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Angel And Demon Customers

Larry Selden and Geoffrey Colvin had a book back in 2003 that made quite a stir. It introduced the idea of angel and demon customers. This was a catchy way of explaining the notion that not all customers are profitable. Indeed, Selden and Colvin argue that customers should not all be treated the same.

What Are Angel And Demon Customers?

Selden and Colvin focus exclusively on driving up the price/earnings ratio. (Just run with their chosen goal for the purposes of this discussion). As such, angel customers are those that help you do this — they describe these as being profitable customers. Demon customers are those who do the opposite, they lose the firm money. As such, this work has obvious connections to work on customer lifetime value — CLV.

Their definition is about an outcome — not inherent customer essence per se. This means that the demons sometimes have characteristics that a reasonable person might dispute their demonity, or perhaps demon-ness. (I don’t know the term for the essential nature of being a demon).

Demon customers buy on discount. They also return items at high levels. To be fair to the authors they, therefore, recognize a lot of the ‘bad’ behavior of the customer is being driven by the decisions of the firm. The authors are keen to emphasize, and do so on a number of occasions, that it is important to sell the customers the right product the first time. What is more, the firm shouldn’t really be offering opportunities to buy that are unprofitable for the firm. As such, the firm can do some simple demon exorcism, turning demons into more angelic customers.

Angel And Demon Customers

In my opinion, it would be an overly crude caricature to say that the authors are all about firing customers left, right, and center. They say “there’s almost always a better alternative” (Selden and Colvin, 2003, page 8). Still, they argue that the company culture must get comfortable with treating customers differently.

Many Important Points

The book is strong on setting the background and the need for a customer focus. (This will be familiar if you know the customer centricity literature). The authors explain how good customers can be alienated by the inability of firms to see the customer as a whole rather than as a lot of separate product-based relationships. (I had a very similar example to the one they describe with my bank recently, in 2020, so I know their points remain valid a generation on).

They argue it is important to structure around the customer. This is radical and interesting.

But when a manager is explicitly in charge of a customer segment and realizes that increasing the economic profit from that segment is his job, then his focus on the customer value proposition suddenly become clear.

Selden and Colvin, 2003, page 108.

While the pronouns could be more inclusive the basic advice seems good eighteen years on. If you are focused on the customer then value propositions are much easier to see than if you are focused on a product.

Reporting should be on the customer segment and these segments should be based upon needs/usage and profitability rather than convenient, but not very useful, things, e.g., demographics. Beyond the angel and demon customers stuff, there is a lot of connected good advice on strategy.

One Strong Assertion

This being a popular book they make a few strong assertions without properly backing them up. The authors have a focus on the P/E ratio. They basically handwave away any objections to measurement issues. They look at (handpicked) firms over a decent amount of time. So, they argue, any short-term increases in the PE ratio from short-sighted decisions to manage accounting earnings should be mitigated. It is a reasonable starting point for a discussion but not really ‘proof’ of their point.

A Second Assertion: On Full Allocation Of Costs

Perhaps even more crucial is the assertion that the costs allocated to the customer must be the full cost. I.e. with all overheads allocated.

The CFO, to his credit, got it. He understood that all of the company’s costs must be attributed to specific customers because the only way the company continues to exist is by serving customers.

Selden and Colvin, 2003, page 49

This is a great point for discussion. Still, the challenge of fixed and variable costs is a massive one. Overhead costs attribution isn’t something that can be “got”. There isn’t a universally correct answer.

Instead, the decision determines the best approach. The authors’ view isn’t at all convincingly developed. They, and the CFO, are essentially wrong for marketing decisions such as customer acquisition. (To be fair, there are problems in arguments on all sides).

A big problem is that many customers who might be seen as angels with one costing system will be seen as demons with another costing system. This gets to the heart of their advice. If angels can appear as devils and vice versa depending upon how you look this changes how you run the firm. As such, their advice remains problematic even from a narrow purely economic decision-making perspective. If you can’t convincingly state who are the angels and demons it is hard to run a firm by such a categorization.

Still, it is a book to get you thinking even if you don’t agree with everything. That has to be a good thing. Do you know who are your angel and demon customers?

For more on contribution see here.

For more on CLV see here and customer equity see here.

Read:  Larry Selden and Geoffrey Colvin (2003) Angel Customers and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock, Portfolio

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