I believe that the economy has driven firms to increasingly focus on becoming more customer-centric, delivering ‘experiences’ to their customers to increase profitability, retention and drive lifetime value. By focusing on developing innovative strategies that address the needs of every individual customer a company develops a one-one relationship. Yet, despite this shift to a customer-centered perspective and implementation of related strategies, not many brands are able to realize their goal of customer satisfaction. Why?
Our experience points to the key reason for this failure. It lies in the generalization of customers and the goal to provide all customers with the same level of service, which is simply not possible or realistic. All customers are not created equal!
Segmentation of customers is essential because of the following reasons:
• Almost every company has a customer base that consists of a minority group who is responsible for its majority of profits. It is imperative to recognize this minority. In a study carried out by Joint Market Research, it was discovered by Procter & Gamble that 56% of its total revenue came from regular shoppers who constituted a minor 14%. The occasional shoppers group, which formed a major 86%, contributed only 44% of revenues. Further, many of the occasional shoppers did not exhibit any loyalty for P&G products.
• It is 5-10 times costlier to get a new customer than to retain an existing one. Even more, companies on an average lose 20% customers, annually, despite best efforts. Studies indicate that increasing customer retention by 50% results in a profit increase of at least 25%. Therefore, more focus should be on growing business by retaining existing customers that bring in real value.
Customer differentiation should be based on a judicious balance of the value the company creates for the customer and the value the customer brings in for the company. But, how do you evaluate the value of your customer? You do it by calculating his/her contribution to the company throughout the customer life-cycle.
While the contributions of your customer to the firm in the past are significant, these statistics alone should not form the basis for calculating the customer’s lifetime value. Customer Lifetime Value (CLV) is a reliable metric employed by organizations to evaluate the future worth of a customer.
Customer Lifetime Value is the total of all the financial profit a customer brings in for the firm, calculated from the existing period to the future (revenues – costs incurred). Employing CLV, managers can derive actionable information that enables them to design strategies for customers that really matter in the long-run rather than focusing solely on increasing short-term profits. CLV is significant as it provides the following crucial insights:
• Any company has only limited resources and it is natural to want to use it for customers that bring them maximum profits. To allow such investment, you need to exactly know the cumulative cash flow a particular customer would give you throughout his/her life-term. CLV equips you with such information using you can know how much would go into retaining a customer to maximize ROI.
• Once you recognize your most profitable customers using CLV, you can optimize the allocation of your resources for maximum profits. You can also customize your future marketing strategies for a specific audience.
Relationships begin to fragment and cease to grow when there are no mutual benefits for the parties involved. Therefore it is important that you make your ‘most important’ customer relationships valuable through effective retention while achieving your financial objectives.