CCG - Target: Who's Best?

excerpted from
StrateScapes – Volume 1, Number 3

Target: Who’s Best?
Who’s your best customer? The person you see every week? Or that barely recognizable face you see only once or twice a year? Or both?

There are several ways to define a best customer. Depending on which method you use, your best customer may not be who you think it is. Here, using an example of two customers who shop at the same store, we’ll illustrate different methods you can use to determine just who your best customers are.

Meet Beth. She’s 35 and a single mom with a 3-year-old and an 8-year-old. She’s shopped at your store for seven years, coming in once a month to buy children’s clothes and apparel for herself. Her average annual purchases total $525.

Now meet Alice. She’s 57, a mother of two teenagers and a 20-year-old college student. Alice has shopped at your store for 23 years. She goes in twice a year to buy basics for her kids, clothing for herself and her husband, and a few home items. Her average annual purchases total $1,500.

Gross Revenue
To define best customers by gross revenue, you look at their total purchases during a specified period of time, which is usually a year but can be lifetime-to-date. Under this method, Alice appears to be the best customer.

RFM — Recency, Frequency and Monetary
Under this method, you use the combination of three variables to rank customers. Let’s say that Beth and Alice’s favorite store defines best customers as those who visit the store at least three times in a calendar year and spend at least $500. In this scenario, Beth is the best customer because she shops 12 times a year, but Alice does not make the cut because she shops only twice per year

Profitability
This method takes into account profit margins on items sold, method of payment and sometimes the cost of servicing customers. You can use this method over a specified period of time, such as a year, or over the projected lifetime of a customer, as in lifetime value (see next item). Viewed this way, Alice again appears to be the best customer.

Lifetime Value (LTV)
This is the most sophisticated method of determining who your best customers are. Using your profitability calculations above, you extend them over the expected number of years your customers will be customers. Then, using an estimated discount rate that considers the future value of the dollar, you calculate net present values of your customers to determine their lifetime values. Viewed from an LTV perspective, Beth appears to be the better customer.

Lifetime value isn’t always easy to calculate. However, because it takes future potential into consideration, it’s considered the best way to determine best customer status. Calculating lifetime value can be extremely useful in allocating marketing dollars to retain and grow certain customers. For example, it’s probably worth it to allocate more marketing dollars to Beth than to Alice because Beth represents a higher lifetime value.

Which method you use will depend largely on the data-tracking capabilities you have. These examples assume a perfect world where all transactions are tracked regardless of payment method. In the banking and mail-order industries, that’s fairly easy. But many retailers have access only to data from their proprietary credit cards. Remember: Determining best customers isn’t always a perfect science. Use what you have and plan to expand your data-capture capabilities when you can. Once you at least have a sense of who your best customers are, you can devise a relationship marketing plan to keep and grow your relationships with them.

*Personnel and overhead. This example assumes it costs the same to service both customers each time they shop. Alice shops two times per year at $1.50 per visit, equaling $3, and Beth shops 12 times per year at $1.50 per visit, for a total service cost of $18.

STRATESCAPES and STRATESCAPES SUPPLEMENTS are published by Customer Communications Group, Inc., a full-service agency specializing in relationship marketing and customer communications. Our comprehensive, turnkey services include data analysis, customer segmentation, strategic consulting, account management, creative execution, print production and multimedia solutions.