How a guy called Pareto & some triangles can help you grow your business!
Understanding the dynamics of customer value is key to understanding where to invest your scarce resources; time, effort and money. When you know how much a customer is “worth” to you relative to all your other customers, deciding on where to focus, spend & prioritise, becomes a whole lot easier.
In a typical business, both B2B or B2C, the number of customers in relation to the value they bring will follow the Pareto Principle (also known as the 80/20 rule). Remember that the 80/20 rule is an observation (not law) that most things in life are not distributed evenly.
NB: 80% of your sales revenues probably come from 20% of your customers. But the numbers don’t have to be “20%” and “80%” exactly. Often this is even more of an extreme ratio, like 90-10 or 90-5.
An easier way of looking at it would be to view your customer base as 2 triangles as depicted below.
Not all customers are equal and there is no average customer.
The inverted triangle represents the number of customers, the other triangle the value they represent.
- The majority of customers will be of low value. This may be because they are new or they just don’t purchase that much or that often. (Identify potential & hand hold new customers)
- There will be many customers of medium value. With the correct treatment they could represent substantial future value. (Invest & Grow them)
- Few customers will be of high value. (Reward & defend them)
The key point is that some customers contribute more than others. As such your business cannot afford to treat all customers the same way. You will need a different strategy & approach.
Taking the two extremes as examples:
- There is an opportunity cost to NOT treating high value customers appropriately. These customers know how much they spend with your business, they expect more than your “run of the mill” standard offers & treatment. If not looked after, eventually they will feel neglected and leave.
The silly thing is – due to their value, you can afford to spend more time, money & effort on them. This should be treated at as an investment, one where the ROI is virtually guaranteed.
- Low value customers do not warrant the same level of attention as high value customers. This does not mean they should be treated badly, it just means they should be treated differently. In fact, you could be making them unprofitable through the incorrect allocation of incentives & offers.
Understanding the dynamics of customer value will allow you to “invest” your marketing budget and focus your resources in the right places to get the biggest ROI. Not only this but, it will allow you to identify those customers with potential and enable you to grow them. It will also allow you to keep all your different customers for longer – the longer you retain a customer the more value they represent to your business.
Do you know how much value a customer brings to your business?
THE SILENT KILLER
Understanding customer value is integral to ensuring the long term success of your business. WHY?
Your business may be acquiring lots of low value customers, which you are not retaining long enough to grow into more valuable customers.
At the same time you may be losing high value customers. A high value customer is often worth 20 – 30 X more than a new or low value customer. Everything may look fine for a period of time – BUT – you will not be able to replace the value leaving your business fast enough. Your business could be in serious trouble and you may not even know it.
Every business needs to take extra special care of its major customers, especially when the ‘Pareto ratio’ is extreme and organizational viability and survival rely on just one or very few large customers.
CONCLUSION
Customers these days have more power and choice than ever before. One thing is for sure, in order to retain the right customers, offer an excellent customer experience, improve customer life time value and grow your business; you have to know your customers better than ever before.
HOW DO I GET TO KNOW MY CUSTOMERS?
Give your business a competitive advantage through the power of customer behavioural data analytics – the quickest and most cost-effective way to understand your customers and grow your business. Click here … to learn more
CustomerLink also specialises in developing and implementing, data driven customer solutions that:
- Increase conversion rates
- Drive customer retention
- Reduce customer churn
- Foster repeat purchase behaviour
- Boost cross-sell and up-sell
- Optimise marketing spend
- Grow customer life time value.
We specialise in SME’s and online businesses, both B2B and B2C.
To maximise customer value & grow your business – click here … OR
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