Do You Really Know Who Your Best Customers Are?

A simple, highly effective way to generate higher ROI through the magic of the 80/20 rule
By Steve Khederian, Director of Analytics, Catalyst

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Copyright 2011 Catalyst. All rights reserved.

Do you really know who your best customers are?

ack in 1945, George Orwell wrote in Animal Farm, All animals are equal but some animals are more equal than others. As marketers, we know that all customers are not created equal. We should be able to generate higher ROI by segmenting customers properly so we can target higher-value propositions to higher-value segments and improve our communications strategy. So why dont we? Im frequently amazed by the number of relatively sophisticated marketers who havent properly segmented their customers. Im convinced this occurs for two reasons: 1. Many marketers believe they already know who their best customers are. This group is usually quite surprised to find out otherwise. Proper segmentation can be a humbling experience. 2. Many marketers overcomplicate the process. The wide range of analytics tools and processes at our disposal, coupled with the expectation to come up with new and better solutions, often drives the temptation to create complexity. As a result, one of the biggest challengesand opportunitieswith segmentation is starting simple. Let me introduce you to a reliable, effective way to start simple: the 80/20 rule.

The 80/20 rule: how to measure and determine customer value by segment
Its an old axiom that 20% of your customers will produce 80% of your sales. Turns out, its true. The trick is figuring out which 20% is the right 20%. But once youve gone through the exercise, you can precisely focus your marketing strategy based on what each data segment is telling you. Each segment will yield a secret that tells you which customers are worth retaining, which ones you should try to win back, which customers are worth cultivating, where to prioritize your marketing spend, and whos actually costing you money to keep.

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Copyright 2011 Catalyst. All rights reserved.

Do you really know who your best customers are?

Heres how to start. 1. First, determine your value segments based on whatever criteria drive your business: for example, sales, margin dollars or unit volume. 2. Now, rank your customers from highest value to lowest value for the most recent 12-month period.* The customers who produced 80% of total value are your High Value segment. The balance is Low Value. 3. Now, do the same thing for the previous 12-month period and you will have High and Low Value segments from last year and this year. Youll also have new customers who had zero value in the first year but are now on the books as High or Low Value customers. Likewise, youll have lost High and Low Value customers from the first year who had zero sales in the most recent year. A simple cross-tab of these dimensions is likely to show significant movement from one segment to another for each year. Heres a typical distribution of the 24-month customer snapshot.

SegmentationCurrent Value and Retention Trends Year over Year

Year 1 Value Segment High Values Dealer Customer IDs Count Total Year 1 Sales Total Year 2 Sales Dealer Customer IDs Count Low Total Year 1 Sales Total Year 2 Sales Dealer Customer IDs Count None Total Year 1 Sales Total Year 2 Sales Total Dealer Customer IDs Count Total Year 1 Sales Total Year 2 Sales Year 2 Value Segment Total Low None 800 500 200 1,500 $4,600,000 $900,000 $700,000 $6,200,000 $5,400,000 $500,000 $0 $5,900,000 300 2,700 1,800 4,800 $300,000 $1,000,000 $500,000 $1,800,000 $1,000,000 $900,000 $0 $1,900,000 300 1,400 1,700 $0 $0 $0 $1,600,000 $600,000 $2,200,000 1,400 4,600 2,000 8,000 $4,900,000 $1,900,000 $1,200,000 $8,000,000 $8,000,000 $2,000,000 $0 $10,000,000 High

For each of these segments, ask yourself: What happened? Why?

*This same approach can be taken using the last 90 days vs. the previous 90 days, or any other time frame that makes sense for your customers buying cycle.

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Copyright 2011 Catalyst. All rights reserved.

Do you really know who your best customers are?

Tracking movement across value segments from one time period to the next defines specific targeting opportunities and prioritization of value.
Each of these segments presents opportunities to impact customer behavior and grow ROI if you understand what happened and why, if only broadly. For each segment, what youre looking to learn is, what can I do to move you forward? Your goal is to drive customers into higher value segments. For example, what can you learn about the customers who moved from Low to High to better determine marketing spend for those who remained Low? Looking at the customers who moved from High to Low, how might you proactively avoid value loss next year among High Value customers? Once you understand what each segment tells you (the data), your job is to ask what happened? and why? (the analysis). Each intersection in the matrix begs important but often overlooked questionsthe answers to which should shape marketing and sales strategies to prioritize marketing spend, drive growth, minimize attrition and churn, and improve ROI. What other secrets can you find hidden in your data? How about customers who should be marketed to less frequently, customers who shouldnt be marketed to at all, lost customers to target for win-back, and clues to develop a more effective acquisition strategy. And the good news is, you dont have to choose between these objectives. You can do them all, and you should. But the 80/20 segmentation matrix will clearly illuminate your red flags so you know where to focus first. Wed be happy to talk to you further about doing a segmentation analysis of your data. For more information contact Diane Quinlisk at 585.453.8313 or email dquinlisk@catalystinc.com.

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Copyright 2011 Catalyst. All rights reserved.

Do you really know who your best customers are?

About the author Steve Khederian is director of analytics at Catalyst, a Rochester, NY-based direct and digital marketing agency, where he specializes in applying data to develop and implement integrated, multichannel sales and marketing programs. He is the former CMO of Modern Marketing Concepts and VP of client services at Concentrix. He holds an MBA from the Simon School of Business at the University of Rochester.

110 Marina Drive Rochester, NY 14626 800.836.7720 www.catalystinc.com

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Copyright 2011 Catalyst. All rights reserved.