No Profitable Customer Left Behind
Not all customers are created equal.
Not all customers are created equal.
Watching the Republican National Convention, I realized online marketers could learn a lot from politicians. Like voters, customers fall into distinct categories. There are core supporters, who are the solid base as your most loyal customers. There are swing customers, with the potential to become better customers. There are the great silent majority who occasionally buy from you, particularly sale items. There are former customers who no longer shop at your Web site. Then, there are nonvoters who have never bought from you.
You can create a winning campaign strategy by understanding how your customer base breaks down across these categories. The rule of thumb is the best 20 percent of customers generate 80 percent of revenue. In my experience, actual results tend to be even more skewed.
The most extreme case I’ve seen was in a business unit targeted at wealthy individuals. In one geographic region, less than 5 percent of the customers accounted for over 95 percent of revenue. Despite strong sales, the market was at risk. A change in market conditions or a few key customer defections would have had a disastrous effect.
Analyze an Online Customer Base Like a Politician
Turnover rate = 1 – [number of top-tier customers in years 1 and 2/number of top-tier customers in year 1]
Positive contribution customer = [customer revenue – total variable costs] > 0
A customer is truly profitable when the revenue he generates exceeds his fully loaded costs (i.e., total variable costs, marketing, and overhead associated with servicing this customer). These customers are worth continuing to market to at the current level.
Truly profitable customer = [customer revenue – total variable costs – applicable marketing costs – allocated overhead] > 0
As this analysis shows, all customers aren’t created equal. To win, you must target your marketing to those segments with the greatest profit potential.
Adapt Online Marketing to Maximize Revenue
Barnesandnoble.com gives its best customers incentives to join its loyalty program. Customers pay $25 annually to join Readers’ Advantage, a membership program. With the loyalty card, customers receive discounts on all online and in-store purchases, as well as special offers. Barnesandnoble.com can track cross-channel sales in a way that would otherwise be impossible.
Consider creating a special by-invitation-only offer for your very best customers, for which an incremental fee may be charged. It can enhance the cachet of being a preferred customer.
For customers who are still profitable, implement or extend a customer win-back program. Based on customer feedback, test different offers to restart purchasing. I’ve successfully tested welcome-back offers with incentives (purchases may take time to return to previous levels). You already have their contact information and they already know your brand, so acquisition costs tend to be less than for a totally new customer. Every win-back creates a second customer lifetime value.
For low-end customers who are unprofitable, drop them. They aren’t worth the additional marketing dollars. Depending on your business, you may need to notify customers if you intend to stop servicing them.
Ensure no profitable customer is left behind. Like a good politician, tailor your message to meet customers’ needs and potential. It may not be PC to say so, but all customers aren’t created equal. Understanding the dynamics of your customer base is critical, especially as online retailing matures and growth rates slow. Finding ways to maximize the value of each profitable customer relationship is even more critical to maintaining business momentum.