Technology
Infrastructure Planning
Business Strategy
Customer Requirements
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ENABLER
But, who enables this ?
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IT as the ENABLER !!
.Growing Importance of IT in Business Strategy
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Multidimensional role of the CIO
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CIO as the ENABLER !

• An integral part of the Strategic think tank of
  the organization
• Acts as the backbone of operations of
  organizations
• Forays into newer areas leverage IT to derive
  maximum efficiencies
• Newer Information Systems and Communication
  Technologies helps organizations reach out to the
  masses.

Sales
Marketing
Information Technology and Networking
Quality
Research
Human Resources
Operations