Customer Value: Narrowcasting vs. Broadcasting
Virtually every brand I’ve met with during the last few months is hungry for new customers. The war for the customer is on. For more on growing your customer base, consider reading “Bigger Is Better, How to Scale Up Customer Acquisition Smarter,” an article about how to grow your customer base.
Many organizations are hooked on customer acquisition. That is, in order to hit sales plans for the organization, new customers will be required in large numbers. It’s about as easy to kick "acquisition addiction" as it is to kick any other addiction for most brands. Try going without coffee suddenly, and see how your head feels. It’s not very different from reducing a business's dependence on customer acquisition as a means of achieving revenue and profit targets.
Organizations that need ever larger numbers of new customers to achieve growth goals eventually will find the cost of acquiring incremental net new customers can become prohibitive. [Editor's note: See "Wells Fargo Fiasco."]
Broadcast vs. Narrowcast
The traditional model for advertising and customer acquisition has essentially been a broadcast approach, reaching a large audience that is generally descriptive of the customer a brand believes to be a fit. Contrast this with what is sometimes described as a “narrowcasting” strategy. Narrowcasting utilizes customer intelligence to understand a great number of discrete dimensions that a consumer possesses and can leverage statistical methods to validate the accuracy and predictiveness of targeting customers through these methods.
The chart below, depicting the value of customers acquired through traditional broadcast capabilities upfront and over time, helps illustrate why “broadcast” strategies for customer acquisition alone aren’t enough.
Broadcast Acquisition Strategies Lack Focus on Customer Value
Large numbers of customers have been acquired in a trailing 13-month window - lots of them. The challenge is this cohort of customers has been acquired without adequate consideration of the right target.
Consider the fact that the target customer value of average or better customers is around $500. In the example above, the marketer has acquired a large number of customers who are lagging in their economic contribution to the business. While the customer acquisition metrics may look good, this was a large campaign and produced several hundreds of thousands of customers over its duration - the average value of those customers is quite low, indeed.
Low Customer Value Manifests Itself, Even If Acquisition Volume Is High
When sales targets are rising, it becomes harder to justify the high cost of customer acquisition if the customers previously acquired are underperforming. This leads to a very common bind marketers are placed in. The only way to “make the number” is to acquire more and more customers.
The most competitive and high quality businesses steadily acquire and have a robust customer base whose economic contribution is materially higher. Consequently, profits are higher, and we have a fundamentally better business.
Oftentimes, “broadcast” advertising approaches define the target with a single criteria like age, income or geography. This can be effective, especially when the media is bought on a good value. However, “effective” is almost always defined as “number of customers acquired.” This, of course, is a reasonable way to judge the performance of the marketing - at least by traditional standards.
There is another way to measure the success of the campaign that is only just beginning to be understood by many traditional “broadcast” marketers: customer value. The chart above shows that this cohort of acquired customers had relatively low economic value.
Root Causes of Low Customer Value
What are the causes of low value? It would be fair to start with the ongoing marketing and relationship with the customer. Bad service could keep customers from returning. Poor quality could lead to excessive returns. Over-promotion could drive down value. Getting the message and frequency wrong could lead to underperformance of the cohort. All viable reasons for lower value that need to be rationally and methodically ruled out prior to looking elsewhere.
Therefore, if operational issues are not clear - either through organizational KPI tracking, or simply by monitoring Twitter - then a marketing professional needs to start looking at three things.
- The Target (& Media)
- The Offer (& Message)
- The Creative
Given the target is historically responsible for up to 70 percent of the success of advertising, this is the first place a professional data-driven marketer would look.
Target Definition Defines the Customer You Acquire, and It Drives Customer Value.
A fact that is often overlooked is that target definition means not just focusing efforts and advertising spent on consumers who are most likely to convert and become customers, but it also defines what kind of customers they have the potential to become.
In conversations with CMOs, we often discuss “the target customer” or the “ideal customer” they wish to introduce their brand to. The descriptions, of course, vary by the brand and the product. Those target definitions are often more qualitative in nature. In fact, only about 30 percent of CMOs we engage with regularity are focused on using hard data to define their customer base. While these are helpful and create a vocabulary for discussing and defining who the customer is, those primarily qualitative descriptors are often sculpted to align with media descriptors that make targeting “big and simple.”
“While simplifying is good business, when simplicity masks underlying business model challenges, a deeper look will ultimately be required, if not forced on the organization.”
While we would not refute a place for those descriptors of a valued consumer, they do fall short of true target definition. Ideally, the process of defining the customer who a brand wishes to pursue must begin with a thorough inventory of the customers it already has, and a substantial enhancement of those customer records - which provides vibrant metrics on affluence, age, ethnography, urbanicity, purchasing behaviors, credit history, geo- and demographics, net worth, income, online purchasing, offline purchasing and potentially a great deal more.
Keeping It Simple: Target the Customers Who Have Greater Potential Value
It’s not enough to have a great story about the “broadcast market” we wish to identify customers from. Today, marketers would do well to more narrowly (thus “narrowcasting”) define not only the customer, but the most valuable customer. In our experience, the minority of marketers have a shared definition of the customer and of the most valuable customer across the organization.
To achieve this, we can determine customer data attributes that are predictive of customer value. Under this strategy, we go beyond trial (conversion) but begin with the end in mind ... acquiring customers who have the greatest potential to become more frequent and more loyal customers in the first place.
This is entirely feasible with the right data set and a modeling exercise against the highest value segment of the current customer base.
Once this “narrowcast” target is formally defined by attributes that are most predictive of their future buying behavior and spending proclivity, we can begin to define the advertising and marketing that would have the greatest effect on the brand.
Saturation Marketing to the Highest Value Targets
While many brands are still struggling to implement and execute true “narrowcast” advertising, there is ample opportunity this approach affords them. Consider the impact of acquiring a base of customers statistically more likely to spend more, and purchase more often. Not only because they possess the means or discretionary income, but possess other necessary factors to actually spend in the category, and do so more vigorously.
Profit per customer goes up dramatically when you weed out those more likely to buy once and then stop at the trial stage of a customer relationship - and instead acquire more customers with all of the necessary attributes to become “best customers.”
A Direct Approach to Brand Investment: Narrowcasting
Given that a narrowcast approach can help a brand be selective in cultivating the customer base that transforms the value of the business and enables marketers to produce more predictable sales, the challenge in some organizations is finding the budget to do this - as it’s not a traditional budget item. Remember at one point, search marketing wasn’t either.
For brands looking to grow smarter and more reliably, one solution that can work is to allocate a portion of the “branding” budget to delivering awareness-generating messages - with a reasonable call to action, to stimulate trial, not in a broadly targeted group (“banded income” is a typical criteria) but on a predictive basis. Models can help in selecting the target and matching back to postal, email addresses and display targeting cookies. It can produce a rich, immersive campaign, focused only on the individuals who a brand in your category really must reach and convert to perform at a high level.
Consider the impact it can have on customer value.
Note, in the above, the customer count is a LOT lower than the broadcast approach. This new approach does not replace, for example, national television in terms of reach. However, we note the rather overt shift between customer value from the first chart. This is what may be expected of narrowcast campaigns that have been intelligently constructed and tested.
This is a different view and brings some of the techniques from programmatic advertising, database marketing and predictive analytics to bear on the customer acquisition challenge. But the results can be impressive, and marketers will ultimately make the majority of their advertising decisions through a more “narrow” or focused lens as the technology grinds forward in efficiency.
To be sure, many firms are already executing these strategies today. These firms are building competitive advantages through a more robust, valuable and loyal customer base who will endure for many years into the future.