Uncovering Customer Profitability Segments for Business Customers

Abstract

Purpose: 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 interaction with the customer that drive profitability. Borrowing from the branding literature, where different types of customer relationships have been described (but not empirically examined), the authors segment customers based on their buying behaviors over time and uncover several distinct patterns of profitability. Methodology: To arrive at a refined measure of customer profitability, the authors allocate costs using activity-based costing. They then segment customers using a finite mixture model relating customer buying characteristics over time to profitability over a three-year period. Findings: Their analysis yields six segments, each with its own unique relationship profile. They find that determinants of profitability vary across the six segments. Interestingly, in none of these segments does longer duration correlate with higher profitability. Contributions: First, the research provides insight into the importance of recognizing different types of buying patterns over time and their impact on profitability. Second, this research provides managers with a method to allocate resources across customer segments that are identifiable using readily available transactional data. Third, the authors contribute to the segmentation literature by adapting and empirically validating buying behaviors as an appropriate basis for segmentation. Specifically, they build on prior research that uses buying behavior to micro-segment customer bases in industrial markets.