Can customer profitability be accurately measured?(REQUIRED READING)

Customer relationship management is all the rage in an increasingly service-oriented economy, as businesses search for the right marketing mix to, among other things, increase the economic profit of their customers. An article in the New York Times June 1 Business section, for example, described how hotels are getting pushy in recruiting business travelers to their loyalty programs. Why? "A rush to accumulate as much information as possible about as many guests as possible, as quickly as possible." Such information is crucial, suggests the article, to keeping hotels' existing customers and enticing new ones.

Companies in all industries are focused on customer relationship management and, more specifically, an analysis of customer profitability; to identify ways to grow their most profitable customer base and increase the profitability of under-performing customers. The reality, though, is that true customer profitability is difficult to quantify. So instead, researchers often evaluate the aspects of a marketing relationship that lead to profitability.

"Marketers want a bridge to profitability," explains Douglas Bowman, professor of marketing at Emory University's Goizueta Business School "But as marketers we often study antecedents to profitability. We study things like market share, customer loyalty, satisfaction--things that we think have a direct relationship with profitability. We often study those things as opposed to profits, because profits are really hard to study. It's hard to find a company that's willing to get you the data and it's hard to get the data because the accounting systems, up until a few years ago, were set up to track costs by product, so they can tell you profitability by products or by brands. They have a hard time telling you profitability when the unit of analysis is the customer."

Profitability researchers often use what is known as the Service-Profit-Chain to link customer profits to operational resources. This and other so-called chain-link resources, however, don't give the whole profitability picture, argues Bowman.

That is why Bowman and co-author gas Narayandas, professor of business administration at Harvard Business School, have delved deeper into the Service-Profit-Chain (SPC) and emerged with groundbreaking research that they present in their paper, Linking Customer Management Effort to Customer Profitability in Business Markets. In the November issue of the Journal of Marketing Research, the study is the first to adapt the SPC framework, typically used in consumer services settings, to accommodate characteristics of industrial markets. What's more, the analysis extends the SPC framework to allow for a richer description of the linkages between vendor effort and account profitability.

Linking Customer Management Effort, offers some of the first hard data to help marketers better understand the relationship between the variables that link customers to profitability, particularly in the business-to-business setting. "This idea of the chain is a sequential process that links efforts to profits through some of these intermediary things that we think are important, such as performance on attributes, loyalty and customer satisfaction," explains Bowman. "But when researchers actually test these linkages, they have a difficult time finding a relationship between these variables--and that leads us to the conclusion that these sequential approaches really don't work. The purpose of this paper is to say that they do work, but you really need to understand and think a little bit about what is going on ...