Do you really know how your customers create value for your company? "Virtually every company claims to be customer-centric, but few really are," said Professor Larry Selden, co-director of a new Wharton program on Customer-Centricity™ with Fortune editor Geoffrey Colvin. "This is every company's No. 1 opportunity to create new shareowner wealth. Until we understand the company at this level, we don't really understand how value is being created, or, all too often, destroyed. "

When retailer Best Buy began applying the principles of Customer-Centricity that Selden and Colvin describe in their book, Angel Customers & Demon Customers (The Penguin Group, 2003), the results were astounding. While Best Buy saw 9 percent overall same-store sales growth in the last fiscal quarter of 2004, seven stores in the Los Angeles area where it piloted "customer-centricity" programs achieved 30 percent growth. The experiment there and in other lab stores was so successful that the company has since rolled out the model to roughly 70 additional stores. Companies such as Royal Bank of Canada and Dell also have applied these principles to achieve returns that have outpaced the S&P 500.

"Everyone is struggling to figure out how to grow profitably," said Selden, who was named business guru of the year by Business 2.0 magazine for his work on Customer-Centricity. "Customer-Centricity can be a powerful way to discover and realize profitable growth on a sustained basis."

Portfolios of Customers

The premise of Customer-Centricity is disarmingly straightforward. Companies are not primarily collections of products, functions, or territories, though that's how most managers think of them. A company is first and foremost a portfolio of customers. "Customers are where the money comes from," said Selden. While this observation may seem obvious, Selden and Colvin relate how executives at one major retailer insisted that they had no unprofitable customers — even though the company overall was unprofitable. The managers had focused on product profitability, arguing that all their products had positive gross margins. But they overlooked other costs, such as store operating expenses and capital costs. When managers factored those in, they found that 50 percent of their product categories were unprofitable.

Managers faced with such evidence might be tempted to simply drop the unprofitable products, but that would be a mistake. The company analyzed true customer profitability by examining the differing product bundles bought by different customers and then factored in customer-specific costs such as time spent with salespeople and product returns. This analysis showed that the company's most profitable customers sometimes bought products that were unprofitable. For example, a customer who buys high-margin belts, sunglasses, and designer jeans might also come to the store to purchase unprofitable branded shoes. By focusing on serving these best customers, the company could increase its profitability across products. "The problem was not as simple as unprofitable products," Selden said. "The problem was unprofitable customers."

One of the most powerful insights of true Customer-Centricity is the link between customers and shareowner value. By calculating customer profitability after accounting for all costs, including capital costs, a company arrives at a measure of profitability (known as economic profitability) that relates directly to the share price. That is, a company can understand for the first time which customers are increasing shareowner value, which are diminishing it, and by how much.

Thrilling Customers

Armed with this knowledge, companies can significantly improve overall value creation by creating new value propositions that better meet the needs of varying customer segments. For example, Best Buy targeted a highly profitable customer segment of upper-income soccer moms, dubbed "Jill," with specific products and even store displays. Royal Bank of Canada went after the profitable "snowbirds" segment of customers who spend winters in Florida by building a branch in Hollywood, Florida. The new branch became profitable in a matter of months.

"Companies need to understand the different needs of different customers and group them into operational customer segments and sub-segments based on common needs," Selden said. "They then thrill their customers by delivering knockout value propositions that competitors cannot match. Customer-Centricity is at the heart of their success."

Companies also can design their R&D around customers rather than products and technologies. "R&D, at the end of the day, should be innovating around the customer," Selden said.

Becoming Customer-Centric

In the new three-part Wharton program, Selden and Colvin examine how champion practitioners of true Customer-Centricity, such as Dell, Best Buy, Royal Bank of Canada, 7-Eleven Japan, and Fidelity Investments are flourishing in the face of formidable competition. "Their approaches are quite different from the method most companies practice, and the benefits are far greater," Selden said.

The Wharton program includes three courses that cover key strategies for achieving Customer-Centricity:

• Customer Profitability Management: Building Competitive Advantage: True Customer-Centricity begins with a clear understanding of the current and potential profitability of the company's customers. Most companies have no understanding, or a seriously flawed and misleading understanding, of this. When done correctly, the analysis is enormously powerful. This course explains how to do it and make it pay.
  
  
• Customer-Centric Innovation: Creating Ongoing Competitive Advantage: Most companies try to innovate through product or service R&D. The shareowner returns are far too often disappointing, and there often is little relationship between R&D spending and average shareowner returns. Cutting-edge research shows that for product and technology R&D to be successful, it must be driven by customer R&D. Products come and go and new technologies develop at ever increasing rates, but relationships with high-value customers must be established and deepened over time to generate truly sustainable profitable growth. Learn how customer R&D can not only thrill your customers but also turn on your entire organization to innovation — further enhancing the customer total experience.
  
  
• Creating Superior Share Price Performance Through Customer- Centricity™: Every company today, whether public or private, is under unprecedented pressure to increase its value. Generating consistent, sustainable, profitable, organic, double-digit revenue growth is extraordinarily difficult, but truly Customer-Centric companies do so, even against powerful, larger competitors. This program provides a clear, six-step process for transforming your company from being product- or geography-centric into being truly Customer-Centric™.

Each program is structured around the theory, best-practice applications, and opportunities for participants to practice their new learnings. These hands-on practice sessions will enable attendees to go back and immediately begin to apply Customer-Centricity principles in their own companies.

Because each program focuses on a different aspect of Customer-Centricity, companies could send different executives to each program. For example, finance, accounting, or marketing managers might attend the Customer Profitability Management program, managers in new-product development and R&D might join the second program, and senior executives might attend the third. "They could all come at it with the same language and know how the pieces of the jigsaw puzzle fit together," Selden said.

The Bottom Line

Every company is in fact a portfolio of customers, and only managers who understand how to increase the portfolio's value will succeed in today's brutal environment. "Customer-Centric firms understand in precise analytic terms exactly how their different customer relationships contribute to — or subtract from — the total value of the firm," Selden said. "Because they manage their customer portfolio on this basis, they know what to manage and where to invest in order to create sustainable, profitable growth and drive outstanding share price performance over time."

As Best Buy's experience demonstrates, Customer-Centricity can transform a company's approach to its business. "This is not just another course," Selden said. "It can fundamentally change your business. No other school has anything like this. You'd better come to this course before your competitors do."

• The Customer-Centricity™ Program

• Wharton Executive Education
  
  
• The Wharton School

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