The Customer Pyramid is a new concept of market segmentation that is based on customer profitability.

A new approach of segmentation

Traditional customer segmentation approaches have often used geographic or demographic attributes such as age, gender, etc. to classify customers (Beane et al. 1987). Recently, new publications have suggested not differentiating customers by demographic factors but by more business related attributes such as their purchase history or profitability (Bock et al. 2002; Tsai et al. 2004), or by their expected lifetime value (Hwang et al. 2003).

All of them have in common a more or less detailed segmentation of the customer base similar to Zeithaml’s customer pyramid:

* Platinum customers: most profitable customers, who are typically heavy users of the product, who are not overly price sensitive and whose commitment to the enterprise is high.

* Gold customers: The profitability level is lower and the commitment is not as high as platinum members, even though they are heavy users.

* Iron customers: These customers provide the volume needed to utilize the firm’s capacity but whose spending levels, loyalty and profitability are not substantial enough for special treatment.

* Lead customers: Customers that cost the company money. The company must minimize this customer segment, either by trying to upgrade customers or by disassociating from them. However, if customers will be more profitable in the future, the company should serve them well.

Each of these customer segments has a different profitability and different service level requirements and expectations. Therefore service offerings should be tailored differently to each of the segments.

The customer pyramid tool enables firms to identify differences in current and
future customer profitability. The key to segmenting customers by profitability
levels is combining per-customer acquisition and maintenance cost data with
revenue information.

Migrate customers up the pyramid

There are several tactics that companies can employ to migrate customers up the
pyramid, from Lead to Iron to Gold to Platinum, including:

Becoming a full-service provider – To increase share of wallet, offer services that

Gold customers may be purchasing elsewhere

Broadening offering range – Offer products related to core offerings to entice Gold

customers to purchase more

Reducing nonmonetary costs of doing business – Instead of lowering prices (which

lowers profits), make it easier for customers to do business with you.

Add Meaningful Brand Names - associating product lines in the stores with more favorable brand images

Become a Customer Expert through Technology - build information database about the customers' preferences and suggest them individual offers (e.g. Amazon)

Become a Customer Expert by Leveraging Intermediaries - Build up knowledge of its local markets and close relationships with customers by working with intermediaries

Develop Frequency Programs - most retail firms can benefit from frequency programs that encourage customers to spend more with the company in order to receive special benefits

Create Strong Service Recovery Programs

Get the lead out

It is very difficult to move most Lead customers from the low tier to a higher tier because they have characteristics that make them less desirable customers. They show often a bad payment practices, low income, needs the company cannot satisfy, or don't have the qualities that make them loyal to companies. Only if the future potential of a Lead customer is known to be high (for example, a student who is currently an unprofitable banking customer) is enduring a period of customer unprofitability justified. During this time, the firm could attempt to make these customers more profitable, something that can be accomplished in two basic ways: prices can be raised or costs to serve the customers can be reduced.

If either or both of the two approaches are not effective, then the wisest solution is often for the company to try to free itself of them. The firm must do this carefully so that customers do not spread negative word of mouth that could deflect potentially profitable customers from choosing the firm:

* Strategically underserve them: longer waiting time, low costumer service, no offerings.

* Charge them higher prices: exceed their willingness to pay.

* Refer them friendly to a competitor.

The company should try to push away customers who does not bring any profits. Since companies in most cases cannot make a forced churn, they have to use subtle techniques:

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