Potential Value

Segment I: Segment I can be regarded as unattractive. It has low potential value and low current value. Therefore, it is expected that future profitability is low. In order to maximize the profitability of this segment, strategies should focus on cost reductions and possibly on price increases (i.e. less promotions) instead of trying to increase the purchase level.

Segment II: Segment II has high potential value, but the company has not succeeded in taking a large share of this value. Therefore, companies should aim to get a larger part of the customer potential in this segment. Customers in this segment have many opportunities for upselling activities. Of course, some customers might be more sensitive to such activities than others.

Segment III: Segment III has low potential value and high current value. We are concerned here with relatively loyal customers with low up-selling possibilities. As loyal customers are important for companies, companies should strive to keep these customers. However, up-selling efforts are not likely to be successful.

Segment IV: This segment is the most valuable segment. These customers are loyal and have a large potential value. Losing this group of customers would really harm the company. Management should strive to keep this group of customers using all kinds of relational efforts. This group might, for example, get priority in the service delivery process.

Customer Value

For any given company, a customer represents 2 values.

1. Realized Value: This is the $ value of profit that the customer contributed to the company's bottom line for a given period.

2. Potential Value: This is the $ value of profit from lost opportunity during the same given period. The lost opportunity could have been lost to a competitor or its still not realized by anyone.

If companies are able to derive these 2 values (Realized Value & Potential Value), then the company can device various strategy to increase the "Realized Value" from the customer.

Once we get these values, the following questions need to be answered:

1. Which customer should the company give more importance to? Is it for customers with higher Potential Value or customer with higher Realized Values.
2. What kind of service levels should we maintain for each of these 2 segments
3. Should we perceive the $ value alone or should we standardize them to a % value. In other words, Realized Value + Potential Value = 1.