The Paradox of Customer Centricity: Lessons (and Some Reminders) from the Collapse of Two Major Banks

Categories Articles, CLV, Finance, Marketing

Written by: Peter Fader, Co-founder, Theta | June 2023

My First Republic Bank (FRB) umbrella has been one of my favorite possessions.  And, apparently, I’m not the only one who feels this way. It has saved me from many a deluge on the campus of the University of Pennsylvania and walking around the city of Philadelphia.  As I watched the recent collapse of FRB and Silicon Valley Bank (SVB), I have been contemplating why they could not avoid their own deluge, inevitably causing their respective corporate drownings.  After all, both of these institutions knew their core customers very well and surrounded them with top-notch products and services, which is the mantra of customer centricity. 

I have had a number of FRB leaders participate in executive sessions with me, and I always thought of the company generally as a great group to work with.  Similarly, our head of marketing, Tara Heptinstall, worked for SVB previously and has shared many stories of their customer focus ─ serving entrepreneurs and investors who fuel the innovation economy.  But the squall line of impacts on these two institutions reminded me of a key concept I discuss in my first book (“Customer-Centricity: Focus on the Right Customers for Strategic Advantage”), which I call the paradox of customer centricity. The core idea, in brief, is that the more a firm tightens its central focus on a select group of customers, the more it needs its “non-focal” customers to stabilize the overall mix and support its growth objectives.

Scenario Planning Helps Drive a Balanced Focus

As good as these two firms were at focusing on their high-value customers, they clearly made themselves too vulnerable to unforeseen forces in 2023.  The paradox of customer centricity  suggests that, while they are focusing on high-value customers, leaders cannot lose sight of the balance of activities required to sustain their business, regardless of how customer-centric they are.  In the case of these two banks, perhaps as part of their risk practices, a customer-centric strategy to instill confidence when seeing signs of a bank run might have been one of those business practices. But in general I mean having a number of scenarios pre-determined and then having the organizational mechanics to track indications of those scenarios so you can quickly take action.  Trending the behavior of all customers (good and not so good) in the face of changing dynamics is a complex practice but one that could help businesses avert catastrophe. In our world of customer-based value analytics, we deploy a simulator customized for our clients so they can do just that!

Learn From the Mistakes of Others

If we look back over time, there are numerous companies that collapsed or faced significant crises due to a disproportionate focus on their high-value customers and a lack of balance in other areas of their business. You’ll recognize all of these examples, I’m sure. But just to illustrate my point, here are some of the most well-known examples of the paradox concept.

  • Blockbuster failed to adapt to changing market conditions and relied so heavily on its most loyal customers that it missed an entirely new customer base emerging that wanted streaming video on demand!  It went bankrupt in 2010.
  • Kodak focused so heavily on its highest value customers who were loyal to its film product that it remained blind to the disruption of digital photography and a host of innovations that eroded its core business.  It filed for bankruptcy in 2012.
  • Sears was a dominant retailer for many years but failed to stay current with changing consumer preferences and online competition.  It was so focused on frequent department store shoppers, with no modernization to its business model, that it ended up filing for bankruptcy in 2018.

And finally, once one of my favorite brands and personal gadgets, BlackBerry. We all know this story: the company failed to keep up with the rise of touchscreen smartphones and continued to focus on its traditional business customers. Its market share declined rapidly, and the company ultimately abandoned its own operating system and shifted to using Android in an effort to stay competitive.  While the BlackBerry brand still exists as a software business, now “focused on providing enabling technologies to ensure the safety and security of all the devices and systems businesses rely on,” their original core business went out of business. (But I must admit that I still miss my BlackBerry…)

Customer Behavior Can Highlight Opportunities and Risks

One could argue that the critical problem in these examples was more related to product management rather than customer focus. On the other hand, it is possible to tease these explanations apart – using metrics such as customer lifetime value (CLV) to better understand a product’s success not through the lens of sales volume, per se, but rather through the value of the customers that buy it. (I talk about this point extensively in my new book, “The Customer-Base Audit.”)

These examples demonstrate the importance of maintaining a suitable balance in all areas of a business, rather than being myopically focused on the highest value customers alone. That doesn’t mean that all customers should be treated equally, or that companies should (over)invest to try to turn their ugly duckling customers into beautiful swans. It is important to prioritize customer value, but companies must also diversify their revenue streams and adapt to changes in the market to remain competitive and sustainable in the long term. In many cases, tomorrow’s best customers are barely on the horizon, so we shouldn’t convince ourselves that today’s best customers will always be the best.

Conclusion

In light of the collapse of SVB and FRB, companies should be even more vigilant about managing customer-related risk.  The paradox of customer centricity should remind leaders of customer-centric businesses to keep taking a step back to look at their customer base with the lens of “risk potential” as much “profit potential.”  Some of my work with Theta co-founder Dan McCarthy examines this issue, but the former doesn’t get nearly the attention that the latter does. These examples further highlight the importance of balancing a focus on high-value customers with a “just-right” mix of so-so customers to ensure that we can weather any storm. Companies that become too narrowly reliant on a specific customer segment risk losing sight of other business threats ─ the proverbial tsunami of changing market dynamics.

I’m pretty sure that my FRB umbrella, as great as it is, would not provide enough protection from a downpour like that.