Customer Portfolio Management: Creating Value with a Large Leaky Bucket of Customers

Customer Portfolio Management

Management on the Cutting Edge series

Abbie Lundberg, series editor

Published in cooperation with MIT Sloan Management Review

Marco Bertini and Oded Koenigsberg, The Ends Game: How Smart Companies Stop Selling Products and Start Delivering Value

Christian Stadler, Julia Hautz, Kurt Matzler, and Stephan Friedrich von den Eichen, Open Strategy: Mastering Disruption from Outside the C-Suite

Gerald C. Kane, Rich Nanda, Anh Nguyen Phillips, and Jonathan R. Copulsky, The Transformation Myth: Leading Your Organization through Uncertain Times

Ron Adner, Winning the Right Game: How to Disrupt, Defend, and Deliver in a Changing World

Satish Nambisan and Yadong Luo, The Digital Multinational: Navigating the New Normal in Global Business

Ravin Jesuthasan and John W. Boudreau, Work without Jobs: How to Reboot Your Organization’s Work Operating System

Mohan Subramaniam, The Future of Competitive Strategy: Unleashing the Power of Data and Digital Ecosystems

Christopher B. Bingham and Rory M. McDonald, Productive Tensions: How Every Leader Can Tackle Innovation’s Toughest Trade-Offs

Thomas H. Davenport and Steven M. Miller, Working with AI: Real Stories of Human-Machine Collaboration

Ravi Sarathy, Enterprise Strategy for Blockchain: Lessons in Disruption from Fintech, Supply Chains, and Consumer Industries

Lynda Gratton, Redesigning Work: How to Transform Your Organization and Make Hybrid Work for Everyone

John Horn, Inside the Competitor’s Mindset: How to Predict Their Next Move and Position Yourself for Success

Elizabeth J. Altman, David Kiron, Jeff Schwartz, and Robin Jones, Workforce Ecosystems: Reaching Strategic Goals with People, Partners, and Technologies

Barbara H. Wixom, Cynthia M. Beath, and Leslie Owens, Data Is Everybody’s Business: The Fundamentals of Data Monetization

Eric Siegel, The AI Playbook: Mastering the Rare Art of Machine Learning Deployment

Malia C. Lazu, From Intention to Impact: A Practical Guide to Diversity, Equity, and Inclusion

Daniel Aronson, The Value of Values: How Leaders Can Grow Their Businesses and Enhance Their Careers by Doing the Right Thing

Benjamin Laker, Lebene Soga, Yemisi Bolade-Ogunfodun, and Adeyinka Adewale, Job Crafting

Fred Selnes and Michael D. Johnson, Customer Portfolio Management: Creating Value with a Large Leaky Bucket of Customers

Customer Portfolio Management

Creating Value with a Large Leaky Bucket of Customers

Fred Selnes and Michael D. Johnson

The MIT Press

Cambridge, Massachusetts

London, England

© 2025 Massachusetts Institute of Technology

All rights reserved. No part of this book may be used to train artificial intelligence systems or reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

The MIT Press would like to thank the anonymous peer reviewers who provided comments on drafts of this book. The generous work of academic experts is essential for establishing the authority and quality of our publications. We acknowledge with gratitude the contributions of these otherwise uncredited readers.

This book was set in ITC Stone Serif Std and ITC Stone Sans Std by New Best-set Typesetters Ltd.

Library of Congress Cataloging-in-Publication Data is available.

ISBN: 978-0-262-04962-7

10 9 8 7 6 5 4 3 2 1

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Contents

Series Foreword

1 The Value of a Large Leaky Bucket

2 The CPM Framework and Relationship Segments

3 CPM Growth

4 Customer Portfolio Lifetime Value

5 CPM Analytics

6 Linking CPM Strategies to Business Performance

7 Capturing Value through CPM

8 Getting Started with CPM: A Roadmap

Notes

Index

Series Foreword

The world does not lack for management ideas. Thousands of researchers, practitioners, and other experts produce tens of thousands of articles, books, papers, posts, and podcasts each year. But only a scant few promise to truly move the needle on practice, and fewer still dare to reach into the future of what management will become. It is this rare breed of idea—meaningful to practice, grounded in evidence, and built for the future—that we seek to present in this series.

Abbie Lundberg

Editor in Chief

MIT Sloan Management Review

1

The Value of a Large Leaky Bucket

Our Interest in CPM

To the executives and managers for whom this book is written, the concept of customer portfolio management, or CPM, is intuitive. We are hardly the first to suggest that firms can improve their financial performance by focusing on all the customers in their portfolio. Yet the business literature is replete with strategies that oversimplify the management challenge. CPM is not just about creating volume through a large customer base. Nor is it just about creating more satisfied and loyal customers. It’s about how to create value with all the customers in a portfolio over time. The basic principle of CPM is to view a company’s market strategies as long-term investments in the strength of relationships over an entire portfolio of current and future customers.¹ Understanding when and how much to focus on acquiring customers, defending and leveraging those relationships, and converting some of those relationships to stronger, more profitable ones are key strategy decisions for growing both the current and future value of a portfolio. The relative importance of these actions requires an understanding of a company’s cost structure, its available resources, the heterogeneity of its customer needs, and the potential for customers to grow their relationship with a brand.

Our interest in CPM is rooted in our research on customer satisfaction and the creation of closer and more valuable customer relationships. But we learned some important lessons along the way. Firms have competing priorities, very different relationships with customers, and those customer relationships should be managed differently. Let’s start by taking a closer look at what we learned.

The Value of Strong Relationships

One of the more universally applicable findings from marketing research in recent decades is the value of increasing customer satisfaction to create stronger, more profitable relationships with customers. As an overall evaluation of a customer’s experience with a product or service provider, customer satisfaction has emerged as a key indicator of business performance and a firm’s ability to capture customer revenues well into the future. The development of national customer satisfaction indices in the 1990s, including the American Customer Satisfaction Index, has led to an extensive body of both academic and applied work on the value of satisfaction toward creating stronger and more profitable relationships.² The research findings are clear—customer satisfaction has well-documented, positive impacts on profit per customer, overall profitability, and a firm’s market value.³

Not surprisingly, our research, teaching, and consulting over the past thirty years has developed measurement and management systems designed to increase customer satisfaction, loyalty, and profit. That closer customer relationships are more valuable is straightforward, as a repeat customer generates more cash flow over time than a single transaction. Organizationally, however, the allure of focusing on current sales remains compelling, especially when a salesforce or management team is rewarded on short term goals. The fundamental problem with a focus on current sales is that transactions are not independent over time—not all sales are equal. In an early example of this loyalty effect, the annual profit from credit card customers was shown to be directly related to the age of a customer’s account. Profit per customer is initially negative, due to the marketing costs of acquiring customers, but grows steadily with the age of the account.⁴ This led to the popular metaphor that a leaky bucket of customers, where dissatisfied customers were constantly leaving or leaking from the bucket to be replaced by new customers, was a poor business model. The cost of constantly adding new customers to replace those who left was far greater than the cost of delivering higher satisfaction and loyalty to plug the leaks in the bucket. This led some companies to focus myopically on building a smaller, watertight bucket of loyal customers to increase profitability.

One of the authors was running an executive seminar on customer satisfaction and the loyalty effect when the discussion took an interesting turn. After explaining the virtues of improving satisfaction and loyalty, an executive from a large US telecom company was convinced that they needed to increase satisfaction and lower the annual churn or turnover in their customer base, but only by 5 percent. The other executives in the seminar were rather underwhelmed by what seemed like a modest goal in an industry where churn in customer accounts at the time exceeded 50 percent annually. The executive’s response was both simple and profound. A more aggressive target would have significant, negative consequences. Only so many customers remain loyal no matter how satisfied they are. With a customer base in the millions, a more aggressive target would significantly decrease the size of the base and undermine the company’s ability to employ thousands of people and keep hundreds of offices open. Put simply, they would lose economies of scale and become a smaller business with lower overall profits.

We learned another lesson from our studies of how B2B (business-to-business) firms manage their customer relationships. Pan Fish was a fish farming company that is now part of Mowi ASA, a Norwegian seafood company with over $5 billion in revenue and approximately 20 percent share of the global salmon and trout markets.⁵ Pan Fish faced a particular challenge. It lacked control over its harvests, specifically the size and quality of each seafood catch. This created significant uncertainties and disruptions in the supply chain, higher costs, and unpredictable pricing. Pan Fish saw an opportunity. It grew sales and increased profits by developing different value propositions for different customer relationship segments. It sold the most preferred, medium-sized range of the catch to partners with whom it had developed close working relationships (i.e., industrial manufacturers of smoked salmon). It developed a customized quality control and logistic solution for these customers which brought higher margins. The bulk of smaller and larger fish were sold to friends, or regular customers (i.e., grocery store chains and other large retailers), and the remainder of the catch was sold in an opportunistic manner to acquaintances who bought primarily on price (i.e., opportunistic buyers representing hotels and restaurants). The results were a higher average profit per customer, lower operating costs, and greater overall profits. In chapter 2 we return to this typology of acquaintances, friends, and partners in more detail as a basis for relationship segmentation.

What did the US telecom company and the Norwegian fish farming company have in common? They were both engaged in customer portfolio management. The telecom executive understood the need to balance efforts to increase satisfaction and loyalty for some customers with the need to maintain their scale of operations by including weaker relationships in their customer portfolio. The fish farming company segmented its customers by the heterogeneity of their needs and developed value propositions for different relationship segments, from strong to weak. These examples taught us what was lacking in many business models—a framework for growth that integrates competing business priorities, the creation of more satisfaction and loyalty in customers while reducing cost per customer through economies of scale.

At its core, the CPM framework views a firm’s market strategies as investments in customer relationships and projected cash flows over time. This includes entire portfolios of current and future customers involving both weaker and stronger relationships. Understanding when and how much to invest in acquiring, defending, leveraging, and growing these relationships are key business strategy decisions that affect both current and future cash flows. Depending on a company’s and market’s characteristics, the return on relationship investments may be maximized by having a larger number of weaker relationships in a portfolio, increasing the cash flow from a subset of closer relationships, or increasing the duration of that cash flow.

CPM builds upon perspectives in marketing, economics, and management strategy.⁶ Economist Michael Porter has long emphasized the importance of incorporating both cost leadership and differentiation into a firm’s strategy decisions.⁷ More specifically, when should firms compete on cost and when should they compete on product or service differentiation? But balancing these different priorities is far from simple, which leads us back to the metaphor of the leaky bucket.

The Value of a Large Leaky Bucket

The value of a large leaky bucket illustrates both the concept and complexity of CPM. Consider the choice between two very different buckets, or portfolios, of customers: (1) a smaller, watertight bucket of loyal and profitable customers, or (2) a