Its Not A Herd: Customers Are Not All Created Equal: There are; High-Value, Less Value, Poor-Value…

Think about your customers for a minute– whether you have 10 or 10 million, it’s most likely that some have more ‘value’ than others… Also some are much more demanding than others, some are much more loyal than others, some are better references than others… But despite this reality, many companies treat all customers exactly the same. Hence message is simply– know your customers; know which ones buy more, know which ones are more loyal, know which ones have more value, know which customers are best references… then invest support resources accordingly.

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Optimizing the value of individual customers optimizes the overall value of your brand, which requires an obsessive, customer-centric approach to aligning the business… It means allocating investment based upon the potential value of customers… According to Stan Phelps; when assessing how to invest a business’ time, resources… to support customers engagement, the answer should be clear; focus on the– ‘vital few’…

According to Tim Ferriss; ‘fire’ the 80% of customers who only bring in 20% of overall revenues… the rationale is that it allows a business to focus on the most profitable… and these special customers are typically represented by Pareto’s Principle or Law of Vital Few; here are a few examples:

  • 80% of company’s profits come from 20% of customers…
  • 80% of company’s sales are made by 20% of sales staff…
  • 80% of company’s new sales come from 20% of existing customers…
  • 80% of companies complaints come from 20% of customers…
  • 80% of company’s revenues come from 20% of products…

In the article All Customers Are Not Created Equal by Emily Alford writes: You don’t have a customer unless they come back and buy more than just once… Measuring ‘lifetime value’ is key to determining which customers are the loyal followers that drive the wealth of the business… and this brings up a whole new topic: What does it costs to acquire or lose a customer? This is a highly debated issue with answers that vary from; ‘it depends’, to ‘3 times’, to ’10 times’, to ‘it doesn’t matter’…

According to Alex Walz; calculating the– Average Revenue Per User (ARPU) spreads the revenue over the entire customer base… ARPU formula typically takes the form:

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The ARPU metric is commonly used to guide financial projections, revealing insights into: How much an active customer is worth? How many active customers you needs to break even (expenses ÷ ARPU)? How much you can spend to acquire a customer (anything less than ARPU)? But ARPU is an overly simplified metric; for more a reliable projections, business needs all-encompassing metric, e.g,; Customer Lifetime Value (LTV), which overcomes many of the limitations of ARPU by incorporating everything known about customers and that allows the calculation of more precise metric of value… LTV formula typically takes the form:

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In this formulation LTV has three components:

  • Monetization: It’s frequently expressed as ‘ARPU’– the dollar amount customers contributes to bottom line, over given time frame…
  • Retention: It’s frequently expressed as ‘1 ÷ Churn’– the level of engagement and loyalty customers exhibit, expressed in length of the average use period…
  • Virality or Referral Value: It’s the ‘value’ of referrals received from customers…

In the article Customers Value and Why It Matters by Paul Jarman writes: Companies like to say– all customers are treated equally: But is it really the case? Perhaps they should say– all customers are seen equally. According to Robert S. Kaplan; happy customers are good but profitable ones are even better… in virtually all profitability study, 15% to 20% of customers generate 100% of a company’s profits…

So what does this mean in practice? It means that each customer brings a different value to a company… Hence companies should support all customer, but they must tailor the services to specific needs and value of each customer… and by doing so they develops a more trusting, loyal relationship with the most valuable ones…

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According to Accenture; companies that optimize services based on varying levels of customer value have increased revenues by 2% while reducing operating costs by 8%… And when you look at the continued rise of social media and proliferation of smartphones and tablets, it’s clear that customers desire to take control of their experience– they want on-demand service on their terms… In addition to providing the best experience possible, companies cannot afford to neglect the critical financial aspect of customer relationships– this means maximizing the ‘lifetime value’ of each customer, and minimizing the cost of each interaction…

In the article Debunking the Everyone Is Equal Myth by Lisa Barone writes: If you treat customers equally, you are shooting yourself in the foot. You’re doing a disservice to your ‘better’ customers, you’re wasting time and money trying to appease your ‘lesser’ ones… It’s probably not politically correct to publicly lump customers into– ‘good’, ‘better’, ‘best’ buckets… but since you are already doing it in your head anyway: Why not just write it down and create profiles of information that are actionable?

These should be meaningful profiles that reflect each customer type, then allocate proportional levels of resources to support the– very best (most value), to least best (least value).Trying to please ‘everyone’ doesn’t work, and by giving more weight to those who actually bring more value… builds a leaner more efficient organization… One that filters-out those who don’t represent true value of the brand, and those who would quickly abandon the brand if it meant saving a dollar… Some customers are simply worth more, have more value than others…

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Treat all customers equal in terms of service, but know which ones best defines and represents the brand– the preferred voices for a brand not the ‘average’ consumer… According to Robert S. Kaplan; few companies closely examine the cost to serve a given customer... The ability to measure value at individual levels allows business to consider varies value metrics, such as; ‘percentage of unprofitable customers’, or ‘dollars lost in unprofitable relationships’… Such measures provide an important signal about value/desirability of particular engagement and how and how much a relationship contributes– greater value, higher profitability, and overall market exposure…

Value metrics provide link between customer types and improved financial performance… unfortunately many businesses are missing relevant value metrics… and as result they continue to experience valueless revenue growth… However, some business are beginning to include– ‘value scorecards’ in procedure for the allocation of customer support resources… A ‘value scorecard’ is a very simple and flexible mechanism for measuring and tracking customer value,  e.g.; value and magnitude of value of each relationships… It can focus the organization on managing for value, not just for sales… Hence, it aligns a company’s allocation/focus of resources with its financial objectives…

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 Implementing a value-based scorecard is not difficult, but it does require a strategic assessment of customers data, and segmenting service levels and options into appropriately buckets, and without alienating relationships in the process… But to survive and prosper in a highly competitive environment, optimizing value of customers and the proportional allocation of service is not just sound strategy, but it’s crucial for long-term value and sustainability…