When to fire your customers: The Pyramid

The Customer Pyramid Explained

The Customer Pyramid (Zeithaml, Rust & Lemon, 2001) is divided into four tiers: Platinum, Gold, Iron, and Lead (though we will focus on the top three tiers and the Lead equivalent). Each tier represents a different level of profitability and customer value.

• Platinum Tier: These are your best customers. They are the most profitable, have the highest lifetime value, and are typically the most loyal. They may also act as brand advocates, promoting your products or services through word of mouth.
• Gold Tier: Gold customers are still valuable but slightly less so than Platinum. They are profitable and loyal but might not have the same level of engagement or purchasing power as Platinum customers.
• Iron Tier: These customers are profitable but more transactional. They may not contribute as much to your bottom line, but they still represent a significant portion of your revenue.
• Bottom Tier (Lead equivalent): These customers actually cost the company money. They might frequently tie up customer service resources, return products often, or only purchase during heavy discounts.

Maximising Profit Margins for the Top Tiers

For customers in the Platinum, Gold, and Iron tiers, the primary goal should be to increase profit margins. This can be achieved through a combination of bundling and enhanced service offerings:

1. Bundling: Offer these customers exclusive bundles that provide added value at a higher price point. For example, a telecommunications company might offer a bundle that includes mobile, internet, and streaming services at a premium price. By bundling services, you can increase the overall spend of these customers, and encourage customers to purchase higher margin offerings.

2. Enhanced Service: Provide superior customer service, personalised experiences, or exclusive perks to your top-tier customers. This not only reinforces their loyalty but also encourages them to spend more, further increasing their profitability. Think about why bars give regulars discounts or additional credit. That is also how Starbucks has been leveraging their loyalty program to reward those that have spent a fortune on their coffees.

Cutting the Bottom 20%

The bottom tier, often referred to as Lead customers (or the lowest 20% in the context of profitability), can actually be detrimental to a company’s bottom line. These customers may drain resources without providing sufficient returns. I personally did plenty of bank switching to open a new account and receive a few hundred quid in switching bonuses – only to never use my account once the money was transferred out. I was probably costing these banks – not only in the bonus they paid out but also in the costs of onboarding my account. In addition, some of you readers might have been lucky to benefit from Pret A Manger’s free trial of their subscription. This was their strategy of bringing on lead customers and hoping to convert them to iron-tier customers, though their move to later remove the free trial reflects that it might not have been a successful experiment. Personally, I cancelled immediately after the trial ended – not a huge fan of the coffee.

An example of a company proactively removing lead customers is Sprint Telecom, which famously “fired” a group of customers who were costing the company more than they were worth. These customers were frequently calling customer service, demanding refunds, or exploiting policies in ways that tied up valuable resources. This strategy isn’t without precedent. For instance, casinos ban card counters because their actions skew the odds of the casino profiting against them.

Risks and Considerations

There are potential risks to removing the bottom 20% of customers. If not handled carefully, it can create negative publicity or alienate other customers who may view the move unfavourably. However, these risks do not always materialise. The key is to approach this process thoughtfully, perhaps by gradually phasing out unprofitable customers or by clearly communicating why certain behaviours (such as excessive returns or misuse of services) are not sustainable.Eliminating these unprofitable customers might seem risky, but in many cases, it’s a necessary step to protect overall profitability.

As for us consumers, I’m always ready to pounce when I see a good deal, even if I have to be a heavy lead customer to another business. Maybe one day I’ll get banned, but at least I got my money’s worth!