Federal Express Corporation

Innovative service companies today recognize that they can supercharge profits by acknowledging that different groups of customers vary widely in their behavior, desires, and responsiveness to marketing. Federal Express Corporation, for example, has revolutionized its marketing philosophy by categorizing its business customers internally as the good, the bad, and the ugly--based on their profitability. Rather than marketing to all customers in a similar manner, the company now puts its efforts into the good, tries to move the bad to the good, and discourages the ugly.(n1) Similarly, the customer service center at First Union, the sixth-largest bank in the U.S., codes customers by color squares on computer screens using a database technology known as "Einstein." Green customers are profitable and receive extra customer service support while red customers lose money for the bank and are not granted special privileges such as waivers for bounced checks. Providing different service to customers depending on their profitability is becoming an effective and profitable service strategy for firms like FedEx, U.S. West, First Union, Hallmark, GE Capital, Bank of America, and The Limited. 

These firms have discovered that they need not serve all customers equally well--many customers are too costly to do business with and have little potential to become profitable, even in the long term. While companies may want to treat all customers with superior service, they find it is neither practical nor profitable to meet (and certainly not to exceed) all customers' expectations. Further--and probably more objectionable to quality zealots--in most cases it is desirable for a firm to alienate or even "fire" at least some of its customers. While quality advocates may be offended by the notion of serving any customer in less than the best possible way, in many situations both the company and its customers obtain better value. 

Understanding the needs of customers at different levels of profitability, and adjusting service based on those differences, is more critical to the enterprise than has been previously held. Specifically, in examining customers by profitability--and understanding the key elements of the costs and revenues aspects of the profit equation--it is possible to actually increase the current and future profitability of all customers in the firm's customer portfolio. The Customer Pyramid is a tool that enables the firm to utilize differences in customer profitability to manage for increased customer profitability. Firms can utilize this tool to strengthen the link between service quality and profitability as well as determine optimal allocation of scarce resources. Companies can develop customized products and services that are more closely aligned with individual customer's underlying utility functions, thereby enabling the firm to capture more value from levels of customers, resulting in higher overall customer profitability.