Competing for Share of Wallet
Getting customers to shift their value between suppliers is
particularly difficult when the service is binary - when customers either have
to be 100 per cent with one supplier or another. This is one reason why
customers have not moved between power suppliers after deregulation as much as
was first thought. In many markets, higher value customers are often harder to
shift, even if they seem the most likely to profit by it. One reason for this
may be that any saving is less significant in relative terms - the well-off
individual who can save $100–200 a year on electricity may not find the game
worth the candle, compared to the poorer user who might switch for a $40
saving.
However, for products and services where share of wallet can be
shifted, such as telecommunications or financial services, the story can be very
different. If switching is easy, customers will often shift those bits of their
business where they feel they are getting worst value. This leaves the incumbent
supplier with those bits of business where customers believe they are getting
the best deal - and of course these can be rather poor business for the suppliers. So, many telephony customers
have switched their long distance calls, calls to mobiles and international
calls to low cost suppliers, leaving their local telephone company with
unprofitable local calls. The same risk applies to postal businesses. This is
why cross-subsidy is so dangerous for suppliers whose monopolies have been
opened up to competition.
An interesting version of this problem is where individual
customer value grows over time - typically because income rises with age and so
customers buy higher value products. This applies in many areas - for example
cars, financial services, travel and telecommunications. Here, the question for
the attacking company is whether it can get a good share of the higher value
business without having the customer from the beginning. The answer to this is -
yes. Indeed, banks have discovered to their cost that having lots of loss-making
student customers is not much use if they switch suppliers as soon as they
become valuable. For the attacking company, the switching proposition is usually
based on excellent value for money, because the incumbents can't give such good
value because of the cross-subsidies required to sustain the loss-making
early-stage customers.
The defence strategy in this case is to be so good at
retaining value as customers become more valuable that there is no need to
recruit as many customers at the loss-making or low value stage. More selective
early-stage customer recruitment, combined with better prediction of which
customers have more value available, and when they will have it available, is
now becoming the central plank of many companies' customer management strategy.
This requires predictive modelling, usually based on events and transactions, as
it is the latter that indicate rising value. Of course, it is also important to
make sure that the company's products and services, people, processes and
systems are attuned to managing this value towards it.