Customers are looking for good deals. It’s what gets them in the door and what keeps them coming back. But what should businesses focus on—getting them in or bringing them back? Two Yale School of Management professors, Jiwoong Shin and K. Sudhir, have developed a tool to make that decision easier.
This decision tool uses two questions:
1. How much shopping flexibility do customers have?
2. Which customers contribute most to profitability?
High shopping flexibility means that consumers could easily get what is offered elsewhere, while low flexibility means that they have few options. The second question essentially asks you to apply the 80/20 rule, where a small set of customers account for a large portion of the profit. If this rule applies, there is a high concentration in customer value. If customers are fairly equal in spending, a business has a low concentration in customer value.
According to Sudhir and Shin, “In markets that have a high degree of both flexibility and value concentration, companies should focus on rewarding their own customers—in particular, their best customers. If either of these characteristics is not in place—that is, either the value concentration is low, shopping flexibility is low, or both are low—then managers should focus on rewarding new customers or those drawn from the competition.”
This is not just some theory: it has had a real-world impact on Red Lobster. According to David Bell of Harvard Business Review, “Red Lobster got its start bringing fresh seafood to landlocked parts of the US. It developed an outstanding supply chain for fish and became a dining out routine for millions of Americans, especially on its famous “endless shrimp” days. But in recent years, as cold chains