Marketing Maven Test:

Q: According to the 2005 Global Customer Experience Management Study, what percent of  executives believe that they actually do deserve their customer's loyalty?

a.  < 30%

b.  30% - 50%

c.  50% - 70%

d.  > 70%

A: Click here for the answer

Discovering Your Top Customers - What You Need to Know - Part I

by Paul Schwartz

According to management guru Peter Drucker the purpose of a business is to create and keep a customer.  Simple enough, because without customers you really have no sustainable business, you only have ideas.  But not all customers are created equal. Some customers make you money, some don't.  Some customers are loyal and will refer you to others, some will switch in an instant.  Wouldn't it be great if you knew which customers were your top or best customers and what made them your best customers?  Armed with this kind of information you can create a strategy to turn average and less than average customers into better, more profitable customers.  

Well, where do you start?  There are many methods and tools available to do this, and each business will have different needs based on their industry and product offering. So let's start with a simple model to help understand the logic used to gain a greater insight into your best customers:

Step 1:  Determine how you want to segment your customers.  You can use the most common methods of revenue, recency or frequency of purchase, or product penetration.  We'll use revenue for our example. (See this issue for more on segmentation).

Step 2: Divide your entire customer base into 10 equal segments with the same number of customers in each segment or decile.  If you have 1,000 customers, you will have 100 customers in each segment or decile. 

Step 3: Using revenue per customer, total the revenue for all customers in a particular decile.  For decile 1 (your highest revenue customers), total the revenue for all the customers in decile 1.  Do the same for each remaining deciles and graph your results.  You should end with a graph like the one below:

Here you will notice that 68% (40%+17%+11%) of revenue comes from 30% of the customers!

Step 4: It is recommended you do the same type of analysis replacing revenue with the other criteria mentioned above (frequency, product penetration, profitability, etc), or other criteria more applicable to your business model.  This will start to point out your best customers.

Step 5: Now the fun begins.  Look at which customers fall into your top 2 or 3 deciles. Ask yourself what your best customers have in common.  It could be demographic criteria, firmographic criteria (B2B), or psychographic criteria.  Armed with this insight you can now build a profile of your best customers and define the needs that drive significant purchases.  This will help you improve your acquisition efforts by targeting customers with similar profiles as your best customers.  

Next Steps: The real value in this type of analysis comes when you track changes over time to make sure your best customers are staying your best customers.  Are top tier customers migrating down?  What products are typically purchased together?  What is the lifetime value of a customer?  All of these questions and more can be answered with this analysis.  

Note of Caution:  I don't recommend using this type of analysis to get rid of poor performing customers - not yet anyway.  Next, we need to look at what you can do to take poor or average performing customers and move them closer to being your best customers.  That is something we will discuss in another issue of this newsletter.

Need help applying this strategy to your customers?   Please contact us for an introductory discussion to see how CONGRUITY can provide unique insights that help you identify, keep, and grow the right customers.  Visit us on the web at www.congruity.biz.

Copyright © 2006  CONGRUITY.

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