You are in business to make a profit. Can you reliably tell which customers are helping fulfil that goal? You have probably identified the customers that interact with you most frequently, but does their frequency realistically mean they will bring you profit?
The reality is that not all customers are created equal; in fact, some require such significant support that they can rapidly eat into your profitability or even generate a loss.
To generate new opportunities that drive a higher return, a more detailed understanding of metrics is required to identify your most lucrative customers. This will then enable your business to build a growth strategy around these customers, as well as targeting potential new customers with similar characteristics.
By utilizing business tools such as a Customer Relationship Management (CRM) solution to evaluate a wealth of customer data from all business functions, this exercise becomes much easier and simpler.
What do we mean by Profitable Customers?
It is quite common to focus on revenues when prioritizing which customers to invest in. Interestingly, spend only tells you half the story about their true value.
In most businesses, 20% of customers account for 80% of a company’s margins.
Business plans kits for dummies, How to describe your business plan’s ideal customer, December 2013.
As we mentioned earlier, a customer who spends a considerable amount with your company, but has unrealistic and demanding expectations regarding their on-going post-sale support quickly impacts your resources. High maintenance accounts will generally not match your ideal customer profile, unless a service agreement is in place to adequately compensate you for the time dedicated to supporting them.
On the other hand, a more modest spender may require little investment to win over and need minimal support, thus providing a higher level of profitability.
Calculating Customer Lifetime Value
To understand what an individual customer is really worth to your organization, you need to calculate what is known as Customer Lifetime Value (CLV).
Unfortunately, 76% of companies see CLV as an important concept for their organisation, but only 42% of companies are actually able to measure CLV accurately.
With comprehensive data and the right tools at your fingertips, calculating CLV can be a fairly straightforward process, although that is dependent on how deeply you wish to delve.
Avoid focusing on transactional value and instead, consider the acquisition cost (cost of acquiring a new customer, including costs associated with promotion and/or salesperson visits) along with the investment required to maintain the ongoing relationship.
The CLV calculation also needs to include the overall cost of maintaining the customer, such as further marketing communications, post-sales follow-up, servicing and time invested in managing the customer relationship throughout its lifetime.
£ Income – £ Retention Resources = Customer Lifetime Value (CLV)
Value of CLV
Utilising customer information to build stronger customer relationships seems like a fairly logical step for most companies, in an era when data is driving more and more business activity. However, a surprising proportion of companies fail to take advantage of their capability to leverage data and technology to better target their best customers. Moreover, a significant proportion of businesses are failing to utilise CRM and other technology to track CLV and understand the common traits of their key customers. Understanding a customer’s common traits is vital, as 65% of companies are able to successfully upsell or cross-sell to existing customers.
Using CLV to guide retention activities can impact margin in two ways: it helps your company retain customers who are contributing higher margins and allows you to spend less replacing them.
Understanding CLV is central to relationship marketing. Without a doubt, it is difficult to know what marketing channels to use, how to set pricing or what angle your messaging should take until you have a clear idea of who your most profitable customers are and what characteristics they share. You can then take action based on what you have learned.
The next step is to build ‘personas’, which are fictional, generalized representations based on real users. They help you understand and clearly define your ideal customers who will actually be using your service or solution and, therefore, can be used to make key design and functionality decisions.
For this, you need to utilize customer information via an accessible, complete view of each customer. You also need a platform to store it and make it readily accessible – a CRM solution makes customer information easier to retrieve with just a few clicks.
So as a business, your most important asset isn’t your building, inventory or even the brand, but in fact, your customer base. Being able to calculate the CLV enables businesses to put an exact value on that asset. This information gives you the power to:
- make more accurate financial forecasts
- identify the customer segments driving the business
- define strategic and operational objectives
- direct your marketing, manage your sales team
- improve client communications
- guide customer service
- foster loyalty
- direct management decisions
- ensure strong ROI in all areas
- increase profitability
Having all this information in place gives companies the structure to evaluate their customer database and determine whether their business is geared to increase or maintain a profit. Having such data within one central environment such as a Customer Relationship Management (CRM) solution will make the assessment much quicker and easier.