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.

 

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…

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.