As marketers we seem to have an innate temptation to complexity, perhaps driven by the range of analytics tools and processes at our disposal and the expectations of our peers (and clients) to come up with solutions that are “really smart.” As a result, one of the biggest challenges–and opportunities—within customer segmentation processes is starting simple.
A reliable and effective way to do this is measuring customer value through the prism of the “80/20 rule.” Value segments can be based on sales or margin dollars, or unit volume —whichever drives your business. Rank your customers from highest to lowest value for the most recent 12-month period. The customers that produce 80% of total value are the “high value” segment. The balance of your customers will fall into the “low value” category. For our b-to-b clients, we have found in most cases that 80% of value actually comes from less than 20% of customers.
Follow the same process for the previous 12-month period to establish who your high and low value segments are from the prior year, too. Now you can notice new customers who had zero value in the first year but are currently on the books as high- or low-value customers. Likewise, you will have lost high- and low-value customers from the first year who have zero sales in the most recent year.
A simple cross-tab of these dimensions will likely show significant movement across value segments from year to year. The distribution of the 24-month customer snapshot (shown) is from a single client, but it is representative of what we see across multiple industries:
Each case presents opportunities to learn and grow ROI if you can understand “What happened?” if only broadly. For example, what can be learned from the 6% that moved from low to high to better target marketing spend among the 36% that remain Low? Similarly, how much of the value loss from the 7% that moved from high to low could be proactively avoided in the coming year with current high-value customers?
Although simple, each intersection in the matrix begs important but often overlooked questions – the answers to which should shape marketing and sales strategies to prioritize marketing spend, drive growth, minimize loss and improve ROI.
Steve Khederian is director of analytics at Catalyst, a Rochester, NY-based direct and digital marketing agency, where he specializes in applying data to develop and implement integrated, multichannel sales and marketing programs.
