How to Identify Your Most Valuable Customers
Not all customers are equal. Most customers fall into one of three categories:
- The Greats
- The Average Joe’s
- The Bad
In his book Customer Centricity: Focus on the Right Customers, Peter Faber writes:
Not all customers deserve your best efforts: in the world of customer centricity, there are good customers…and then there is pretty much everybody else.
Drew Sanocki explains it perfectly:
Identify your most valuable customers, and
- Align your products / services / marketing to attract / create / develop more of them.
- Maximise their value.
How Does This Impact Our Thinking About Customer Acquisition?
The impact is that it shifts focus towards maximising value as opposed to acquiring the maximum number of customers at the lowest cost.
Custora presents a good example using a fishing analogy to compare acquisition cost minimising strategy vs a value optimising strategy:
Using the above data, we may think that Adwords is the best place to fish because you acquire customers at the lowest cost. But when we look at the CLV:
We can see that Microsoft acquires customers with the largest profit. Despite the high CAC, I think if you had a choice, you would rather fish at Lake Microsoft.
What is Customer Lifetime Value (CLV)?
CLV, or Customer Lifetime Value, is a prediction of the net profit from the entire future relationship with a customer. We usually limit CLV within a certain duration. e.g. 1 or 2 years.
Who are your best customers?
Here is the list of attributes that I typically use to define the best customers. Add or remove any of these depending on your own unique situation:
- Average Order Value: High
- Complaints, Returns and Refunds: Rare
- Customer Support Interactions: Low
- Order Frequency: High
- Price Sensitivity: Does not only order during sales, promotions, offers.
- CLV by channel, medium, source, campaign, product: This is what I will cover in this article – how to use CLV to optimise your acquisition strategies.
What Does Customer Lifetime Value Analysis Have To Do With Acquiring Great Customers?
As in the fishing analogy above, you can spend all that money marketing to acquire new customers using a Facebook ad campaign for example, but what if most of them turn out to be bad or average customers? It is possible for your business to generate losses in such a scenario.
The basic idea is to:
Reallocate your acquisition budget to channels, campaigns, blog posts, ad groups that produce your great customers.
CLV by Channel / Campaign / Source / Medium
Should you spend more on Facebook, CPC, Banner Ads, Content Marketing etc? By analysing the CLV for each channel, it gives you better clarity on how to reallocate your acquisition budget.
Here is a great quote from Custora:
…a marketer may focus on finding undervalued keywords to acquire [high CLV] customers very cheaply, when instead there may be overpriced keywords that attract customers that are worth far more than the extra cost of a keyword.
I am using the same definition of source / medium that Google Analytics uses.
- Source refers to origin of traffic such as search engine or a website.
- Medium is the category of the source, such as organic search, web referral etc.
Focusing my efforts on the best customers has been the single most effective strategy I have ever used. Apparently, Amazon, Harrah and Bonobos are using this strategy to great effect. The premise simple:
Identify your best customers and find more like them. If possible, try to transform your bad and average customers into great customers.
That’s about all for now. Thanks for reading.
Customer Centricity | Marketing AI | Predictive Marketing | Trainer
For www.redstringdata.com in Singapore.