Run the Business as a Portfolio of Customers

What it is

Portfolio published the book in June 2003. Selden was a Columbia Business School finance professor and consultant, and Colvin an editor at large at Fortune. It’s the whale curve written as a management book. The first chapter says a company is made of profitable and unprofitable customers, “angels and potential demons,” and the demons aren’t bad people. Many are unprofitable because the company doesn’t know who they are and isn’t offering them the right value proposition.

What you’ll take from it

Be precise about the numbers, because this is a consulting book, not a study. The publisher’s summary says, “In many places, it’s typical that the top 20 percent of customers are generating almost all the profit while the bottom 20 percent are actually destroying value.” The first chapter goes further and says the bottom 20% can lose more than 100% of total company profits. The evidence there is the authors’ client work, including two of the most profitable companies in North America where 10% to 15% of customers were “hugely unprofitable.” The companies aren’t named and the underlying numbers aren’t shown.

Unprofitable, for Selden and Colvin, means failing to earn the cost of capital, so a customer can show an accounting profit and still count as a demon. Their first principle follows from that.

“Think of your company not as a group of products or services or functions or territories, but as a portfolio of customers.” Chapter 1, Principle No. 1

The other two are to manage that portfolio for superior returns to shareowners, not just revenue growth or customer satisfaction, and to win each segment with a better value proposition than the competition’s. Firing customers is a last resort, and in their words “there’s almost always a better alternative.”

Where it shows up in your numbers

The opening story is a bank customer who was highly profitable in brokerage and deposits and got treated like a stranger by the mortgage department, because nobody owned him. He took his mortgage elsewhere and started moving his trading too. That’s what product reporting does to your A’s.

Best Buy’s CEO took up Selden’s ideas in late 2002. Fortune reported in 2006 that the first few dozen stores rebuilt around profitable segments grew same-store sales at three times the rate of regular stores. When Best Buy pushed 154 stores through in one quarter, the gap shrank to 5.4% against 3.3% for the chain.

So measure profit by customer before you reorganize around it, with the cost of capital as the bar. Then ask the book’s three questions of each tier. Who owns it, who’s accountable for its profit, and how differently do you treat it? Give the A’s and B’s an owner with a P&L, route service by tier, and fix the D’s terms before you think about firing anyone.