Bridging the customer value gap

Jul 01, 1998 9:30 PM  By

Rather than relying on the promise of new customers, catalogers must become smarter at identifying opportunities for business growth by digging deeper into their existing customer databases. n For one, the economic pie is not expanding as rapidly as it once did, due to lower birth rates and slower population growth. What’s more, catalogers are targeting an increasingly smaller pool of buyers-many of whom have stretched themselves to the limits of their purchasing power, dipping deeply into savings and financing their consumption through revolving debt.

A measurement approach called value gap marketing (VGM) can help you achieve your long-term growth objectives cost-effectively by determining both the current and potential value of your existing customers. Expanding upon the time-tested standards of lifetime customer value and share of wallet, VGM lets you slice and dice this information many ways to satisfy the need for varied marketing strategies.

Whereas lifetime value calculates how much your customer is likely to spend with you over time, VGM helps you measure how much customers spend on your type of product or service in general. The “value gap” in VGM refers to the difference between a customer’s current value to a catalog-perhaps his spending history-and the total value that he might generate over time with other catalogs in that product or service category. VGM can be considered a springboard to more proactive and profitable marketing because of its potential to yield more actionable information about customers’ future purchasing behavior.

Let’s suppose a catalog shopper spends $1,000 a year with a particular cataloger, Wholesome Products. If the customer spends $5,000 in total catalog purchases with several companies over the year, then Wholesome Products has a 20% share of the customer’s value. Using the VGM approach, this customer’s value gap is $4,000.

If the customer increases her total catalog buying to $10,000 a year, spending $2,000 of that with the Wholesome Products catalog, Wholesome Products has maintained a 20% share. But the customer’s value gap has increased to $8,000.

Capturing more of that buyer’s future value gap is the challenge facing Wholesome Products-and any cataloger in today’s market. Traditional measurements of customers, such as RFM (recency, frequency, monetary value), may be deceptive if the market value of your customer is changing. For instance, the lost opportunity to the Wholesome Products catalog, as represented by the value gap, grew 100%.

The key to the VGM approach is determining a customer’s total value path, not just his spending history with your company. Finding out which customers could be spending more with you will help you decide how much to invest in cultivating those customers. You can do this using customer surveys, quantitative models, and testing.

Once you determine the potential value in your existing customer database, you can draw a detailed picture of the most promising marketing approach by segmenting customers into groups defined by their current and potential value, and more finely by variables such as past purchase behavior, demographics, or psychographics.

In short, the philosophy behind VGM is this: Don’t be satisfied with your slice until you know how big the whole pie is.

An eight-step process The VGM process depends on how much data you have available, but VGM generally consists of eight steps:

1. Establish a baseline of customer activity, considering factors such as customer flows, RFM statistics, purchase history, and cross-sell ratios.

2. Calculate customer value.

3. Establish customer potential in your product or service category by building qualitative models that predict category behavior, or by testing marketing progams in specific regions or with a sample of customers.

4. Segment your customers into groups based on life stage demographics, channel preferences, and other characteristics.

5. Define marketing alternatives for each customer segment and the expected payoff.

6. Select the marketing actions with greatest returns.

7. Measure program results after an acceptable tracking period, and re-assess value gap to determine progress.

8. Evaluate marketing actions and reallocate resources.

A caveat for future VGM marketers: Those customers with the greatest potential value are not necessarily the customers in which you should heavily invest your marketing resources. The cost of extracting incremental value from these buyers may be relatively high, while other customer groups may be more easily motivated to increase their spending with you.

There may be specific reasons a certain customer won’t buy more products from you, such as extreme loyalty to your competitor. For instance, a die-hard L.L. Bean customer may buy most of her sweaters through the outdoor gear and apparel cataloger and spend a small amount of money on sweaters from Bean competitor Lands’ End. It may not be worth Bean’s additional marketing efforts to try to capture that small percentage of business with this particular customer. The value transfer costs need to be determined through actual experience in the market, through surveys, or by gathering information available in the public domain.

Many companies in competitive industries, such as financial insitutions, are now taking an interest in VGM. But catalogers, which have longstanding experience in database marketing and a plethora of customer behavioral data, are ideal candidates to practice value gap marketing.