Who are your most profitable customers?

The business world is full of company leaders who profess to ‘know’ definitively who their best customers are without resorting to any number crunching and hard data analysis. But is that realistic? Can you really know just by experience and instincts, which customers are making money?

To increase profitability and grow margins, a company has to ensure its retention activities are focused on profitable customers. In fact (depending on the industry) acquiring a new customer can be anywhere from 5 to 25 times more expensive than retaining an existing customer[1]. Therefore, it is vital to use data to determine the characteristics of different customers and decipher which ones are going to add to the bottom line.

Indeed, companies now have a wealth of data which can be analysed; typically this data is made available through using various business tools.

For instance, CRM should be a tool which can be accessed and employed by all functions of a business and is becoming the central hub to which all decision-driving company information is relayed. If businesses use this data to first identify the most profitable customers, then they are equipped to develop profiles based on the varying traits which they all share. This insight can focus on gearing sales and marketing activities towards these profitable individuals, while shifting resources away from those that the data shows are not contributing to growing profits.

Personas

Ideally, businesses should be segmenting their customers and creating buyer personas for each key customer segment. Personas are fictional representations of a business’s ideal customers, but based on real data. They highlight customer demographics, buying behaviour, preferences, personal details and individual circumstances.

These personas help company leaders to understand the needs, motivations, concerns and spending patterns of customers in various segments. Businesses should create a detailed description of each (name, job title, industry, company information, demographics and characteristics). However, this is only possible with a solution in place to facilitate capturing this valuable customer insight.

These personas can then be matched against prospect data. Buyer personas also help to create more specific content; businesses will be able to ensure their message is more relevant and attract website visitors, ultimately generating better quality leads and customers that provide higher margins. Finally, buyer personas can also be used to guide targeting of desirable customers based on inbound marketing data.

Once a business has identified the type of customer it wishes to try and attract, it is important to understand what an individual customer is really worth to the organisation, and in order to do so, their Customer Lifetime Value (CLV) needs to be calculated. If the right data is available, then tracking CLV is simple. To do this avoid focusing on transactional value and consider instead the acquisition cost, along with the investment required to maintain the on-going relationship. This calculation should include further marketing communications, post-sales follow-up, servicing and time invested in managing the customer relationship throughout its lifetime.  In most businesses, 20% of customers account for 80% of a company’s margins, so there is huge value in knowing who the 20% are[2]!

It is important to note that CLV is not fixed in stone and how it is calculated varies from company to company. This data can then be used to refine engagement strategies and improve initiatives that extend the lifetime value of existing customers.

Creating buyer personas and calculating CLV gives companies the structure to evaluate their customer bases, and will enable them to make sure that each of their customers achieves their full profit potential. This information can help businesses to make more accurate financial forecasts, identify the customer segments that are driving the business and foster more loyalty; however, to do so, businesses need to have the right technology in place to provide snapshot views of their customers – namely a CRM solution.