Different customers have different values to the enterprise and different customers have different needs. Your customers are an investment, so it is wise for a business to invest more in the customer that gives the greatest return and less into a customer that only takes resources and receives no return.
Companies and specifically start-ups need to prioritize efforts, and define the value a customer is currently creating by his/her actual value as well as the potential value the customer could create for the enterprise.
Marketers with direct connections to their consumers customers use decile analysis, ranking their customers in order of their value to the company and then dividing this top-to-bottom list of customers into 10 equal portions to understand their marketing environment. The objective is to find the top 10% of customers and serve their better. Anticipating the future value of a customer is challenging because behaviours are always changing, and a firm will never truly know as forecasts are based on assumptions.
This is an aspect of marketing that is a science. Determining the actual value, or lifetime value (LTV) is the net present value of the expected future stream of financial contributions from the customer. This is based on the idea that every customer day will be responsible for some series of events into the future and will have a financial impact. The net present value (NPV) of value creating events (purchase, warranty, exchange, help line call, referral, etc..) can be achieved by applying a discount rate to it to factor in the time value of money as well as the likelihood of the event. Each customer has a journey (trajectory) to go through with a business (think about banking) and that journey can be anticipated and quantifiable with predictive analytics.
The variables used in quantifying LTV is challenging as many aspects are qualitative and very hard to measure. However the following are data points LTVs should incorporate:
- Repeat customer purchases
- Greater profit/loss per sale from repeat customers : new customers
- Relationship strength (customers willingness to collaborate with trust through data exchange)
- Customers records
- Cost to serve/support
- Acquisition costs
- Response rates to marketing/advertising efforts
- Company and industry specific info
A customers potential value represents the increased value that could be realized if the customer were to behave differently, presumably based on the firms behaviour. Unrealized potential value is used to describe a customer that with the right strategy will increase in value. Assigning proxy variables to assist companies in ranking customers can be useful to assist in determining LTV. In direct marketing a proxy variable called RFM - Recency, Frequency, Monetary Value - are used. The goal of this is to gain insight into future actions, and be predictive.
Based on Relationship Marketing theory, there are five categories of customers:
- Most valuable customers (MVCs)
- Most Growable customers (MGCs)
- Low maintenance customers
- Suer-growth customers
- Below zeros (BZs)
Understanding if customers would or do refer customers is valuable too, and Fred Reichheld's Net Promotor Score (NPS) assists enterprises in doing so. NPS is a compact metric designed to quantify the strength of a company's word-of-mouth reputation among existing customers. The NPS distinguishes customers into promotors, passive and detractor customers. The metric does not answer the question of why, but it does quantify customer dissatisfaction and is a much better predictor of defection than customer satisfaction if of loyalty. It is important to recognize the value of referrals because it is a significant component of overall lifetime value.
Companies will have a mix of customers and managing that mix is what will bring a competitive advantage and a more profitable relationship with customers. Firms need to add the number of MVCs, create more profitability from MGCs and decrease the number of BZs. A company needs to focus on acquiring MVCs and MGCs and these customers are harder and more expensive to acquire. This means a firm needs to invest in acquisition, development and retention accordingly.
Some customers are worth pursing and fighting for, while others give reason to end the relationship. The key aspect of all of this is to treat each customer differently and to understand that each customer has their own needs and current and potential value for the company. By differentiating customers a firm can better serve and add value for a lifetime customer-vendor journey. By identifying and concentrating on the customers view in all aspects of a business and their future needs a learning relationship will flourish.