Do you have insight into the value of your customer database? What are the risks if you don't? And what are the the most important factors in determining the value?
The fact that your customer base has value is obvious. Because your company would cease to exist without customers, even if your product or service is innovative and unique. But do you have insight into (the evolution of) this value? And what do you risk if you don’t?
Everything can be expressed in numbers - the value of your customer base as well. The value of your customer base is determined by the revenue generated by groups of customers, which can be recognised on the basis of the purchasing characteristics of these customers.
The value of your overall customer base can tell you a lot about the financial health of your business. Information that you can then use to make smart choices and take targeted measures. For example, you’d obviously like to know which cash flows your business will generate in the future. And whether these are in line with expectations or whether adjustments are required to achieve your financial objectives.
Your earnings, i.e. your customers, are crucial here. As such, it’s important to gain insight into the development of your customer base so you know how the value of your business will develop over time.
It’s only meaningful to make statements about the value and evolution of your customer base once it has reached a certain volume. After all, it’s hard to tell how your business is doing looking at a handful of customers.
If one customer is lost, the entire financial picture is skewed, and it’s impossible to derive meaningful information from it. As such, a larger customer base supplies more reliable - and therefore usable - data about the financial health of your business.
The big picture
Information which is essential for mapping the value of your customer base includes the newly acquired customers, the existing customers that remain and those that are looking for a different supplier. This allows you to see at a glance which movements are taking place and what the net result is – and thus what the impact is on your customer base as a whole.
If you for instance see that a lot of customers left over a certain period of time, it’s advisable to chart whether these customers have a common denominator and whether you can expect comparable customers to leave as well. Conversely, a discount for loyal customers can stimulate customer retention.
If you don’t pay any attention to the development of your customer base, you risk overlooking certain developments within your company. For example, it’s perfectly possible for your sales team to achieve good results and bring in a large number of new customers.
But the big picture might show that existing customers are leaving en masse. Or you might discover that these new customers don’t purchase much. You also take a risk when you take measures without keeping the long-term effects in mind. For example, if you set up a campaign to acquire new customers but stop the campaign after a year because the costs appear to outweigh the benefits. At first sight, this appears to be a sensible decision. But let’s say that you sell subscriptions and reward each new customer with a tablet.
If you don’t pay any attention to the development of your customer base, you risk overlooking certain developments within your company.
This tablet could be an expense which – together with the cost of the efforts of the sales team – would lead to a negative result per new customer at the end of the first year. But the following year these new customers do not receive a gift or require a sales effort. Each customer that then extends means profit. If it turns out that 80% of the new customers extend their subscription after a year, it’s unwise to pull the plug on the campaign that same year because it’s not profitable in the short term. If the expense component disappears, the income figures will after all shoot up in no time.
This example shows that smart choices can only be made if you have insight into the big picture of your customer base. If you don’t, the view you have of the financial health of your business may be incomplete, misleading or downright incorrect. And that would be a pity.
How do you determine the value of your customer database?
The value of your customer base says a lot about the financial health of your business. But even more importantly: this value helps you make substantiated choices in order to increase the revenue from your existing customers or to expand your customer base. But how do you determine the value of your customer base? Below you’ll read which insights you need for this.
1. The number of active, passive and ex-customers
As I've already explained, you can only carry out substantiated (marketing) actions if you have insight into the big picture of your customer base. An important first step towards seeing this big picture is charting the number of active and passive customers in your database. Do you for instance know how many active customers there are in your customer base? And how many customers haven’t made a purchase in a while?
We define an 'active' customer as a customer who recently made a new purchase. Whether you consider a customer active is entirely dependent on the industry in which you operate and the frequency with which your goods or services are purchased. Customers return to a bakery more frequently than a car dealer.
You can only carry out substantiated (marketing) actions if you have insight into the big picture of your customer base.
In determining the number of active customers, it could be a useful addition to make a distinction between different kinds of products. For example, a baker can distinguish between bread – something he sells to the same customer several times a week – and a birthday cake, which a customer would at most purchase a few times a year.
'Passive' customers are those who haven’t made a purchase in a while and who therefore aren’t as reliable. Still, you can often easily make them more loyal customers with targeted measures. The number of ex-customers is the ‘waste bin’ of customers: these are customers who have not made a purchase in a long time. These customers no longer need your product, or a competitor offered them better conditions.
2. The revenue per customer segment
A second aspect which allows you to determine the value of your customer base is the revenue for which a customer or customer segment is responsible. You do this by dividing your customers into large, average and small purchasers. This shows you which part of your customers or customer segment is responsible for the largest share of your revenue. A common proportion is that roughly 20% of your customer base is responsible for 80% of your revenue. This proportion indicates the best way to treat your customers.
In this case, you’d want to pamper your most important group of customers: a message on their birthday, invitations to exclusive events, a fixed contact person, regular discounts, etc. This seems excessive, but in reality, these measures are effective. It’s important to keep an eye on the development of these customer segments. If you for instance see a number of your large customers leave, this is more worrying than a similar decrease in small customers. Not every customer is equally essentially to the survival of your customers.
A common proportion is that roughly 20% of your customer base is responsible for 80% of your revenue.
On the other hand, a situation in which 10% of your customers is responsible for 90% of revenue isn’t ideal either. The chance that an essential share of revenue is lost due to one top customer leaving is very significant in this case.
A large base of smaller customers means a reasonable spread of risk: customers can leave without hugely affecting your overall revenue. The disadvantage of a lower proportion, such as 50/50, is that it’s harder to determine a target group to pamper in order to achieve extraordinary revenue or for whom you could develop new products.
3. Extraordinary expenses in sales and marketing
If you would like a complete picture of the value of your customer base, you should also map the costs of the marketing and sales activities you undertake for customer acquisition and retention. It’s important to include these expenses in determining the value of the customer base: it’s fairly normal that new customers only cost money in the beginning, but there must be a certain recovery period for this. So, don’t be startled if you see these expenses lead to a negative result in the first year. In the following years, the expenses will decrease as customers remain for longer. As such, it’s about keeping the multi-year plan in mind.
An example: Your company succeeds in acquiring new customers by raffling a car every year. Unfortunately, this campaign is attracting less and less support. You therefore decide to cancel the campaign and replace it with a different one. You know that you’ll lose a lot of existing customers because of this – they remained loyal to you because of the annual raffle. But through targeted sales efforts, you’re convinced that your expertise will convince new customers. This example as such represents a customer base with customers from whom you will virtually never recover the expenses. It could lead to more active customers, but it’s not good for profits. These customers will have a very long (unrealistic) recovery period.
The value from your customer base can thus be mapped from multiple angles: from the perspective of quantity (the number of active customers), quality (how much revenue do these customers generate) and expenses (how much do these customers cost you). Only with these insights can you further expand your customer base and help your company grow.
About Mark Zwart
Mark Zwart graduated in Cognitive and Theoretical Psychology. He focused on imitating human behavior in neural networks. This led to his interest in a numerical approach to consumer behavior and the growth of customer value. For 15 years he has been passionately engaged in marketing intelligence for B2B and B2C companies and for charities. For example, he worked on projects related to customer lifetime value, the optimization of customer contact strategies, customer segmentation, the construction of data warehouses and dashboards, etc. He likes to share his expertise and experiences with others.