First your worst customers (and other strategies)

The following column looks at new and emerging trends in direct response marketing....

The following column looks at new and emerging trends in direct response marketing.

Looking at the year ahead, one might ask what strategies should be offered as solutions to significant business problems? In this column, I suggest three quick analyses that will identify customer-specific situations and an appropriate action for each, just to get you started.

Customer profitability ranking. Prepare a spreadsheet that lists all customers for the calendar year 2000 in one column and their revenue in another. Ideally, ‘revenue’ is net income by customer, but gross income is an acceptable alternative, since a less accurate barometer is better than no barometer at all! Then, simply sort the two-column spreadsheet based on revenue, in descending order.

You will likely find a pyramid-shaped distribution with a relatively small group of customers accounting for a large percentage of profits, a second, larger group with moderate profitability and a third group – often the largest – with marginal or negative profitability. Imagine a business with 20,000 customers; the distribution may look like this:

• 2,000 customers generate 25% of net revenue, while the next

• 8,000 customers generate 50% of net revenue, while the next

• 10,000 customers generate 25% of net revenue.

The obvious conclusion is that the top 25% are of primary importance to your business and need to be treated as VIPs – not merely to lessen the probability that they will defect to a competitor, but to increase their volume of business with you, which will disproportionately increase your profits. The equally obvious conclusion is that fully 50% of your customers are not generating much profit, on a per-customer basis. Further analysis of these 10,000 customers will likely show that many are actually producing negative net revenue. They, literally, cost you money since they cost more to serve than they produce.

Then, identify your best and worst customers and take action on both fronts. Invest in your best customers, with the objective of building an ‘evergreen’ relationship. Equally important, restructure the business relationship with unprofitable customers so that, at worst, they become marginally profitable. Or, fire them.

Customer retention rate. Compare your 2000 and 1999 customer lists. Assuming that your product or service has multiple purchase occasions within a 12-month period, determine the percentage of customers (or customer locations) that purchased from your company in both 1999 and 2000.

Although retention rates vary widely by industry, one universal truth prevails: the higher the retention rate, the better.

While every business needs to develop new business, just to offset normal attrition, customer acquisition is a costly process, one that drains profits. By comparison, customer retention is much more cost efficient and increases profits. Retaining top-producing customers (and potential top producers) is an important key to sustained profitability.

With that in mind, target the customers that you want to retain and develop marketing programs that add value and support their continued business. In developing your programs, remember that discounts do not add value, except in very limited circumstances, such as cross-selling. For example: ‘Because you are a valued photocopier customer, we are pleased to extend this special price on our latest fax machine…’ or vice versa.

Customer transaction-type analysis. If your business has two types of transactions – ‘regular’ and ‘deal’ business, prepare a spreadsheet showing customers and per cent of sales by transaction type for the year 2000. Most customers will have both ‘regular’ and ‘deal’ purchases – after all, everyone loves a bargain from time to time.

Chances are, though, you will find a group of customers whose ‘deal’ business will be 80% or higher. All these customers want from you – or from anybody else for that matter – are deals, so that is precisely what you should give them.

Offer them, by mail, the chance to receive your company’s periodic specials by fax or e-mail. In my view, they must respond to the offer to be included on the ‘deals’ distribution list – this avoids the problem of spam or ‘junk fax’ and gives you their permission to contact them. As deal buyers, they will likely accept your offer, since it addresses their demonstrated interest – deals. Then, send them the deals each week or month as promised, but don’t spend another dime on this bunch.

Making marketing decisions based on customer behaviour is one thing, but it’s not the only thing. Next month’s column will delve into customer attitudes.

David Foley is a marketing consultant and an instructor in database marketing at York University in Toronto. He may be reached at (416) 253-1224; by fax at (416) 253-4637 or via e-mail at dfoley@idirect.com.