You have probably heard or read references to the “portfolio” approach to managing customers and their value.
I think it’s a sound idea and one I have used over the years because it’s generally quite easy to understand in theory, though the actual implementation is always left for you to figure out on your own. So we’re going to take a look at this portfolio approach for managing customers and I am going to supply you with the implementation tools you need to actually make it work. This is an important chapter, because understanding these concepts will provide you with the very foundation needed for developing all of your Data-Driven marketing campaigns and programs.
The general idea behind the portfolio approach to customer value management is this: your customer base is a business asset. Businesses can have lots of different assets, for example, real estate holdings, buildings, inventory, and common stock, along with other financial instruments. Each of these assets has a value to the business. This collection of assets is an “asset portfolio,” just as you may hold your own personal portfolio of stocks.
The assets in a portfolio have a current value, which is what they can be sold for today. As we know, there can be changes in the current value of an asset portfolio over time, as what you can sell assets for changes almost daily.
Assets also have an “expected” or future value, which can be rising or falling as well, depending on the market for an asset and the type of asset it is. For example, real estate generally appreciates in value over time, but machinery generally declines in value over time. This means at any point in time, an asset has a current as well as a potential or future value.
The customer base can be viewed as such an asset as well, and in fact, each customer has a current and a potential value. The current value is whatever the customer has created in value for the business as of today. Current value could be the cumulative profits for the customer since they became a customer, or the cumulative advertising value of all the visits made to a web site since the first one. Potential value is the future stream of profits expected from the customer as long as they continue to be a customer. If the customer terminates the business relationship, the potential value of the customer drops to near zero; this is the end of the customer LifeCycle, the defection by the customer. In simple terms, the sum of Current Value and Potential Value is equal to the LifeTime Value of the customer; it’s the Total Value contributed by the customer to your business.
If customers in your customer portfolio have both current and potential value, then you can set up a 2 X 2 chart describing the value of your customer base in terms of current plus potential value (LifeTime Value):
(click the link below to see chart)
https://murdok.org/images/64cb504b62e9cjpg
Figure 1: The Customer Value Portfolio
Customers having both high current value and high potential value (upper right corner of chart) are the “rocket fuel” customers; these are the 10% – 20% of your customers generating 80% – 90% of your profits. You very much want to keep these customers and should be paying special attention to keeping them happy; these are your best buyers, heaviest visitors, and so forth.
In the lower left corner of the chart, you have the opposite situation; these customers have low current and low potential value. This group probably includes most of your 1X buyers, accidental visitors to the web site, and so on. For the most part, though it’s nice to have these customers and they perhaps contribute to paying overhead costs, you probably should not go out of your way to spend a lot of resources trying to grow their potential. In fact, this group likely contains every customer you have already spent too much money marketing to – those that never respond. This is also the group customer “win back”
programs often focus on.
The upper left and lower right corners of the chart hold customers with a mix of current and potential values. In the upper left, you have high current, low potential value customers. This area is populated mostly by defecting best customers – they were best customers at one time (by current value) but for whatever reason have slowed their profit-generating activity with you and are probably destined to fall into the lower left corner of the chart by defecting. If you’re smart, you’ll come up with programs that drag them back across to the upper right corner. Customer retention / CRM programs should be focused on this group, but more often than not, are not really focused on any group in particular, and that is why they have a high failure rate.
In the lower right corner, you have customers with high potential value and low current value. Who are these people? It’s likely they are fairly new customers who have not had a chance to create a lot of value for you yet, but are expected to create value in the future. If they do, they will rise into the upper right hand corner of the chart and become “rocket fuel” customers. If they don’t, they will fall back across the chart into the lower left corner and contribute very little. Customers in this corner should be the targets of programs designed to increase customer value, though as with the retention programs mentioned above, these “grow the customer” programs are often not focused on this specific group and tend to actually lose a lot more money than they make.
That’s the portfolio approach to managing customers and their value, or at least my definition of it. There are others, which for the most part use lifestyle or demographic metrics to allocate the customers. But we’re on to that charade, right? Demographics tell you nothing about the current or potential value of the customer, and if you’re in a real business, what you care about is the money. For this reason, my approach uses actual spending or value-generating behavior to allocate customers into the quadrants of the customer portfolio.
You say, “Yea, but wait a minute Jim, you’re pulling a fast one here. I get how current value is derived, I mean, it’s the actual transactional value of the customer – sales, visits, whatever behavior is monetized by the business. But how do you do this “potential value” allocation, how do you measure potential value? I guess future behavior will create value in the future, but how do I measure behavior that has not happened yet? What kind of behavior indicates the potential value of the customer? I was with you until now, but this idea sounds…”
Relax. Can you take the pebble from my hand, grasshopper? When you can take the pebble from my hand, it will be time for you to leave.
If you didn’t get the reference above, you’re not up on your 70’s TV shows. Try a web search on “pebble grasshopper Kung Fu” if you really need to know.
This article is taken from the book Drilling Down: Turning Customer Data into Profits with a Spreadsheet
Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of The Guide to Web Analytics and author of Drilling Down:Turning Customer Data into Profits with a Spreadsheet. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.
