Importance of Profitable Customers?
How can retailers ensure they are engaging with their ‘best’ and most profitable customers? Today’s retail climate is extremely competitive with customers increasingly switching between brands, favouring discounts and conducting extensive online research. In a consumer driven market with less brand loyalty, how do businesses ensure that they are engaging with customers that are most likely to deliver maximum profitability?
The best way to increase profitability is to drive sales with customers who already spend the most. So how can businesses utilise their data to gain marketing insight to help target, attract and engage with their most profitable customers?
Data driven actionable Insight is the answer. The following outputs of customer analysis, provide the customer intelligence that enables retailers to target their most profitable customers.
Customer Segmentation
To gain an understanding of who your most profitable customers are, you first need to profile your customer base to understand who they are and what they look like.
Customer segmentation is a means of grouping your customers into shared characteristics or traits. This could be by socio demographic factors, or sales behaviour, but ideally a hybrid of the two. To read more on customer segmentation visit our blog customer segmentation the basics. Once you have a picture of your different customers you can analyse who (type of customer) is buying what (products, value, frequency) and which segments of your customer base are spending the most. Customer segmentation provides the means of driving more targeting and informed marketing communications that will build customer loyalty and therefore customer lifetime value.
80/20 Marketing Rule – Proportion of Profitable Customers
We are all familiar with the 80/20 marketing theory, that 80% of your sales come from 20% of our customers. It stands to reason that if we can identify the 20% of customers that spend the most, we can then drive profitability by upselling to these ‘most valuable’ customers and finding more prospects that look just like them.
By analysing your customer segments by value, we can build a picture of customers who spend the most and therefore are more valuable. As an example, we worked with a client, whose customers consisted mainly of the older generation, retirees who had more free time who visited their venue during the week. We concluded, after a customer profiling project, that a minority segment of ‘families’ who visited on weekends were far more profitable per visit (read full case study). This customer insight helped change their targeting strategy to include communications that would directly engage with families – in turn leading to increased visits of the type of customer who spends more on site – driving profitability.
Align Spend and Resource to Potential Value
Understanding the profile of your highest spenders, enables companies to align resource and spend in proportion to the opportunity each segment has to offer.
Businesses that can prioritise resources are more likely to be able to provide a better return on investment by concentrating on pulling in the right type of customers.
This could be setting your marketing spend proportionally to the opportunity or profitability each group offers or reducing the follow-up or sales pipeline on those prospects/customers that do not spend as much or take longer to convert.
Increase the Volume of Your ‘Best’ Profitable Customers
A profile of your best customers provides insight into who they are, how they live and what motivates or interests them. Utilising this insight, companies can implement highly targeted and personalised campaigns to attract, engage and ultimately sell to prospects matching their ideal customer. The more customers you have that match your most valuable customers, the more profitable you will be. Businesses that are able to target and acquire more valuable customers, can then concentrate on quality not quantity. Align you advertising, placement and positioning to target your most profitable customers.
Catchment Analysis
In retail, as with any location-based businesses, understanding where your customers come from and how far they are prepared to travel can be as important as who they are. Businesses will have an optimum catchment area where 75-80% of their customers reside. Any spend or marketing efforts outside of this area could be deemed a waste of budget that could be wisely spent elsewhere.
How far people are travelling can be an indicator of motivations or influences on shopping behaviour. Understanding these can feed into your overall strategy. High ticket items often have greater catchments whereas smaller habitual commodities have smaller drive-times. (Think food shopping versus white goods or household furniture). However, if your store or business is in a hot spot, retail centre, shopping centre, tourist spot, then customers/footfall may be a result of being located in an experience destination.
Market Penetration Analysis
A profile of your most valuable customers (and different types of customers) by socio demographics, enables you to map these customers against the GB population. This is extremely important if you want to find more customers that look like them. Once you can match the profile of your profitable customers against the GB population, you can then size the potential market opportunity.
If your customer numbers are low in an area with a high density of your ideal customer, you can increase spend to drive sales. Similarly, if you map your existing customers (best customers) on a map and overlay density of your ideal customer – you can see which areas you have low or little penetration. For store locations this is a necessity to see where you have room for growth (read a case study on store location analysis) . Even online businesses can use this method to understand where they need to build awareness and exposure of their brand.
Customer/Product Analysis
We have been outlining how identifying your most profitable customers is beneficial. Understanding which customers buy which products or services is also valuable. If there are specific patterns in types of customers that purchase or use different products and services, you can tailor the messages to resonate with specific audiences.
If customers always pay full price or are brand led, then you do not want to devalue your brand or price point by offering them a discount. These promotions should be saved for the customers that only tend to purchase when they receive offers.
Look for patterns and interests in purchasing behaviour, so you can offer the next item, product or service that you think they’d be interested in – before they start looking.
To conclude, there are many reasons to identify your most profitable customers. Customer insight, market penetration analysis and catchment analysis provide the tools for retailers and venues to attract more of their ideal customers. Once you have them, use the same insight to drive the right marketing strategy to keep them!
If you would like to discuss any of the above techniques, please contact us on [email protected] or call a member of our insights team 01926 887555