One fifth of your customers are worth more than all others – do you know who they are?
The Pareto Principle, also known as the 80-20 rule, posits that 80% of your sales come from just 20% of your customers. One fifth of your customers are worth more to your business than all the others! For your business to be successful, you need to know who these MVC (most valuable customers) are and how to target them.
You need to find the CLV (Customer Lifetime Value) of your MVCs!
Knowing your Customer Lifetime Value gives you the ability to prioritize budgets, focus on retaining the right customers, and avoid wasting money and effort when you roll out targeted promotions. Using CLV, you can deploy better strategies designed around a single customer-level metric.
How do you determine CLV? Historically, businesses rely on customer-level spend/revenue information to measure CLV. Unfortunately, this one-dimensional approach does not account for a customers’ true future potential. Here’s a common scenario:
A business selling Brand X has three customers: A, B and C. Over the past twelve months, each customer spent $125 on Brand X. But the business does not know about the following customer habits:
Customer A has loyalties elsewhere, and has spent $650 on a competing brand (for an overall annual wallet size of $775);
Customer B is extremely loyal, buys only Brand X, and is a valuable Brand X ambassador, posting positive feedback about Brand X on social media,
Customer C is ambivalent about Brand X, dividing their overall annual spend between Brand X and competing Brand Y, and is thinking about switching to Brand Y.
You can see that the typical “spend/revenue” approach to CLV does not account for these unknowns. Furthermore, businesses usually sell multiple products, so they need to add in cross-sell-related potential. For example, Customer C is turning 27 next month, getting married and planning to start a family. This means that over the next twelve months, Customer C has significant potential spends! (How do you leverage that potential?)
To find true CLV, you must understand your customers’ future value across multiple dimensions – current spend, cross-sell potential, loyalty and social clout, among others. In addition, the Holy Grail of customer retention is knowing a purchaser’s “size of wallet” and “share of wallet.” This information, combined with Advanced Predictive Analytics, helps determine a single metric, or dollar number, to more accurately quantify CLV. An accurate CLV can give you the insights you need to fine-tune and optimize your customer acquisition strategy. The time to do this is now.
Develop your CLV priorities by evaluating:
Your most profitable prospects;
Expected revenue from new customers weighed against their acquisition and retention cost;
How much to spend on marketing programs for different customers,
High-value customer segments that can contribute the maximum revenue, and the special offers that will entice them.
Knowing this information can help you differentiate between Customers A, B, and C, and design targeted strategies specifically for each one. Focus on “acquisition” for Customer A, “maintenance” for Customer B, and “retention” for Customer C and their new family.
We combine information and analytics for new perspectives on demographic and market segmentation, retention strategy, performance and profitability. This detailed analysis can reveal a more accurate CLV for your MVC!
For more information, download our eBook Five Ways You Can Increase Customer Engagement Today