Do You Understand These Important Customer Analytics Concepts?
For five years I worked in the catalog industry.
If you want to know about customer analytics then the catalog industry is a great place to work.
Catalogers have been using big data before big data was even a term. While working at the company, I read a book by the former president of LL Bean. In the book, the concept of RFM was discussed. The term refers to Recency, Frequency and Money. This concept became big in the catalog world in the ’70s or so and continued into the ’00s.
Recency was the last time a customer purchased.
Frequency was the number of times the customer has purchased from the company.
Money was average order of the customer.
I think some companies do it a bit different, but this the basic concept. Depending on how a customer interacted with the company and these three facts, they would be put into segments. Those segments determined how often a customer would get a catalog and it would determine the type of catalog the customer would receive.
The process was used to predict what customers would likely purchase in the future. When you’re mailing out millions of catalogs per month you want to be as accurate as possible. So this formula worked really well until the late ’00s when more sophisticated models took into account even more customer data.
What does this all have to do with businesses today?
Well, customer analytics are incredibly important for all kinds of business. From retailers to ecommerce companies to small businesses – they can all benefit by using important customer analytics concepts.
Here are a few of those concepts including action steps you can take right now to improve the way you interact with your current and future customers.
Concept #1 – Lifetime Value
The first concept I learned on the job at the catalog company was Lifetime Value. Basically, you look at the cost to acquire a new customer and figure out how long it takes until that customer becomes profitable for your company.
For example, a cataloger might spend $100 to rent one hundred customer names via a database and to send them catalogs. From that segment, most would think that they need one customer from that group to spend $101 with the catalog mailing to be profitable.
But catalogers are pros when it comes to this type of customer analytics. They take it a step further and analyze the life of the customer.
For example, out of the 100 prospects, one purchases something for $50 in profit for your company. On the surface, that appears to be a losing proposition for the company at -$50, but over the next 18 months, the customer purchases two additional times at $50 in profit each time. That’s $150 profit in 18 months for a total of $50 profit in 18 months.
That’s how lifetime value works and it works for just about any type of business.
For your business, figure out the how much your new customers spend with you within the first one to two years. You could go longer or shorter if you like, but one to two years is a good bet. Once you have that number you’ll know how much you can spend to acquire customers. Track it based on lifetime value.
Concept #2 – Ideal Customer
Next is knowing your ideal customer. At the catalog company we scrutinized our ideal customer. We knew who exactly the type of person we wanted as our customers and looked high and low for sources that could deliver those ideal customers.
When you understand your ideal customer you can find places where they are and figure out how to market to them so they’ll become a new customer.
The process for identifying your ideal customer begins by analyzing your current customers. Look through your entire customer list and start marking all the attributes for each. Most businesses have a prioritization of customers. Usually the best customers are the ones that spend the most on the highest profit items with little to no customer service requirements.
Once you know who your best customers are you can figure out how you acquired them and really go after more in the same manner. You can also ditch the bad customers on your list and stop acquiring customers through the sources of the bad customers.
Look through your customer list and identify your ideal customer. If you’re a large retail company, you’ll probably need some deep data mining software to be able to figure out your most profitable and low-maintenance customers, but it’ll be worth it to know your best customer. Look for customers also that tend to purchase new items. New items are key to a successful business.
If you’re a small business you can go through your customer list manually. It will take some time, but again it will be worth it. You’ll have better focus and your business will succeed because of the effort.
Concept #3 – New Product Success Rate
At the catalog company we had this big board of all the products offered in the catalog. After each six-month season we would analyze how every product did. The success was based on profit. Products that didn’t do well would be turned over with replacements the following year.
However, one of the keys to this process was new products. New products tended to generally not do as well as established products. But you have to realize that new products are the key to a growing business. Once you have a product that hits you can keep selling it, but after some time you’ll kind of max out the number of customers you an reach with that one offering. You’ll have to offer new products to keep growing the business.
Think of Apple. They hit it big with the iPod and today they still sell a lot and could be doing just fine if they never came out with another product. But they released the iPhone and acquired even more new customers.
You have to look at new products different. At the catalog company, we did. A new product might be in the lower half of the board of products, but we knew to give new products a little extra time. You obviously don’t want to back a loser for long, but give it extra time.
Realize that you need new products to grow.
Look at your new products. Figure out the ones that are showing promise. Figure out how you could possibly improve the profit margin and maybe give a little more marketing effort to them. See if you’re getting more of the customers you want with new products and keep trying to come out with new products. It’s the lifeblood of your growing company.
Concept #4 – Product Profit By Channel
Channel is another big area of business. With small business, it can really be important because there are a million different options for acquiring new customers and each produces different types of customers and different types of profit.
In the catalog world, the customers acquired via catalog were very different from customers acquired via online advertising and those were different than customers acquired via natural search.
This process is part of your ideal customer work. You look at how you’ve acquired your best and most profitable customers. Then you look at those channels and see how you can turn them into overdrive.
At GBW, we get a good number of clients through natural search. That’s why we invest much of our effort into blogging. We know we need great blog posts to bring in natural search traffic.
Look at the different channels you’ve used to acquire customers. Analyze the profit each channel generates and keep track on an ongoing basis. You can learn a lot from this information and you might even be able to figure out new channels that you’re missing out on while identifying channels that should be discontinued.
Concept #5 – New Customer Acquisition By Channel
Have we mentioned that new customers are important?
This might seem similar to the previous point, but with new customers you might not always make profit right away. This can skew the results of your profit analysis and could cause you to ignore certain channels.
It’s expensive to acquire new customers, but you need new customers if you want to grow. You can only go to the well with your current customers so many times.
This is why lifetime value is so important.
Look at the channels that are doing well by bringing you new customers. They might not be turning profit in the first year, but over five years the channel could prove to be your best.
When looking at your acquisition channels, use lifetime value to see what channels are bringing in the most profitable customers and the customers that generate the fewest headaches.
Customer analytics is a great area for businesses. There is so much technology today that can help with customers analytics. You can use that technology to mine your customer data especially if you’re a large retailer or ecommerce company. But even if you’re a small business you can dig into your analytics – even manually – and find great information that you can use to improve your company.
Hopefully the concepts above can get you started off in the right direction.