The 80:20 Conundrum - Identifying and keeping profitable

customers

Vijay Srinivasan, Chief Operarting OfficerEnterprise Services – Corporates, West

andDivya Sethi, National Head – VSAT Sales

BHARTI AIRTEL

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

80:20 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

Interpreting the 80:20 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

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 !

•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

Mirror Interpretation: Unaddressed opportunities

……We will never be short of opportunities

Only 20 % of the market is addressed efficiently

The other side of the coin !

20 % of the customers get 80% of the business20 % of the customers get 80% of the business

…..Fresh look at the addressable markets

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

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

But, is every customer equally profitable?

Contribution to Overall Profitability

Source: R.S Kaplan and S. Anderson , “Time Driven Activity Based Costing”

Contribute to more than 100% of profits

Customers requiring

investments

Break even customers

Customers contributing negatively to profits

…Customer Segmentation is a must !

• Invest maximum time and effort to serve these customers

• Communicate frequently, respond promptly in case of issues

• Milk these accounts as long as they are active

• The Key is to recognize when to stop investing in the relationship

• Do not invest in these customers

• Maximize the profit on each transaction

Customer Groupings

Period of Association

Cu

sto

me

r P

rofi

tab

ility

True Friends

BarnaclesStrangers

Butterflies

• Analyze the size of potential business

• Cross sell if potential is large; else minimize investment

Source: Harvard Business Review, April 2002

– The Reinartz & Kumar Model

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

Calculating customer lifetime value

• Calculating a customer’s 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

Recurring Costs

RecurringRevenues

Net Margin

Life Spanof Customer

CumulativeMargin

AcquisitionCost

LifetimeValue

Infrastructure Planning

Customer Requirements Business Strategy

Technology

Telecom Infrastructure Planning

ENABLER

But, who enables this ?

IT as the ENABLER !!

…….Growing Importance of IT in Business Strategy

Multidimensional role of the CIO

Technology Leaders

Change Enablers

Planners

Business Solution Provider

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.

Information Technology and

Networking

SalesMarketing

Research

Human

ResourcesOperations

Qu

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