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“Identify your most valuable customers then go out and acquire some more just like them”. It seems a logical and straightforward strategy, yet in many industries, segmenting an organisation’s customers by profitability or value measures delivers a top decile that is packed with all kinds of customers that look radically different. In retail banking for example, the most profitable decile will typically include: single product current account customers with high overdraft usage, single product current account customers with high average balance, long-term relationship customers with multiple credit products, savings customers with high deposits. They all deliver similar profitability, yet demographically, behaviourally and attitudinally, they all look very different. So what’s the solution? The solution is to work harder at your analysis and create segmentation and profiling models that take into account diverse factors, including product holdings, transactional behaviour and customer longevity, in addition to standard variables like life stage, financial mosaic and demographic groupings.
It’s clear that identifying your most profitable customers is a challenging task, but it is achievable. And if you don’t have profitability measures, then revenue comes a close second. Yet even if you can calculate customer profitability down to the last penny, there are other “time” factors to consider, because customer value is not a one-dimensional metric. In many business sectors, customer value is only fully realised over time. You invest your marketing budget in new customer acquisition, and you may have to spend further budget on-boarding customers, and even then you may have to nurture the relationship over time, cross-selling and up-selling additional products, carefully managing value over several years until the customer becomes profitable. So customer retention is key.
Effective customer retention costs money. Retention activity may take the form of regular customer communications, timely offers, selective pricing, or any one of a whole range of tactical or strategic measures. Yet you’ll only see a good return on that investment if you target your efforts at those customers who have the potential to become profitable in the long-term. So part of your segmentation strategy should include propensity modelling to determine which customers are most likely to buy additional products and/or services. The flip side of this coin means you may have to consider diverting your retention efforts away from your least profitable customers, especially those that deliver negative value.
Returning to the retail banking example, the unprofitable customers are likely to be heavy transactors with minimal average balance and limited use of credit. So in addition to identifying your most profitable customers, your customer segmentation should also identify your least profitable customers. And once you’ve done that, you have to ask yourself three questions. Are unprofitable customers simply a cost of doing business in your sector? Is there anything you can do ethically to increase customer attrition in this segment? Or is there anything you can do to convert them into profitable customers? And that’s where the real marketing challenge lies.
AICEX Customer Experience Italian Association