Uncovering Customer Profitability Segments for Business Customers
Journal of Business to Business Marketing,
A central premise of relationship marketing theory is that economic benefits flow from retaining customers. However, the early research focus on the duration of the relationship may obscure other important aspects of the interactions with the customer that drive profitability. Borrowing from the branding literature, where different types of customer relationships have been described (but not empirically examined), we study the patterns of business customers’ buying behavior over time and uncover several distinct patterns of profitability.
To arrive at a refined measure of customer profitability, we allocate costs using Activity Based Costing. We then develop a finite mixture model relating customer buying characteristics over time to profitability over a three year period.
Our analysis yields six segments, each with its own unique relationship profile. We find that determinants of profitability vary across the six segments. Interestingly, in none of these segments does higher duration relate with higher profitability.
Our research contributes to the customer management literature by providing insight into the importance of understanding a portfolio of different customer-firm relationships and their relative profitability to the firm. In addition, this research provides managers with a method to allocate resources across customer segments that are identifiable by using readily available transactional data.