The Most Important CRM Metric You Might Be Missing
Virtually every organization we have worked with in the past year is working on managing, improving or optimizing their relationships with customers. This work falls under the umbrella term “Customer Relationship Management” or “CRM.” It is, of course, the oldest “new thing” that marketers have focused on, en masse, for a long while.
“CRM,” as it is, is a term that means many things to many different organizations and to different individuals in those organizations. This has created some confusion and leads to missed expectations in organizations.
Through meetings and executive interviews with brands, we have found that the majority of marketers will eventually describe the primary purpose of “CRM” initiatives as growing the value of customers who do business with them. We say “eventually,” because the initial responses to the question “what is the objective of your CRM initiative” gets quite a few answers including:
- Know our customer better
- Improve communications with our customer
- Grow customer relationships (the most common response, and also the least actionable)
- Decrease the usage of promotion
- Reduce the volume of emails sent
These are just a few of the ways the organizations we work with begin to define their CRM initiatives; but to really make a difference in the business, CRM needs a clearly defined vision:
Intelligently managed customer relationships grow customer value. It drives incremental profit by either reducing the cost of promotion or driving incremental profitable revenue. CRM requires ongoing testing and learning, which can strategically inform customer acquisition and, in turn, increases the quality of the business.
“Intelligently managed customer relationships grow customer value. It drives incremental profit by either reducing the cost of promotion, or driving incremental profitable revenue.”
Can You Really Grow the Value of Your Customers?
Given the continuing trend of technology and data-driven CRM, it often comes as a surprise that few organizations have a heavy concentration of high-value customers. In fact, it’s the norm.
In a study Kaplan and Anderson published in the Harvard Business Review, the following was found across all industries:
- 10 to 25 percent of customers drive 100 percent of profits
- 50 to 60 percent deliver no profit at all
- 10 to 25 percent deliver negative profitability
Some may find the magnitude of these facts surprising, perhaps even alarming. Not surprisingly, these profitability metrics correlate entirely to our experience across many dozens of organizations in working with their customer databases. What is sometimes an “uncomfortably large” percentage of revenue and profit is driven by a small group of the most valuable customers. In the luxury segment, where some brands have created an "accessible luxury" segment, the results grow even more staggering.
One example where we’ve seen this is among premium luxury brands that have grown “more inclusive” in their customer base. The concentration of customer value in the organizations is often almost exclusively in the top 10 to 15 percent of customers. When we have revealed this insight and evidence, the very business model may need to be rethought. To be sure, across all segments, customer value is a very big deal to all organizations — and, therefore, CRM.
Do Brands Have 'Bad' Customers?
This is a topic that is also hard to engage on. Often, marketers dedicate many hours and PowerPoint slides to focusing on the successes, and how good our customers are for our business. That’s an entirely intuitive point. These great customers also have an inverse; that is, customers whose value isn’t quite so great.
Some of these organizations have a material number of what might be called "bad customers," altogether. But given that customers are the key element to realizing value in every business, how then can they be “bad"?
Let’s be clear, “bad” may carry a visceral sense of judgment. That’s not the point here, at all. The point is to meaningfully differentiate between customer groups or segments that naturally exist today in your database. “Good” or “bad” for the data-driven marketer really means how profitable the group is, or if it's profitable at all. Simply put, a "bad" customer” must exist if a "good" or "great" customer does. Perhaps more “PC” — all customers have value, yet the value they hold for an organization is very, very different.
“All Customers have value, yet the value they hold for an organization is very, very different.”
You may even have a term for a segment of your customer base that you can’t afford to service well as “cost-control” customers. This happens in financial services, for example, where cost control may mean higher fees and online self service only. While that specific model does not necessarily apply to every business, all businesses have various segments of customers by value — both realized, and potential.
An Example: The Luxury and Accessible Luxury Categories
In the luxury category, brands sometimes become “more inclusive” (for example, in 2008 and at the depths of the Great Recession), which often means either markdowns or a product line for the “accessible luxury” category. As a result of this, customer value inevitably declines. In our experience, that decline was driven by decisions years earlier to scale at the cost of customer quality.
In these scenarios, if you were managing a CRM initiative, you'd have what’s known as a “dual-universe” problem — you can’t manage the value of these very different customers the same way. They may require a different P&L to account for them, and understand their value to the business.
A simple starting point in understanding a “dual universe” goes like this: Segment out your customers into the two groups — those who buy your true premium product, and those who have bought everything else. Analytics can then be leveraged independently across those groups.
The key to understanding if you have good and bad customers is, of course, the speed and dexterity you have to analyze customer data and your ability to measure and monitor changes in customer value by cohort. That’s a tall order for a lot of organizations today. Most are still focused on revenue through acquisition, rather than a strategic view where customer value is crafted first through the unique kind of customer acquired.
Good Customers — The Heart of Your Business
Good customers typically have longevity. Good customers purchase frequently, they have higher order sizes, or monetary value to your organization, they tell their friends about you, and while they appreciate a product they like on sale, they can also pay full price to get what they want.
Most importantly, while great customers generally cost more to acquire, and are harder to come by — good customers are quite profitable.
When a customer is considered good in most situations, they sometimes have the potential to become great ones. And therefore the mission of the CRM practitioner becomes, in simple terms, to ID the similarities and differences between them, make communication more relevant, and shape the value of each sale systematically. Growing customer value for your “good customers” can fill several of these columns, and we’ll put a series on migrating the good customers to great ones. (leave me a comment, or email me if you’d like to see those in the next couple of months).
Great Customers, or 'Gold Customers' — The Backbone of Your Business
The challenge for these “great customers” is they are often few and far between. If you're in a business, where you have many great customers, you are either very, very fortunate, or you have not created a meaningful stratification of customers by value! This is one of the reasons that an intelligent segmentation of customers by value is an eye-opening engagement for most marketers and CRM practitioners.
Great customers, in most cases, are not only few in number but — counter to what may be one’s “gut feeling” — they quite literally carry the business. If you were to assume the contribution of customers to your bottom line followed a normal distribution, (think the bell curve, with a big fat middle), you would be quite surprised by what it most likely looks like. That contribution is stacked heavily to the top standard deviation, or way to the right side of the curve.
The insights we glean over time and across industries on organizations' "Gold Customers" is the genesis and the reason CRM as a practice exists today.
“The Insights we have gleaned over time and across industries on organizations' ‘Gold Customers’ is the genesis for and the reason that CRM as a practice exists today.”
The Best Way To Influence your CRM and Customer Value — Smarter Acquisition
This comes as a curveball to many CRM practitioners, especially those early in their CRM careers and experience. Nothing but nothing will change the performance of your database more meaningfully than adding more customers with higher potential value.
Put another way, great — or "Gold Customers" — are the backbone of a business, in that they are primary drivers of profitability, and they are the reason we’re engaging in CRM. So it’s imperative that we not only treat them differently and market to them wisely — but very simple math suggests we must also be acquiring more of them to increase the value of our database, our customer base and our business.
The Most Important Metric of Your CRM Strategy: Potential Value
There are many ways to measure your customers, their behaviors and their value. Concurrently, the most strategic way to grow your business and the value of your CRM initiatives is to collaborate with and inform your customer acquisition; that is to say, you can sculpt potential value through who you market to in the first place.
Customers who can’t afford you, don’t have the habits, beliefs, credit or lifestyles that your great (most valuable) customers do simply won’t or can’t buy like those who do. Those who do are your MVCs (Most Valuable Customers) and those who are ever further from this ideal are your least valuable.
Therefore, there is nothing we can do as marketers and as CRM practitioners that will improve the value of customers now and over time more so than acquiring more of the right ones. The strategy to how we do that is covered in another important article I’ve published as part of the body of work in this column on, "How to Scale-up Customer Acquisition Smarter."
When you take a holistic view of your marketing, and place the appropriate value on the role of customer intelligence from CRM into your customer acquisition approaches, you can have an ever greater impact on the No. 1 metric we discuss herein — the potential value.
A high-potential value in the customer database then can be translated into ever-greater revenue and profitability, in a scalable and methodical fashion. While potential value is unlocked through all of the strategies and tactics we engage with through CRM — it all starts the most important “inputs” to your CRM — the customers themselves; moreover, acquiring the right ones.