You can’t create value without customers but that doesn’t mean that all customers are valuable?
Over the past 20 years I have worked with small and medium sized businesses as well as some of Britain’s best brands including Asda, Egg, ITV & AA. I always ask new clients to tell me about their valuable customers. I want to know who they are and what makes them different to low value customers and how customer value varies across the customer base.
I am always surprised that so few companies can answer this question with any confidence and it is normally a good indicator of where we need to focus to transform business results. It is one of the key reasons why 95% of business websites fail to deliver value to the business.
A big brand example
One large corporate successfully acquired 100,000 new customers in the year I worked with them. For the following year, they wanted 120,000 new customers. Their business plans had always been built around volume not value which struck me as old fashioned thinking. So I did some analysis of their customer base and identified that:
- 1/3 of customers had an average net value of £200
- 1/3 of customers had an average net value of £20
- 1/3 of customers had an average net value of £0
Their new business plan required 120,000 new customers (of the same value mix as the previous year) i.e. 20,000 more new customers. I put forward a radical alternative, that getting 44,000 high value customers (compared with 40,000 the previous year) would deliver the same value as 120,000 mixed value customers.
In reality, acquiring just 44,000 high value customers rather than 120,000 mixed value would also significantly reduce operating costs therefore delivering even greater value to the business.
What makes high value customers different?
Once you have identified different high value segments you need to try to determine if there are any key characteristics that make them different. It might be demographic such as age or gender or social grade. However, attitudes are often a more important discriminator.
In the UK, marketers often refer to people over 35 as being a different ‘species’. I am not sure about you but I didn’t suddenly change my buying behaviour aged 35 years and 1 day. This was confirmed by a recent project I did for ITV, the UK’s biggest commercial TV broadcaster which showed that people’s attitudes not demographics was a bigger driver of entertainment usage and behaviour.
Key marketing lessons for all business (big and small)
- It is unlikely that all customers will deliver the same value in your business
- Customer lifetime value will be made up of a number of different value drivers
- Identify the key drivers of customer value for your business such as acquisition costs; costs to serve; product holdings; profit margins; customer lifetime etc
- It’s usually easier to track customer value with an online business compared to an offline business, by using web analytics
- Develop a value model based on your drivers of customer value
- Apply the model to your customer base and score / grade customers
- Analyse the results and decide what action is required to improve customer value
- Develop the key metrics that you will use to measure business success – I often use 20 key metrics
- Implement actions
- Review business performance against key metrics and revise as necessary
Remember web marketing is about solving customers’ problems profitably.