Strategies to identify top customers, allocate marketing dollars more efficiently and boost ROI.
In the competitive world of sports, rankings and ratings differentiate the cream of the crop from the also-rans. In the competition for customer engagement in retail marketing, using performance scores to create customer value segmentation can lead to increased sales, more cost-efficient marketing campaigns — and a healthier bottom line.
What is customer value in marketing?
Customer value is a methodology that helps retailers benchmark their success in nurturing their greatest assets — their customer relationships.
The Benefits of a Strategic Customer Value Model
Identifying top performing customers is crucial for retail marketers who want to allocate their time and budgets more cost effectively. After all, it’s not uncommon for the top 20 percent of a retailer’s customers to account for 67 percent of sales. So naturally it makes sense to focus resources on maintaining engagement with those best customers, as well as motivating customers who are most likely to become best customers.
Likewise, some customers are heavy spenders and some are not. Some customers only shop during sale periods, while others make purchases throughout the year.
Customer value scoring helps you track these customer activities and behaviors and turn that data into a ranking system. With this value-based segmentation, you can define what “top performing” and “best customer” mean to your organization — in short, helping you identify that valuable 20 percent. In addition, value scoring is a useful tool for measuring the overall importance of all your customers on an individual basis. And you can use that information to guide your customer relationship marketing strategies and investments.
Lay the Groundwork for a Customer Value Formula
Before you can calculate a customer value score, you need to establish parameters — like those below — for your customer value formula so you create a ranking system that’s customized to your organization
- Establish a time period for tracking purchases. Most retailers define an “active” customer as one who has made a purchase within a specific time frame, which typically ranges anywhere from six months to two years. The time period for ranking customers should correspond to the time frame you use to define active customers.
- Assign points based on transactional details. Points act as the currency for valuating customer purchase behaviors. For example, you could assign one point per dollar spent as a way to convert spending activity to points. You could also vary the number of points assigned depending on the day of the week or time of year. And you could assign more points for purchases made during key promotional periods.
- Developing a ranking system or weighting scheme. The idea here is to emphasize customers who have spent with you more recently. For example, purchases made in the last quarter could be worth more points than earlier purchases.
Most ranking systems use some type of average score so that customers can be compared to each other and then ranked from highest to lowest score. For instance, you could use average points per week, month, quarter or some other time period. The higher the score, the more valuable the customer is to your bottom line.
It’s also a good idea to track and save customer scores over time. Customers with declining scores may require immediate attention to prevent them from drifting away, while customers with upward trending scores could be rewarded for their loyal behavior. To get the most value out of your ranking system, update customer scores frequently.
Create a Customer Snapshot
The chart below shows a value-based segmentation example of a rolling 12-month period for accumulating purchase transactions. Customers earn one point for each dollar spent in the most recent 12 months. Weights have been assigned based on 13-week intervals. Any points accumulated within the most recent 13-week period will be doubled. Points will then decline in three equal quarter intervals.
Assume that a customer has accumulated purchases in six out of the past 52 weeks. Using the weighting factors above, we can calculate a value score for this customer that looks like this:
By incorporating the customer value formula outlined above, you now have a snapshot of a customer’s overall value represented as a score. Repeating the process for your different customers allows you to rank customer performance from highest to lowest scores. Keep in mind that the primary objective is to assign a customer rank based on measurements that are easily observed and recorded.
See What’s Trending
The next step in developing your customer value marketing strategy is to look at how a customer’s score changes over time, as well as comparing the performance scores of different customers. The chart below tracks two different customers over the last 10 weeks. The boxed area represents a range of customer performance scores that have been identified as within the upper and lower limits of an average customer.
Note that Customer A has performed above average in each of the most recent three weeks. Meanwhile, Customer B’s score is still within the average range, but is close to dropping below the lower limit.
Identify Additional Scoring Factors
In addition to scoring customers on recency and total spend, what other factors should you consider in your customer value equation? Look at your customer data to determine other metrics — like certain customer behaviors and demographics — that positively correlate with customer value. Talk to your team about which data attributes should be included for ranking customers. These could include factors such as the following:
- Proximity to store
- Customer demographics
- Range of purchase channels used
- Purchase regularity
- Depth and types of products purchased
- Receptiveness to offers and communications
Once you’ve developed a checklist of customer data attributes, solicit feedback from key decision makers in your organization who have a vested interest in the results of the scoring methodology.
Turn Knowledge Into Action
Six out of every 10 retailers treat their best customers differently from their regular customers — for good reason, as we noted earlier. Value-based segmentation lets you focus your time and marketing dollars on campaigns that deliver the right message to the right customer at the right time — and ensure you’re treating your best customers differently than the masses.
The tactics below can help boost customer relationships, create new opportunities to engage — and ultimately increase customer value scores.
- Create targeted marketing messages to modify future behavior, whether it’s rewarding top customers with special discounts, VIP experiences and exclusive events, or providing incentives to customers you haven’t heard from in a while.
- Create win-back campaigns that target customers who exhibit a declining performance/value score.
- Maintain a strong presence on the channels and platforms that your customers frequent — including your website, social media or mobile app — so they can interact with your brand whenever and however they choose.
- Use your loyalty program to reward your highest scoring customers with gifts or rewards when they make more frequent and/or high dollar purchases.
Boost Your ROI with Customer Value Marketing
Who is your top performing customer and how do you know? Do you have a scoring model in place to rank customers in increasing (or decreasing) order? From designing messages to modify future customer behavior, to tracking customer progress along a value continuum, your team can follow the customer value marketing strategies outlined above to make smarter marketing decisions based on customer performance — and ultimately reap the benefits of better ROI.
Our retail marketing experts have spent the past 40 years helping top retailers develop and maintain long-lasting, profitable customer relationships. Check out our strategic retail marketing services for all the ways we can assist you in increasing customer engagement, loyalty and retention. Call us at 800.525.0313 or email us today for a complimentary one-on-one discussion.