Can you quantify the economic value of your customers?


Can you quantify the economic value of your customers?

Most companies believe that every customer is a good customer. The simple fact is that many companies lack the infrastructure necessary to quantify the net present value of a customer by segment, distribution channel or product set.
 

The reasons for this are varied; companies invariably feel that they:

  • Can’t be bothered developing the infrastructure
  • Don’t have the human capital necessary to do the work
  • Are doing fine in the aggregate

The reality is that in most organizations, there is an 80/20/20 rule in effect.
 

About 80% of profits come from the top 20% of customers, but the bottom 20% of customers account for 80% of the drain on a company’s resources.

 

That’s right; in most organizations, the bottom 20% of customers contribute around 80% of customer service costs, returns, bad debt, etc…
 

Still think your organization can’t be bothered to develop the infrastructure necessary to measure customer value? Think again.
 

While the truth is stark, the reality is that measuring customer value need not be an expensive or taxing drain on a firm’s resources. Most companies have the basic foundation of data necessary to perform some basic analysis.
 

Here’s a simple approach for just about any company of any size:
 

  • Organize customers by whatever segments your firm currently uses; if you don’t have any fancy customer segmentation, that’s ok, too.
  • Filter your data by recency and frequency of purchases; that is, look at customers who have purchased 1, 2 and 3+ times over a 6, 12 and 18-month period.
  • Organize your data by revenue and profit per customer (if possible); simple averages or aggregates are fine at this point.
  • Line up this data to any insights you have as regards to marketing expenses during this same period of time.
  • Divide profits per customer by marketing expense by customer (or customer segment or time period, depending on how your data is organized).

The result is a very simple measure of ROI; depending on how robust your data is, this ROI might be organized by customer segment, time period, distribution channel or product set.
 
This is a very simple approach to measuring customer value, but it’s a good start for most firms.
 
Now stand back and think about the data you’re seeing. Where do your most profitable customer come from? Do they tend to purchase similar products? Did a particular investment in marketing help you to generate more sales? Are there certain products that generate more revenue but less profits?
 

About the Kabardian Group: We help clients achieve profitable growth. Short, simple and to the point. Our clients include companies large and small and at every stage of their development, including start-ups. www.kabardian.com
 

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