The value of prime customer relationships

Abstract

PurposeThe author has previously written about the concept of “strategic market position.” Simply stated, SMP is a strategic discipline which ties together the principles of customer preference, producer economics, and corporate finance and helps companies understand when and how increased market share leads to stronger competitive position and higher profitability. This enables businesses to make smart decisions about where to expand and go after increased market share – and, conversely, where not to dig in deeper. Customer Market Position (CMP) carries SMP down to the individual customer level. It keys off the extra value inherent in what the author calls “prime customer relationships.” This paper aims to address these issues.Design/methodology/approachThe author discusses the benefits that accrue to businesses that have a high CMP with customers that account for the majority of their business. He cites a number of case examples of businesses that have reinforced their commercial success through closely managing their relationships and share of wallet with key customers. Examples of businesses in the article include medical products, e‐commerce and traditional retailing. The author then draws lessons that can be applied broadly by any business.FindingsThe author proposes four key applications for businesses wishing to apply the concept of CMP: benchmarking CMP against competitors to understand strengths and weaknesses; assessing profitability for customers in different tiers of CMP to stop subsidizing less loyal customers; identifying untapped potential to build further business with high‐CMP customers; using CMP as a leading indicator of future performance when making investment decisions.Originality/valueThis article sheds light on the economics and value of nurturing a business's most loyal customers and introduces a new metric to manage and monitor this.