Most business leaders want to run an enterprise that's truly “great.” Some are satisfied with running a “good” business, and in many circumstances there's nothing wrong with that.
Over the long haul however, there’s a problem with just being “good.” As the venerable Jim Collins has researched and proven, all businesses over time break one way or the other. Eventually, the few become great — and the rest will ultimately go away.
Consider the fact that of the largest and most well-known businesses in the Fortune 500 in 1955, about 90 percent don’t even exist anymore. For most executives, this is a sobering reality worth consideration and reflection.
There are a number of reasons companies become great. They do one thing, and they do it very well. They're relentlessly focused on the customer, or as Warren Buffet says, “on delighting the customer.” They face the harshest unvarnished current realities and take action to change it. They have great people who can deliver on a great vision. Many of these points are well developed in Jim Collins’ seminal work "Good to Great."
Great Businesses Are Built on Great Customers
Great companies don’t only delight their customers, they also tend to have great customers in their category.
This vein of business and marketing has traditionally been couched as “knowing the customer,” or being driven to “service the customer.” Yet our experience shows there's another crucial dimension — knowing the customer also means knowing who the customer really is and is not.
Strategic Implications of Adding Higher Value Customers
The implications of achieving high value customer growth are much more than adding good customers alone. Growing the depth and breadth of high-value customers is a requirement in making a company a fundamentally superior business to its competitors.
Consider the following chart, in which an organization’s “right customers” (aka most valuable) are acquired scientifically rather than acquiring customers en masse with either minimal consideration or without consideration of customer quality in the first place. In other words, the customers an organization is adding are disproportionately more valuable than the "average" customer in their customer base at the start of the period.
In this real field-proven example, a “Most Valuable Buyer (MVB)”-targeted campaign produced customers with 420 percent (or 4.2x) the revenue than that of the average buyer in their customer base.
While this surely is impressive, there's a strategic implication beyond the high return on high quality customer acquisition. As the volume of high-value customers increases, the percentage of “MVBs” in the customer base continues to grow. In turn, the rate at which the company's sales and profit volume grows is faster than the rate of customer growth alone.
Can You Really Grow the Value of Your Customers?
Given the continuing trend of technology and data-driven CRM, it often comes as a surprise that few retailers have a heavy concentration of high-value customers. In fact, it’s the norm.
In a study Kaplan and Anderson published in the Harvard Business Review, the following was found across all industries:
- 10 percent to 25 percent of customers drive 100 percent of profits;
- 50 percent to 60 percent deliver no profit at all; and
- 10 percent to 25 percent deliver negative profitability.
Not surprisingly, these profitability metrics correlate entirely to our experience across many dozens of organizations in working with their customer databases. What's sometimes an “uncomfortably large” percentage of revenue and profit is driven by a small group of the most valuable customers. In the luxury segment — where some brands have created an "accessible luxury" segment — the results grow even more staggering.
One example where we’ve seen this is among premium luxury brands that have grown “more inclusive” in their customer base. The concentration of customer value in the organizations is often almost exclusively in the top 10 percent to 15 percent of customers.
When we've revealed this insight and evidence, the very business model may need to be rethought. To be sure, across all segments, customer value is a very big deal to all organizations, particularly in retail.
Therefore, while “great customers,” it seems, carry good companies, great companies have identified a product or service that deeply satisfies — and therefore retains — a materially larger proportion of their “great customers”.
All customers have value, yet the value they hold for an organization is very, very different. Thus, the distribution of your customers by actual and potential value can actually have a profound impact on your assortment.
Your rarified most valuables might shop again if you introduce a more rarified version or edition of products than you already have. Think of the Hermes Apple Watch, which is selling at 500 percent of the price of the lowest cost Apple Watch.
For all intents and purposes, the watch has the same computing, size and software of the entry-level product. However, it was brought to the market to secure the high end of customers, who in turn motivate other consumers to shop the brand.
Just consider the impact the Hermes Apple Watch has on the MVBs in Apple’s customer base. It’s a perfect example of assortment built around MVBs.
So while a great customer may not be a great customer for you, having the visibility and intelligence on who is or isn’t a high potential customer makes all the difference in the world to how great your business stands to become.
Smarter Acquisition is the Best Way to Influence Your Customer Value
This comes as a curveball to many retailers, especially those early in their careers. Nothing will change the performance of your database more meaningfully than adding more customers with higher potential value (PV). Put another way, great customers are the backbone of a business. They're primary drivers of profitability, and they're the reason we’re engaging in customer relationship management.
Therefore, it’s imperative that we don't simply treat certain customers differently and market to them wisely. Very simple math suggests we must also be acquiring more of them to increase the value of our database, our customer base and our retail business.
Then watch how well your CRM initiative performs.
Mike Ferranti is the founder and CEO of BuyerGenomics, a Predictive Marketing Automation (PMA) platform.
Mike Ferranti is the Founder and CEO of BuyerGenomics, a Predictive Marketing Automation (PMA) platform. He brings 20 years of marketing, analytics and technology depth. He has developed solutions and software to major brand clients and niche marketers alike. Mike is a recognized thought leader in the database, search engine, email, and direct response marketing. He provides commentary and analysis to the media including Bloomberg TV, Brandweek, and DM News. Mike earned an MBA from The University at Albany and an Entrepreneurial Masters from the Massachusetts Institute of Technology.