Definition of the customer pyramid in business

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.