In today’s volatile economy, keeping the customers you want is more important than ever. Increasingly, we see customers – and brands – being recognized and valued as assets. Similar to other tangible assets such as real estate, capital and inventory, customers also need to be managed for growth and return on investment.
Customer management is a strategy designed to increase retention, enhance loyalty and build brand equity. The concept has its roots in Pareto’s Law, which suggests that 20 percent of your customers, regardless of industry, will typically give you 80 percent of your sales and profits – hence the old but true cliché we marketers preach: “All customers are not created equal.”
Some groups of customers contribute a larger share of revenue than others. Customer management is the process associated with identifying these higher and lower performance customers and aligning invest and spend strategies commensurate with their value.
Managing your customers is a key requirement for revenue enhancement. Here are five easy steps to jump-start your efforts:
Gain customer insight. Understanding who your customers are and what moves them to or away from your offer is a critical first step. To begin, you will want to identify all sources of available customer information. As an example, a bricks-and-clicks retailer may link multiple databases to analyze its customers.
This may include:
• Point of sale data.
• Store/channel sales statistical data.
• Channel buying behavior data.
• Customer promotional history.
• Customer demographic/socioeconomic data.
• Trade area data.
• Consumer research.
• Product inventory data.
Key questions to address in this phase include: What is the annual attrition/retention rate? Who are the most profitable customers? How much do they spend? What payment method(s) do they use? What products do they buy? What channels do they shop? What part of the total offer do they buy (i.e., Do they shop in one department? Do they use one of the many financial services available?)? How frequently do they buy? What is the distribution of high value shoppers? Is buying/usage behavior seasonal? What services do they use? How responsive are buyers to promotions? What are their demographics, attitudes and lifestyles?
With this information you can begin to develop initial hypotheses about your target market and the opportunities for, and threats to, growth.
Define meaningful segments. As a next step, perform a segmentation analysis to group your customers in some meaningful way that distinguishes them in terms of sales and profitability. You use this process to decide how you invest and spend your marketing dollars. Various segmentation schemes can be employed. One such scheme, a decile analysis, places customers into 10 groups based on a performance indicator (spending, frequency, cross shopping, etc.) then ranks customers in each decile from highest to lowest. This determines how many customers account for each 10 percent of the performance indicator. Monetary spending decile analysis, along with frequency and recency decile analyses, are often the first and simplest measures of customer value that marketers use to evaluate customer value.
Commercially available statistical packages such as SPSS, SAS and Group1 Software’s Model 1 product enable more complex multivariate statistical and modeling techniques for segmentation. Areas to consider during this phase include:
• Are the numbers of segments manageable? Targeting five to 10 segments of customers is realistic – targeting 20 segments can become unwieldy for a communications program.
• Are quantities efficient for marketing contact efforts? Unless you plan true one-to-one marketing communications, with personalized services, as the gaming industry does for its high rollers, you are more likely to benefit from marketing to a larger quantity of customers per segment, where upward migration of customers per segment is likely to have a real effect on sales and revenue. Cost efficiencies of direct marketing production also can be realized with larger quantities.
• Are your segments measurable? Creating stable segments, which can be identified and tracked for response analysis over time, is critical.
• Have you remembered to isolate and track new customers? These customers often get ignored or grouped with low value segments, with little marketing investment made at a critical time in their buying cycle.
Identify and quantify potential opportunities. Building on customer profile and segmentation analyses, and initial hypotheses generation, you are now ready to build a business case to assess the potential return on investment for a customer management strategy. This will involve identifying and quantifying potential opportunities for incremental revenue.
During the course of this process, a number of potential opportunities will likely be identified, however, not all will be worth developing. A best practice is to prioritize the initiatives on the basis of costs, return on investment, ease of implementation and timing.
Craft the customer management program. The purpose of a customer management program is to capture greater share of wallet and grow loyalty among key customer segments. The program should consist of a series of initiatives, which have been selected and reviewed based on business case development.
The selected initiatives should be targeted toward specific customer segments. In addition quantitative and qualitative goals should be defined upfront. For example, one objective might be to increase retention of a particular customer segment. An associated quantitative goal could be to stem attrition by 5 percent. Another goal might be upward migration, with a target metric of migrating 2 percent of a particular segment up to the next spending level. These goals could then be measured and tracked.
Program development should also include a contact strategy for communications and key performance metrics to measure success at specific intervals.
Launch pilot pest and measure results. Begin with a pilot to test one or two initiatives. The advantage of testing before program roll out is that it will require minimal investment and minimize risk. The selected initiatives should be those identified as being easy to implement and which is likely to provide quick, short-term results. Select several markets or stores, which represent a good cross-section of business and where internal support for program execution will be strong. For the pilot, you will need to benchmark customer performance data for pre- and post-measurement. Other important to dos include:
• Set up a database to measure results.
• Create stable customer segments for tracking.
• Identify key performance metrics (i.e., retention, migration, sales, etc.).
• Benchmark segment performance prior to program launch.
• Develop and measuring results.
• Craft plan to communicate results.
• Refine initiatives based on results and business needs.
Remember, a sound customer management strategy to increase retention, stem attrition and enhance loyalty no longer provides a competitive edge; it is the price of entry for building sales and profits.