Customer Value: Narrowcasting vs. Broadcasting
Virtually every brand we’ve met with in 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,” which is an article we published recently 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 the "acquisition addiction" as it is to kick any other 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 to 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.
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 who a brand believes to be a fit. Contrast this with what is sometimes described as a “narrowcasting” strategy. Narrowcasting uses 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.
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 at 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. These are 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 (and Media)
- The Offer (and 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 CMO’s we engage with regularly 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, ethnographic, urbanicity, purchasing behaviors, credit history, geo- and demo-graphics, net worth, income, online purchasing, offline purchasing and potentially a great deal more.