You can hear the sound of the bell on the door as another customer leaves your store. Another happy customer–you hope. Another returning customer–you hope. A customer that tells other people about you–you hope.
All these “you hopes”. Anyone who understands how to build a customer base knows that happy, high-value, referring, repeating customers make a business successful over the long term.
If you ask shopkeepers “Who are your best customers?”, they will start listing names, or behaviors. The trouble is, the customers you remember may not be the best ones for your bottom line. In addition, knowing a few best customers individually does not help you to market to them as a group, to help them stay in contact with you, and make sure they maintain their behavior.
How do you know which customers meet those qualifications, and how can you measure and influence them?
??Customer lifetime value (CLV) is referred to as the gold standard of customer loyalty and profitability. Customers with higher lifetime value, in general, buy more often, spend more and have fewer returns. When that high lifetime value is combined with an authentic relationships, those customers also improve the satisfaction of your sales staff, and refer prospects that are more like them. So businesses that have a higher percentage of their customer base with high value and relationships have more stable growing revenue and a happy staff. What’s not to like about that?
But customer lifetime value can be challenging to understand and measure. And if you cannot understand and measure, you are unlikely to take the right actions to improve relationships.
Customer Lifetime Value – What It Is
How exactly do you measure customer lifetime value? CLV combines (1) anticipated length of relationship with (2) estimated customer financial value, to create a predicted measure of how profitable that customer will be. For example, if a customer were forecasted to have a length of relationship of five years with an average spending of $100 per year, then that customer’s total CLV would be $500. If you want to get more precise, you can discount future cash flows to get a net present value, but if you just focus on the basics, you are well ahead of the game. Note that CLV contains two factors, both of which retailers can influence – length of relationship, and annual spending. How a retailer builds and extends customer relationships directly and indirectly influences both of those factors.
If you are a retailer who has not yet measured CLV, how do you start? By doing some basic math on an Excel spreadsheet, you can get a handle on where you are, and where you can go, with just some basic marketing. Don’t let the fact that your data may not be complete stop you, use what you have. See this post for how to deal with inaccurate data.
Understanding Best Customers
1. Add up total spending and number of transactions by customer. Sort customers from high to low in terms of last year’s spending. Don’t worry for now about profit – we will address that later. What you will find (as do most of the retailers I work with) is that the top 20% of your customers represent about 65% of your revenue and the bottom 50% usually only contribute 10-15%. You will also find that those top 20% are made up of two groups – customers who purchase a large amount in few purchases, and ones who make lots of transactions at lower value.
2. Set your goals. For your more frequent best customers, determine how often they purchase and when those purchases tend to happen. For most retailers, more customers purchase during the winter holidays than any other time. If customers are also purchasing from you in other seasons, then you have a real frequent customer! The goal for a data-driven retailer is to have frequent loyal customers purchase one additional time a year. The best time for that new purchase is usually around customer-driven events, such as birthdays. Collecting birthdays and marketing heavily around them is usually one of the best ways to increase frequency. Since birthdays are an annual event, you can sustain the new frequency once you achieve it.
For your big spending, less frequent best customers, the goal is often to understand the occasion that drove their purchases, and then to see if you can use that occasion to begin to build a relationship with them. Remember, frequency drives relationships – customers you only see once per year are the most likely not to return in the subsequent year. How do you get in touch with these valuable, hard-to-reach customers? The most successful strategies involve identifying the timing of their last major purchase and then facilitating a repeat order, perhaps with add-ons. You can send emails beforehand offering a discount for early ordering, giving them the details of their order last year, and helping them make a quick reorder with the least amount of hassle possible. A priority reorder phone number will also help.
Customer Lifetime Value is more than just a metric; it is a way of thinking. Focusing on growing relationships and bringing current customers back can be counterintuitive to retailers who are used to running lots of local advertising. Yet your current customers are your biggest opportunity- they already know who you are and have tried your products. Some will come back anyway, but often more than 50% would not return if you do not extend yourself to building a relationship and contacting them proactively. Focusing on your best customers will drive higher profit and sustained growth at a lower cost than trying to fill your business with new customers over and over again.
Stay focused with this core approach, and you will be “hearing the bell ring” more and more.
Image by beest via Flickr
