What is a customer worth?
I am surprised how often the answer to this question is “We don’t really know.” Most marketers have a pretty good handle on customer acquisition cost because this number is often used as a benchmark to value marketing campaign spending.
Assigning a numeric value to customers can be challenging for a number of reasons. Usually it’s because there are insufficient systems in place to capture the data needed to arrive at this valuation.
Sometimes the internal processes within an organization are unstructured and unreliable so determining customer worth is difficult, even impossible.
Why is it important to know customer worth?
Customer cost and customer worth are two fundamentally different approaches to customer marketing. Cost is primarily based on improving efficiency; nothing wrong with it as a practice, it’s tactical not strategic. Customer worth is about maximizing value to an organization.
Maximizing value requires a strategy because it must be driven by an understanding of a customer’s needs and behaviors. When organizations align their strategies to systematically address these needs across all touch points, customers typically consume more over a longer period of time.
How do you define customer value?
This is an important question to answer, and it may not be as easy as you think. There are some obvious questions like:
- How many of our products and services does a consumer have?
- How much of this product do they use?
- What is the average lifetime of a customer?
- What does a customer cost? Do they all cost the same?
- What is the cost per customer to cross-sell or up-sell more of our products and services?
Customer worth forces you to examine your customers from a portfolio rather than a program perspective. Once you understand value, then creating programs that add value to the organization and customer creates a win-win scenario.
What is your customer acquisition cost?
I know, I just said that most marketers know how much it costs to acquire a customer, but that is not always true. Often the answer is based on a hunch or a guess, not with real data.
Understanding customer acquisition cost is critical, especially in a price conscious market. If promotional offers don’t take customer worth into consideration, the results can be disastrous. The last thing anyone wants is acquiring customers that are going to cost the company money in the long-term.
Most financial executives are going to want to know when they can expect a pay-back from the acquisition investment.
How do you maximize customer value?
The simple answer is increase revenue and decrease cost per customer; however, there are many different means to achieve this goal. The best approach begins with a thorough understanding of your customers; how do they value your products or services.
Once you have analyzed your customer portfolio, create segments based on similar attributes. For example, create a new customer segment to educate consumers on ways to get the most value from their purchase, and then encourage them to obtain other appropriate products and services.
Organize customers by their capacity to use products or services and encourage them to use more.
Acknowledge and reward tenure, American Express recognizes by showing a “member since” date on the front of their cards. Recognizing and rewarding will go a long way toward increasing the lifetime value of a customer.
Benefits of knowing your customer value
Knowing customer worth should guide acquisition and retention spending. Adapt your marketing strategy to identify most profitable segments and match with the appropriate product or service offering. Using customer worth to inform marketing resource allocation will improve efficiencies and profitability.
Other thoughts? How do you measure value?