Common wisdom says you should concentrate your marketing efforts on your best customers – those 20 percent of your customers who, historically, have generated 80 percent of your profits.
Contrary to common wisdom, this is not where you should allocate your marketing resources. Instead, you should target customers whose behavior would change in a positive way due to your marketing efforts.
It is important to note that a positive change in behavior also can mean preventing a reduction in profitability or attrition. If that customer is likely to reduce his volume if you do not market to him, then the net effect of marketing is a positive change in behavior.
Who is a best customer?
There are many ways to define a best customer. Normally, it is based on historical behavior such as revenue, gross margin or profit over a period of six to 24 months. Maybe you look at frequency or consistency of behavior instead. Some companies even have created forecasting models to predict individual future behavior. The yardstick you use to define your best customer is not important if it ignores the effects of your marketing efforts.
Let’s look at an example: You are an enterprising individual and have opened a lemonade stand in front of your house. Dana is one of your best customers. Every day, rain or shine, she stops by on her way home from work for a 5-cent glass of lemonade. At a cost of 1 cent per glass, Dana is worth 88 cents in gross margin each month.
Such a valuable customer certainly deserves some of your marketing efforts. So you spend $1.20 and print 20 “free refill” coupons (at 6 cents each), which you drop off at her house and the houses of your other best customers. The next day, Dana buys her glass of lemonade and asks for a free refill. Thereafter, Dana continues her regular routine.
Naomi, however, stops by about once a week to buy a glass of lemonade. She nets you only 10 cents a month. Since you happen to have a coupon left over, you give it to Naomi one day. Naomi appreciates it so much that she visits your stand twice per week, generating an extra 10 cents a month.
Marketing to both customers, you earned 96 cents in the month: 88 cents from Dana and 20 cents from Naomi, minus 12 cents for giving both of them coupons.
Had you done no marketing, you would have earned 98 cents in the month: 88 cents from Dana and 10 cents from Naomi.
Had you marketed only to Naomi, you would have earned $1.02 in the month: 88 cents from Dana and 20 cents from Naomi, minus 6 cents for giving Naomi a coupon.
Should you always ignore customers whose behavior will not change?
No. If doing nothing increases the probability of customer attrition, then your marketing efforts to this customer would positively change her behavior (see exhibit 1).
Suppose your neighbor Wendy sees what a gold mine you have in front of your house, and she opens a lemonade stand in front of her house. To give her business a competitive edge, Wendy offers curbside service. “I bring the lemonade to you!” is her slogan.
As a result, Dana now buys her lemonade from Wendy on Fridays, reducing your gross margin by 16 cents a month, to 72 cents. To combat this, you give Dana a free refill coupon and, as a result, retain her loyalty. Naomi thinks Wendy’s lemonade has too much sugar and does not buy from her at all.
In this case, it is more profitable to market to both customers since it will keep Dana as a loyal customer (see exhibit 2).
So how does this apply to marketing financial services products?
Segment your credit cardholder base into best, good and worst customers based on past profitability. Add up the profitability measures for your customers during some past period – 12 months, for example. Then you can decide on profitability ranges for each group or split them by percentage of customers desired in each group. Having defined your best customers, you now can target your marketing efforts to them.
The flaw with this concept is that it assumes all customers will behave the same when you market to them. Suppose you want to generate more revolving balances, so you send a direct mail promotion to your best customers: Anyone whose balance increases by $200 this month over last month will get a $10 rebate check. As testing has proved, some cardholders will not change their behavior – while others will increase (or decrease) their usage – regardless of the offer. The customers who matter most are those who will increase their card usage only if you promote to them.
Does that mean there is no value in segmenting out your best customers? No. From a retention perspective, it is important to know who generates the most revenue.
Where should you concentrate your efforts?
Spend money to make money. That is the primary purpose of investing. If you market to your best customers and they either do not generate more income for you, or are not more likely to stay loyal, then you are wasting your marketing resources. n
• Jeff Nagel is a business consultant at Acxiom-Atlanta, a regional office of Acxiom Corp., Little Rock, AR.
