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Last week I stumbled into a post from Don Peppers about the Real Implications of the 80/20 Rule. Peppers uses a football-stadium of 50.000 people (Customers and prospects to be exact) as an example to explain that the 80/20 rule not only implies that 80 % of your business is done by just 10.000 people in the stadium, but that the same rule also implies that 80% of the business of those 10.000 is done by just 2.000, and 80 % of the business of these 2.000 is done by just 400 etc etc.. In the end Don concludes that it is just 80 people who do as much as 2/3 of the business the other 49.920 are doing.
Peppers continues stating
“the truth is that some of these customers will inevitably be much more valuable to you than others, and your marketing investment would be much more productive if you knew who they were.”
I’ve been rethinking this “truth” for sometime now. Not that I came to a decisive conclusion btw (if there even is such possible), but I’d like to take you on this mixed journey of hope, belief, evidence and thought that I’m going through right now in relation to this topic. Please contribute yours in the comments!
First, it is of course very true that some Customers are more valuable to a company than others, but I’m beginning to doubt we are even able to understand who those Customers are. Analytic teams work with less than half the data the company has or generates, let alone it is the right data. Like Graham Hill states in his comment to my previous post [text in brackets added by me for reasons of clarification]: “Without access to enriched data of this [e.g. contextual data, use-data, influence-data] kind, too much analytics is wasted on pushing propensity models [based on past transactional data] to achieve the next 0.01% sales uplift”.
And that’s not even included so-called “engagement” data as in Customer feedback, willingness to participate in surveys, recommend your service to a friend etc etc. The former data being part of the concept of Total Customer Engagement Value which would be the next frontier of Customer Value Management. I doubt it will be anytime in the next decade, since very few (if any) companies have started to incorporate e.g. social interactions into their CRM systems. And if we do not have that data, how can we even begin to find out who is more valuable, let alone who might be in the future.
Secondly, I’ve discovered that most Customers/Prospects you target based on Lifetime Value based propensity and other predictive models, and who actually buy, would have bought without you targeting them in the first place. From my own experience the real return on your effort here can be as little as 20 % of what you thought your conversion rates where. And yes, that’s 20 % of less than 5% (if you’re lucky!) conversion rates to begin with. So, what does that mean for your Cost per Order? They will explode with a factor 5.
If there are more interesting conversion-rates, let’s say in the 20-something percentages, it will not likely be out of more than a few (relatively speaking) “prospects”. If you want to be successful growing your business based on these conversions in a B2C environment you are likely making such high costs that any one will out-price you before you can actually reward your first Customer in your Customer Loyalty Program {pun intended;). Unless you are providing a service that Customers value no matter what the costs to them and your boss doesn’t care about the cost you make to find and lure them in. If so, I can congratulate you 😉
Moreover, as I stated in my Hobby Horse post, companies need to focus their Customer experience efforts. We cannot be great in anything if we do not focus. Focus on the right experience for the right Customers. That is, the ones willing to pay (much, preferably) more than the costs we need to accrue for serving them. And I’m starting to believe that that is exactly where the Customer Lifetime Value approach took a wrong turn: taking costs into the equation. Costs are our problem, not the Customer’s. And if costs should not be the driver for our price, why should it be a driver for determining who our most valuable Customer is?
Last, but not least: If we want marketing to transform from goods-logic to service-logic, if we want to focus on what Customers value over what companies value, why be so bothered with Customer (Lifetime) Value? Should we not focus our efforts, our precious time and money on how we can better serve Customers? If we are ever to take the Customer’s experience serious should we not transfer budget from sales-campaigns and advertising to improving the very experience the Customer’s value? Instead of collecting and analyzing data to try and find the Customers we think we need, should we not collect and analyze data to understand what Customers want?
Am I wrong to think that your marketing investment would be more productive if you knew what your Customers value (when), not who you value?
