If left to their own devices, innovation and efficiency in the supply chain won’t do enough to make customers spend their disposable dollars.
The industry has evolved from push to pull when it comes to product, and while some companies have come to terms with the concept of customer centricity and building their business around that customer, too few have yet figured out who that customer is—and are even more in the dark about what to give them.
What’s becoming clearer as consumer demand shifts in favor of more tailored, personalized products and approaches, however, is that customer centricity won’t suffice on its own either. Companies that aren’t up to speed on the lifetime value of each of their customers as entirely individual entities, risk overextending themselves for the wrong customers and underserving those who could really give the bottom line a boost.
“In the old days, it was all about innovation and efficiency—let’s come up with cool stuff, make it in a cost-effective manner. Let’s bring all that cool stuff together and distribute it. Let’s just get it out there to the customer, the faceless, nameless entity that would just basically help us keep demand in line with supply,” explained Peter Fader, professor of marketing at The Wharton School, speaking at the Sourcing Journal Summit in New York Thursday.
Today, the industry has reached a point where things like data analytics, Google and Facebook have made each individual customer visible and rendered demographic data insufficient as a means of strategically targeting consumers. While customers may not seem terribly different from one another when looked at under a demographic lens, their lifetime value, or the potential amount they could spend with the business over a lifetime, could vary “by orders of magnitude,” Fader noted.
Taking customer centricity a step further forward into retail’s new reality, companies that can see, at a granular level, the projected future value of each individual customer might alter their approach to doing business.
Instead of focusing on dropping product and figuring out who to push it to, it’s about recognizing existing valuable customers and thinking about what to do with and for them, Fader said. It’s thinking: what kinds of products should we be developing? What kinds of services should we be surrounding them with to enhance the value of those customers to extract that value for us and find more customers like them?
“That we can see the value of our customers will not only change the way we do the marketing thing, but it will ripple across the organization all the way through the supply chain to let us run the business in a fundamentally different manner,” Fader said.
The value of customer lifetime value
It’s well known that more often than not, 20 percent of companies’ customers drive 80 percent of their business, but that adage aside, companies still aren’t creating enough of their product around what that 20 percent wants and delivering it to them in healthy doses. And brands and retailers have suffered losses in both traffic and relevance as a result.
As head of customer analytics at the data powerhouse that is Google, Neil Hoyne has data to demonstrate where the miss in tailored targeting has already cost companies big.
When looking at retail and how many website visits actually result in conversion, Hoyne told attendees at the Sourcing Journal Summit, the number hovers around a considerably low 2.5% to 3 percent. However, he added, “For some of the companies and retailers now using lifetime value, they’ve seen conversion rates up into 40 percent.”
But the errs in tapping into those kinds of conversions have been manifold.
In analyzing the purchasing path of a woman shopping for shoes, Hoyne said over a 14-day period the woman interacted with the brand she was interested in buying from more than 268 times. When asked what it had learned about that particular customer amid all of those interactions, the brand’s response, according to Hoyne, amounted to, “Well, here’s the very last ad she clicked on and then she bought shoes, so that ad worked really well and all the other ads didn’t.”
Naturally, there was likely more to be gained in the short-term over the interactions with that shoe shopper, and if played right—with greater insight at hand—the company could have counted her among its lifetime loyalists.
A customer’s exhibited behavior should change the way a brand or retailer interacts with them, perhaps with adjustments to the products offered up, or discounts as an incentive, and a post-purchase follow-up to nurture the relationship. And a customer’s lifetime value should even further alter that interaction.
While it may cost more to acquire new customers than to retain existing ones, the expense could yield a greater return on investment if those new customers prove more valuable.
“Don’t manage your customer base on the basis of cost, manage your customer base on the basis of value,” Fader said. “Sure, it might be cheaper to hang onto these so-so customers that we have over here, try to roll out the red carpet for them, hoping that we can turn these ugly duckling customers into swans, but it turns out, that’s really, really difficult to do.”
No amount of cross selling, upselling or customer education can transform customers that aren’t interested in being transformed. Companies would be better served to determine the differences between those none-too-keen consumers and those who could present value over the long term.
“If we can quantify it, if we can understand what’s the lifetime value of this customer, how much of it is at risk in the next year, and therefore what kinds of discounts should we be offering or, better yet, what kinds of value enhancing activities should we be promoting instead,” Fader said, then that’s where the upside lies. “Yes, it’s going to be more expensive but there could be 100 if not 1,000 times more value with those customers than the so-so ones. So, it’s going to be a really high ROI investment.”
To get there, it will take a rethink for brands and retailers, and a willingness to value data on the right customers over blindly marketing to the wrong ones, and investing accordingly.
“Step one is just having the ability to recognize the customers,” Fader said. “Step two is having the discipline and the accountability to recognize that everyone is not necessarily your friend. … Most of them are quite content to buy the product and never buy from you again. It doesn’t mean that you failed, it just means that they’re not looking for a relationship.”