Lesson one in succeeding at customer management: don’t treat them all alike.
Whosoever said that the customer is a king, didn’t tell us which customer! And until you know which customer deserves your very best, you’re not likely to have a very effective customer management strategy. In this post, I want to share a framework which will allow you to understand how to holistically look at your customers and then decide where to start with managing your customers better.
But why is this even important? Well, it is. The competitive pressure that most of the organizations face today has compelled them to find ways to identify customers who deserve to be king and then treat them like one! There is a strong rationale to do so: most of the organizations report that less than 1/3rd of their customer base drives more than 2/3rd of their revenues. This number varies depending upon industries; for instance, a telecom operator may report less variation in per customer revenue contribution than a B2B software development company. This variation simply depends upon the upside potential of customer engagement. Remember, huge variations in a company’s customer engagement dynamics present attractive opportunities for (niche) competitors. Therefore, companies with higher upside customer potential need to have their ‘royal strategy’ ready soon before their king departs to rule elsewhere.
Now, there are two challenges: A) how to identify king customers B) how to design a royal treatment. Though there are numerous ways one can approach this issue, the framework I propose simultaneously takes into consideration the acquisition strategy and CRM strategy of an organization. The argument is, “if a company is not attracting the high potential customers (kings) in first place, no matter what CRM strategy (royal treatment) it pursues, it will never succeed”.
1) Acquisition decisions reflect in the profile of target customers, acquisition channel, and messaging / advertising strategy. The success of these decisions will reflect in the type of customers you attract. Before putting customer segments to either right customer or wrong customer type, take some time to identify any common patterns / characteristics / predictors of your most desirable customers.
2) CRM decisions broadly cover product selection, buying experience, incentives, personalization, and post-sales support. You succeed if your customers find your overall value proposition exciting on an ongoing basis! Before putting your customer in different buckets of value proposition, consider a combination of quantitative / qualitative factors which show how invested a customer is in this relationship. E.g.: Avg. Order Value, Number of Orders, Recency, Net Promoter Score (NPS), etc.
3) CLV (Customer Lifetime Value) is the sum total of expected profits from a customer. Companies should try to find CLV of each customer or small (but serviceable) customer segments, rather than identifying all the customers with one CLV.
4) King Customer is the one who has demonstrated either the potential (requisite characteristics) or the actual behavior (spend + mutual fit) to be your most desirable customer.
Segmenting an organization’s customers strictly across a 2X2 framework may not be that easy or even necessary. But if you look at a range of options on the spectrum of wrong customer to right customer or low value proposition to high value proposition, you’d be able to identify the levers you need to start playing with.
Key take away for a winning customer management strategy: you definitely want more of your customers in the top-right segment. These are the customers you have always wanted to attract, and now, all that you need to do is to keep these people constantly engaged with high value proposition.
I will even argue that an organization should look beyond Pareto’s Principle of 80-20. Why not have 80% of such customers who contribute the most to your revenue? I don’t think there is a reason for us to cap our kings at just 20%… Let everyone be a king, let it be an ultimate democracy!