What Separates Winners from the Pack?

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.    Now here’s a more in depth view of  Lifetime Value Analysis… 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	Action
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.