by Hosein Moghaddas
My US-based colleague Jeff McCall senior vice president, strategy services, recently told me of a conference where the entire audience realised that most companies ignore the fact that different customers represent dramatically different relative values to their organisation. In short, ‘differential customer value’. Naturally, the offshoot of this realisation is that most current strategies focus resources on customers that are unlikely to reap long term value for brands.
While there is nothing wrong with traditional online strategy objectives of increasing traffic, conversion and average order value per se, the flaw lies in how the strategy is applied in such a cookie cutter format to all potential customers. Consider the ‘average’ customer segment, which assumes that most customers spend around £60. If we used a graph to depict this ‘average’ customer base divided into deciles, showing the distribution divided into ten groups of equal number of customers, you would quickly see that there are marked disparities in the value of these audience segments.
Customers in Decile 1 each spend closer to £500, while those in Decile 10 spend less than £20. Pointedly, more than 70% of these customers never deliver anywhere near the ‘average’ £100 in revenue, as the vast majority of revenues are driven by a small number of customers (generally 20-30%). This 80/20 phenomenon is true of almost every customer base in existence, yet this fact is routinely ignored by strategists.
This type of ‘average’ customer bracketing means that brands will invest an equal amount of resources capturing low value customers, who may invest temporarily in heavily discounted items or free shipping offers and never shop again. Surely it’s far better to invest in a high value, repeat customer, who is more likely to offer enduring value to your brand?
Our goal should be to shift the customer spending curve
In an ideal world, companies would focus their efforts on their most profitable (and loyal) customers; however to do this there needs to be an intrinsic understanding of what drives and motivates them. Ask yourself, are your most valuable customers interested in ‘one off’ offers that may motivate a temporary customer who is purely interested in entering competitions? Would they be more interested in individually targeted deals or, taking the example of an online fashion retailer, ‘look of the week’ e-mail or an offer of a guest blog slot on your website?
The fact is, these value differences are ignored not just in strategy formation, but also in customer data collection and feedback. Consider the amount of times you’ve seen a site-intercept survey blithely targeted at random customers, or a focus group with a sample of customers that have had no prior screening for relevance to the brand.
Think about it. If 500 customers are randomly selected for a survey, some simple valuation analysis would argue that almost 400 of these 500 responses should either be ignored or heavily discounted. For any product screening to work, we have to ensure that the answers and insights given by the 20% of most valuable customers are considered with the most sincerity, and tailor our strategies or improvement roadmaps around them as appropriate.
The bottom line is that the 80/20 customer valuation phenomenon holds true in almost every customer base, regardless of industry or focus. Choosing to ignore or take stock of this fact is, quite simply, the difference between modest and real growth in the years to follow.
Hosein Moghaddas is VP & MD International of GSI Commerce