Customer centricity can reveal the insights necessary to determine which customers should get the premium treatment, and which should not. Specifically, a business would be best served by reserving its most outstanding service for those with high residual customer lifetime value (rCLV, the aggregate value of a customer’s future transactions discounted appropriately for time-value of money). This makes people uncomfortable (the idea that some customers are more worthy of the “red carpet” than others).
Let’s take the idea even further. Any resource allocation to low rCLV customers is usually wasted. It is even worse than that, because those resources cannot be allocated instead to high rCLV customers in ways that would return more value to the business. Any time your salesperson or customer service rep spends time making a low rCLV customer feel great, it is at the cost of additional value from a higher rCLV customer. Are you uncomfortably squirming in your seat yet?
First, let’s address the glaring misconception here. When we talk about low-value customers, we are not talking about a particular class of people, and we certainly do not mean a potentially vulnerable segment of the population. Customer centricity is not about discrimination by demographics or economic circumstances. In fact, one fundamental tenet of customer centricity done well is that behavioral data is much more informative than demographic data. What a customer actually does is much more important than his/her zip code or ethnic background.
In customer centricity, “low value” is a definitional label. If you run a piano store, then even millionaire guitar players, by definition, are low-value customers. If you run a hair salon, then bald men are low value. Being low value is about a misalignment between the value proposition of a business and that which a consumer values.
Often, when I share a graph like the one above, and I point to high-value customers on the top left and low-value customers on the bottom right, the tone of the room changes. Gears begin churning, and one marketer will almost surely ask some version of, “What can we do to help those low-value customers move up?” The answer is three-fold.
- Low-value customers are not some particularly disenfranchised group of consumers. They do not need help “moving up.” Think about it. As a salon owner, how much investment of resources should you spend convincing the bald man of the value you provide?
- There may be an opportunity to migrate some segments of low-value customers to more valuable customers. However, this tends to be more difficult and costly than just finding new high-value customers in the first place. Instead of trying to convince guitar players that they should take up the piano, go find more piano players.
- Low-value (not negative value) customers are still important. You need them, primarily, because there are so many of them! Not everyone will be a super-consumer. With a customer-centric servicing model, low-value customers, in aggregate, represent a significant value to your business. They provide a financial foundation that lets you focus on your most valuable accounts in the first place. Even if low-value individuals are volatile in their predicted future value, there is stability in their aggregate financial performance. However, if you spend heavily to service these customers (or if you have not properly identified these customers in the first place), you may inadvertently turn large volumes of low-value customers into negative-value customers, hurting your overall business performance.
Low-value customers are not a problem to be solved.
Then, what should be done with low-value customers? First, identify them. Predictive marketing analytics can help. Next, optimize your operation so that servicing low-value customers, which may represent the majority of your base, is as cost-efficient and as streamlined as possible. Deliver a level of service that is consistent with your brand and that is sufficient to reduce any long-term support costs that may otherwise creep in, but do not over-invest. Think of this segment as your auto-pilot segment. This significantly large group is valuable to your business as long as you keep your cost basis low for supporting them as customers.
Originally published at crookedchimney.com on December 29, 2016.