Sounds easy doesn’t it?! How do you start such a strategy? Do you even know who your most profitable customers are?
Typically most data led organisations understand the need to identify different segments of their customer base to drive better marketing plans. However, there are so many organisations out there, which do not do any data led segment planning to derive stronger marketing results. For those organisations, I hope this is a eye-opening read!
There are different types of segmentation models. The one I am referring to today is the RFV segmentation model: simply known as the Value segmentation model – or the Recency, Frequency & Value segmentation model. It does just that; it measures the recency of customer spend/transaction, the frequency and the value (e.g. value of financial transaction or retail basket size). So how is this useful?
Such a model allows you to identify your most profitable customers. It may, for example, show you that your top 4% of customers are worth 23% of your turnover. Equally, at the opposite end of the scale, you may see a huge amount of customers only yielding about 5% of revenue. Globally, retailers seem to follow a trend of the top 3% customers, yield approximately 20% of turnover. Amazingly, the gaming world tends to see their top 4% of customers are worth 58% of turnover….wow!!!! You can rest assured that the gaming industry uses value segmentation in a very sophisticated manner and knows their top 4% customer behaviours, trends, likes, dislikes…intimately!
So what is this magic segmentation model used for? Firstly, it is used for good old fashioned direct marketing. However, surprisingly, you may not always get the results you expect. A novice CRM marketer may feel that they must communicate offers and campaigns to their top tier customers. However, imagine in a retailer that your top customers are in the store most frequently and most often. They know and love your brand, so they may not be the most responsive to a seasonal trend release email campaign. They probably have already purchased or know of your trend release dates, as they are more emotionally involved in your brand. You are more likely to see positive results from your middle tiered customers who are slightly ambivalent about your brand. They shop more than once but not frequently. You have the most to gain by enticing them to your store if you offer the right offer, product and in a personalised and targeted manner.
However, you must not ignore the top and bottom tiered customers. Remember that even your most loyal customers are spending a significant amount at competitor brands. Not even the most entrenched customers seem to spend 100% of their wallet in one place. You need to inoculate your most profitable customers against the inevitable seduction of your competitors! Make sure you reward these customers appropriately and keep them engaged in your brand so they can not only continue to spend frequently and with great value, but they can become your brand ambassadors, on and off line.
So what about the bottom tiered customers in the value segmentation model? Typically, you may not get much uplift from a direct marketing campaign, as they seem to not be interested in your brand. Maybe a very deep discount offer would yield some results, but at what cost to margin and brand perception? However, we need to overlay a more sophisticated approach. These customers may be brand ‘detractors’. You may or may not use the Net Promoter Score research tool, but basically, after 1 simple question: “Would you recommend brand X to others?” - you get a sense of how many of your customers will ‘promote’ your brand, ‘detract’ from your brand or are ‘passive’ about your brand.
Imagine if there is a strong bias of ‘detractors’ amongst your lower tiered value customers. It may be worth creating a brand perception/win-back campaign to at least stop the negative influence of these detractors, even if you don’t expect to see an increase in sales from a campaign. Equally if you know your promoters and where they sit within your value segmentation, you must seek to engage these customers so you can successfully achieve positive word of mouth at a lower cost, rather than a broadcast brand campaign. Let your most loyal customers do the talking for you.
Finally, in my experience, if organisations know how to use value segmentation properly, they begin to use it as a long-term strategic tool. You can see year on year trends across different customer tiers. You may see a decline in your most profitable customers as a clear indication of poor sales performance on the horizon. It is a more powerful strategic indicator than simply being used for marketing campaign customer selections.
Such customer tools are available to assist all brands to run their customer strategies. Are you doing so? Do you know and love your most profitable customers!?
Amanda Cromhout, founder & CEO, Truth
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