Customers are not created equal: some are more valuable than others. Businesses that have the ability to determine the value of the customers have the edge in today’s highly competitive business environment.
Customers fall into different categories, such as:
- Customers who are profitable;
- Customers who increase your competence .
- Customers who build up the image and provide contacts with other customers.
- Customers likely to generate a flow of new projects, accounts or new purchases, rather than the occasional one-off
Your role as the business owner, therefore, is to be able to distinguish among the different customer types. More importantly, you must learn how to choose the “right” (defined as most valuable and profitable) customers in order to thrive and compete with their larger competitors.
To assess the value of your customers, the key is to get critical information about your customers. You need to know who are your best customers, where they are, who offer the most opportunity for continuity sales, cross-sales, up-sales, how much can be spent to acquire them, and what are their life-time values. The goal in the entire exercise is to gain a better understanding of your overall sales opportunity.
Gathering Customer Information
What information do you need to collect? At its most basic, you need to know the following information about your customers:
- Who they are;
- Where they buy;
- What they buy;
- When they buy;
- How they buy
- Why they buy
You need to know what they want, how they want it, when they want it, and how much they are willing to pay for it. Examples of what you need to collect are profiles of customers, revenue and profitability of segments, and many other variables.
The basic facts gathered about customers combined with real life transactions can help you make decisions about when and how to market to them. Such information could be used to retain customers, to cross and up-sell.
The information can also make it easy for you to personalize your relationships with your customers. Think of all these information as gold nuggets in your hand: the more you know about your customers, the better it is for you to anticipate their needs, which could then increase your sales and profits.
However, collecting critical information is a process often overlooked or deliberately ignored by small and home business owners. Many do not know what to look for and how to gather information. Some do not have the time or manpower to gather information and look through the data collected. Others think that the process is too expensive, as they often associate the process with expensive data warehouses and software often beyond the reach of the SOHO entrepreneurs.
Customer information can be collected through a number of ways, including:
- Customer Registration
- Records of customer transaction
- Customer satisfaction surveys
Web sites, particularly e-commerce sites where a customer has to give out their basic personal information to purchase, or members-only sites where customers must register to get into the site, have the distinct advantage of gathering customer information than many traditional brick-and-mortar businesses. A customer who walks into a clothing boutique need not give out their personal information when purchasing an item. Unless these customers frequent the business on a regular basis, offline small business owners find it hard to capture the information that they need from their customers.
Customer satisfaction survey is another effective way of getting customer information. Look at the comments of the customers, and try to group them together to uncover patterns in the responses by “coding” them.
There are a number of things you need to watch out for when gathering customer information. First and foremost, you must always respect the customer’s privacy concerns. Whether you are sending out traditional mailings or email alerts, only send your mailings to customers who have expressed their desire to accept them. Honor removal or unsubscribe requests immediately.
Techniques for Analyzing Customer Information
Whether you sell on the Web or offer business-coaching services, there are a number of techniques to help you identify the most profitable customers and determine purchase patterns. These techniques can range from the simplest to the more complex techniques – use of data mining and database management tools such as on-line analytical processing or OLAP.
You can simply leaf through your sales order sheets to evaluate your customers and write down notes on a sheet of paper. Or, you can create an Excel spreadsheet to track your customer activities and analyze purchases using percentages. If you have the both the financial and manpower resources, you can invest in an OLAP software for complex analysis.
One simple yet effective tool is called R-F-M, whose acronym provides the criteria for determining the most profitable customers:
- Recency: how recently customers bought from you
- Frequency: How frequently they have bought from you in a given time period, and
- Monetary: How much they spent with you in that same period
According to this technique, the best customers are those who are most likely to buy again. They may be those who bought most recently or may be those who bought specified quantities most frequently within a specified period. The RFM technique was first applied in the direct mail business and used to help select and exclude customers who receive their circulations. Its goal is to help estimate the future sales potential of customers, allocate promotional costs, and evaluate potential benefits.
With R-F-M, you score customers based on the three criteria. To illustrate, you can allocate points for each of the criterion and add the total score for each customer:
24 points – Current quarter
12 points – Last six months.
6 points – Last nine months.
3 points – Last twelve months.
No of purchases x 4 points.
10% of the dollar value of purchase with a ceiling on the maximum at the discretion of the manager.
The higher the score, then the more important that particular customer is for your business.
Information is power. The more information you know about your customers, the better you can plan your marketing and sales strategies.
However, it is important to remember that information is useful only if it is used – and used properly. Take advantage of the information you have collected and modify your marketing techniques accordingly. To succeed, you need to acquire the capability to extract the right information quickly and share them with the right people to take quick correct action that determine success.