Base Marketing Investments on Customer Value

Oct 09, 2006 5:23 PM  By

You’ve heard it again and again: Know your best customers and serve them fanatically. This isn’t just fodder from the latest business best-seller; it is the foundation for any multichannel merchant trying to succeed in today’s highly competitive market.

With consumers enjoying an ever-expanding array of shopping options, you have to create differentiation from your competitors in order to remain relevant. To enable a differentiated customer experience, you need to achieve two objectives: identify and profile your best customers, and segment your customer database based upon potential customer value.

Let’s look at models for determining current customer value, future customer value, and potential customer value.

The first model of customer value is very familiar to any company that runs a catalog operation: RFM (recency, frequency, monetary value). The RFM model is a simple way to understand the current value of a customer based on past purchase behavior. In a recent online survey we conducted, more than 75% of respondents said that they use RFM to determine customer value.

More than 50% of respondents in the same survey said that they use customer lifetime value (LTV) to measure customer value. LTV is a great tool for determining how much to invest in order to acquire a customer. It is a calculation that estimates the future value of a customer based on past purchase behavior of similar customers and the cost it took to acquire and serve them. Using this calculation as a predictive indicator, you can determine the payback associated with future acquisition strategies – by acquisition source, by channel, by first product purchased, etc.

LTV is a tremendously useful tool for determining promotional spend across all media channels. If, for instance, you calculate that the LTV of customers acquired via print catalog is twice that of customers acquired via affiliate programs, you know that you can spend about twice as much to acquire a customer via catalog than via affiliate marketing.

Customer loyalty is a critical factor in determining customer value. One way to measure customer loyalty is through a share-of-wallet analysis. Share-of-wallet is one of the most valuable yet underused tools for driving differential marketing investments in one’s customer base.

For example, two customers who spend $800 annually with your company may not be equally “loyal” when you look at each customer’s spend across the merchandise category. For Customer A, that $800 may represent 100% of his purchases in that category. But for Customer B, that $800 is only a small percentage of the $12,000 that he spends overall within the product category. Based on this information, you may want to adjust your marketing investment to try to gain more share from the second customer, who is not as loyal as the first but has more growth potential in this category.

While each of the methods discussed above provides a picture of customer value, each has its distinct function. They should all be used together to help you make sound marketing investment decisions. The data you glean from the combination of tactics can help you define your contact strategy, enabling dynamic customization of content, offer, and creative, segment by segment. They can also enable you to better group customers according to their overall value and potential value to the organization, and to treat them accordingly. And they can provide demographic and psychographic customer profiles to help hone your merchandising strategy in terms of product development and creative positioning

Marc Fanelli is vice president of the Business Strategies Group for Schaumburg, IL-based database firm Experian Marketing Solutions.