Tuesday, November 30, 2010

Invert the Pyramid and Supercharge Your Profits

All customers are not created equal.  Rather than investing your marketing budget equally across your customer base, consider focusing funds on customers with the highest current value, the strongest relationships and the greatest ability to return value to the company.

Different customers have different needs, and different willingness to spend their money on your business.  In addition, customers differ on the amount or type of relationship they want to have with your company, either due to their psychographics, or their relationship with other companies in your space.  Net of everything, most customer bases end up being distributed like this:

Across our clients, consistently, the top 10% of customers represent between 50-60% of revenue, and the next 30% represent 30-35% of revenue.  The bottom 60% of customers are extremely low value, and usually contribute less than 15% of total revenue (this trend of value concentrated in top customers is even more so when you analyze profitability).  Now, the “right” way to do this analysis is based on Customer Lifetime Value, but as you can see in this post, that approach has its challenges.

When researched, most customers do not spend all their money with a single company, even when those customers are in the top 10% of the base.  In some of our research, we have found that even those best customers spend only 50-60% of their category spending with our client. So even the best customers have upside – additional category spending they could do with your company, but do not.

If you ask marketers whether they target those best customers (and the mid-value, high potential customers) or not, and they will tell you “yes.”  Sometimes they do.  Some marketers limit their direct mail to high value customers; some do not.  Way too many marketers mail too deeply into their customer file, choosing to waste marketing dollars to squeak out a little bit more revenue, even if that revenue costs more than the profit it yields.

While some marketers do tighten their targeting to focus on higher value customers, they consistently fail to change their spending per customer in their database marketing efforts to reflect the differences in current and future value.  The best marketers vary their spending per customer in three different ways: 

1.     Frequency of communications – Rather than contact each customer one time, contact higher customers two or three times to break through the clutter and successfully reach your customer.
2.     Type of communications – Instead of just sending low-cost emails and blanketing your customer base with communications that they may not want, create a multi-channel communication plan, where you reach your best customers through a blend of low-cost and higher-cost communications (such as email, direct mail, phone calls, etc.).
3.     Value of the material delivered – if you are creating a database marketing program, consider increasing the value of the communications that you send to your higher value customers.  For example, send a postcard to your lower value customers, a trifold piece to your medium value customers and a beautiful brochure to your highest value customers.  Take a lesson from the airline reward programs, where the costs of the intro pieces escalate according to the value of the customer.

 When you add all of this up, you end up with a marketing investment plan that looks like this:


Ultimately, the goal is spend most of your resources where they can do the most good, where they will yield the highest return.  Focus your spending (and your effort) on the smaller group of customers who buy the most from you.  Measure your marketing strategies carefully and you will reap the rewards.

Check out a video blog post on this subject at: http://www.cultivatingyourcustomers.com. 

Mark Price is Managing Partner of M Squared Group, a consulting firm focused on understanding and building customer relationships, and the author of the blog “Cultivating Your Customers,” where he writes about practical approaches to improve customer retention and overall customer value.

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1 comment:

Marc Sokol said...

Great post! For my money, one of the biggest challenges occurs when senior executives get too far from their customer base or only remember customers as they knew them in the past. The analyses and segmentation your provide, Mark, can help senior executives see how they can increase impact across the real market, not just the one they hope exists.

Rather than cut the established marketing budget based on the segmentation, have you ever tried asking managers to work from a zero-based budget set of assumptions as they review the segmentation you can provide? That might more quickly get them to see that their investments should differ based on customer behavior as you have captured it here.

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