3 customer analytics well worth doing right now- part 2
In part one of this three part series we outlined three primary tactics to grow you small business Response Modeling, Customer Lifetime Value modeling and Segmentation as follows:
1. Response Modeling- this addresses a product offer 37% more of the leaders use it.
The advantages of a correctly developed response model are enormous. By zeroing in on just those consumers most likely to respond to a product offer, the marketer is able to specifically craft the mailing to each consumer.
2. Customer Lifetime Value modeling, which is customer retention- 35% more than non-leaders
Customer lifetime value is a critical metric for any business. Those that are able to measure and maximize the lifetime value of their customers have a distinct competitive advantage over those who do not.
3. Segmentation understanding the strata of your customer and needs- 33% advantage
The process of defining and subdividing a large homogenous market into clearly identifiable segments having similar needs, wants, or demand characteristics. Its objective is to design a marketing mix that precisely matches the expectations of customers in the targeted segment.
Per part one Response modeling: tracking tactic results and identify cost data to whatever returns the most for the least amount of resources.
Now here's a more in depth view of Lifetime Value Analysis...
2. Lifetime Value Analysis
What information will you need:
- Historical sales data by customer
- Historical acquisition costs (Optional)
Building the model
- Using captured archival data to historically and determine by client the revenue per month to determine the monthly financial value of each customer
- Log the activity over the the total number of months for each customer
A simplified mode
As an example suppose company called 800Razor, which sells disposable razors directly over the web. Perhaps you have a customer model that looks like this:
Some customers will buy the cheapest offer, some other ones will buy more products (e.g., male and female razors).
- Bottom end: 24% of customers = 14% of the revenues
- Middle 56% = 56% of the revenues
- Top end: 20% of customers = 29% of revenues
The four ways to grow this business:
- The lifetime value of the average customer is $171.
- The average acquisition allowable is between 20% to 25% of sales.
- Taking the low end, 20% of the $171 average is $34.
- Four ways to grow this business:
- Get more customers à Can we lower the cost?
- Get the existing ones to buy more expensive razors (upgrade) àGive them an incentive or trial offer
- Get the existing ones to last longer à Give them an incentive to stay
- Get the existing ones to refer new customers à Reward referrals
A quick decision grid
Number of Customers
Lifetime Value of Customer
How many months will he last?
Maximum Acquisition Cost
|3,000||$ 68||8||$ 14||Create a retention program to extend the "life" from 8 to 12 months generating an additional $34 in revenues. Allowable: $6.80|
|9,000||$ 114||12||$ 23||Increasing from 12 to 15 months will only generate $28.50 per person. Increasing from $9.50 to $11.00 generates only $18 per person.|
|16,000||$ 132||12||$ 26||Increasing from 12 to 15 months will generate $33 additionally per person; allowable is $6.60|
|12,000||$ 225||18||$ 45||Increasing the average monthly sale from $12.50 to $15 will generate $45 incremental per person; allowable is $9.00|
|8,000||$ 255||15||$ 51||Increasing from 15 to 18 months will generate $51 additional per person; allowable $10.20|
|2,000||$ 228||12||$ 46||Increasing from 12 to 15 months would generate an additional $57 per person; allowable $11.40|
|50,000||$ 171||$ 34|
The same logic can be applied to creating referral programs.
As with all these programs, it is important to test, evaluate and refine, which we addressed in the previous column.
About the author
Marcelo Salup's 30+ years career in advertising covers a wide range of everything. A wide range of roles -he began his career on the creative side, won 2 Addies, changed to media, included strategic planning and consumer insight and has been an agency owner several times. A wide range of venues: Spain, Latin America, International and the U.S. A wide range of clients that go from automotive through banking, electronics, fast food, soft drinks and much more. His professional philosophy can be summed up in four words: “Only performance is real”. Today, he runs a successful strategic planning consulting, Iffective.Website