Whoever said “the customer is always right” forgot to include … depending on his or her value.
This week I asked a client to conduct some quick-and-dirty sales analysis; she found that a whopping 8% of her customers contribute 93% of her revenue. Yet – her direct sales forces responds to every customer demand the same. After segmenting customers by value (low, medium, high) she is starting to see the downside of “egalitarian marketing.”
For example, here is how she recently approached a simple direct mail effort.
Fewer people got the piece (costs were cut in half) but response rate was 500% higher than her previous campaign. What CMO doesn’t want to hear you generated 50% response versus 10%?
This approach, often called value-based marketing also has a big impact on pipeline management. For example, converting 2 out of 100 prospects (to customer) generates a measly 2% conversation rate. The smarter, value based marketer converts 2 out of 10 prospects with a 20% conversion (at far lower cost) by being more relevant.
Yes, Virginia .. less really is more.
What are the attributes of your high-value customers?
You can’t practice value-based marketing if you don’t segment customers by value. It’s an important activity. But you need to get your BU or service line managers involved to help define value – and you need help from IT to align your efforts with the requisite data management requirements and practices.
Once you do this, you’ll love the synergies. For example, one banking marketer told me his highest value customers have a portfolio of services: large cash deposits, credit cards, auto loans, perhaps a mortgage.
His first priority is to make sure these customers never leave.
Hence, the bank’s value-based marketing initiative informs its retention program.
Value-based marketing informs smarter up-sells
Value based marketing helps you identify who is just one cross-sell away from becoming a high-value customer.
In the wireless industry, a marketer might define a medium value customer as multiple cell phones from a family plan, a data plan … and land line service.
- Value-based marketing entices these customers with the benefits of bundled high speed Internet and TV services.
- If a medium value customer bites, it enters our high-value strata (and the offers that goes with it, for example premium channel packages and a DVR)
- If we get a response, the customer enters our elite platinum category. After tracking performance, we find that moving customers up the value ladder with product bundles is a particularly effective action.
When Should You Fire a Customer?
This is an option if the customer produces negative value. Sticking with our wireless industry example, a customer might receive a heavily subsidized handset, then flood the call center, not pay their bill on time (or at all). This customer is fired (by being disconnected and turned over to collections).
Every company has these type of customers. You may not fire them, but you certainly want to migrate them to higher value status or to a lower cost channel (or let them fire themselves).
Value-based marketing requires you first understand the spectrum of lifetime value for your customer base so you can categorize them (in buckets such as high, medium, low), then manage them appropriately. I saw one marketer define this at 80 years, the hopeful length of an average life. This doesn’t work however. A more reasonable number is three to five years, which gives you room to respond, manage and maneuver your tactics in shorter time intervals to maximize profits.
Of course, operationalizing value-based marketing is not trivial. Many of you, especially event marketers – do a good job, targeting customers that have never attended an event differently than those that always attend your events. But as an organization wide practice, value-based marketing is spotty.
Watch Gartner for Marketing Leaders in 2014 as we do deeper dives into this topic and its operational implications.
Postscript: I’m told Marshall Fields originated the phrase “”the customer is always right.” Others claim it was Harry Gordon Selfridge, the founder of Selfridge’s department store.