Join Jill Griffin for an in-depth discussion in this video How to identify your best customers, part of Building Customer Loyalty.
- In building customer loyalty, the 80/20 rule is alive and well. Roughly speaking, 80 percent of your revenue is being generated by 20 percent of your customers. All customers are not created equal. Some represent more long term value to your firm than others. I did a revenue analysis for a regional office of a Big Four accounting firm. It was a real eye opener.
Forget 80/20, turns out 63 percent of the firms revenue came from just three percent of the clients. This analysis was a big wake up call for my client. It showed them they needed to dig into those top three percent of customers and closely examine what, when and why they buy. It also pointed out how vulnerable they were if those big clients walked away. Let's take a look at a simple way to begin to pinpoint your most valuable customers.
Take a sheet of paper and at the top record your total customer revenue from last year. Now you may call it total sales. Now calculate what 80 percent of your total sales are and report that number up top as well. Next begin listing in descending order revenue by customer. You'll begin the list with a customer with highest revenue contribution continuing down to the lowest.
You've established two columns. Now you'll establish a third. In this far right column list the running total of revenue. Stop when you hit 80 percent of total customer revenue. How far down did you go? How many of your customers is that? And who are those customers? Now here is something to think about as you answer that question. You may want to look at your revenue per customer over, say, five years, not just one.
By having more data and looking at more years you'll likely smooth out outlier revenue spikes and dips and get a clearer picture of who your high revenue customers really are. But defining best customers based simply on past revenue can be a risk. I'd like you to think about ranking your customers on something we call lifetime value. It's a prediction of value attributed to the entire relationship with a customer. For example, a new college graduate just lands a job and he's just opened a checking account at your bank.
He's a low revenue customer now but he has high future value. Such as financing a new car, marriage, purchasing the first home, starting a family, and opening a college fund, setting up a retirement account. All these possibilities give him high lifetime value. The prediction model can have varying levels of sophistication. Ranging from a crude rule of thumb to the use of complex, predictive analytic techniques.
If your firm is like most, you'll need to develop a lifetime value formula by which to calculate this. But don`t get overwhelmed by this. You can keep it simple. There are a lot of great tips about calculating lifetime value that you can find online. Google the term "customer lifetime value". When I did it I found some helpful tips on Wikipedia. To wrap up, it's important to identify your best customers.
Do it two ways. According to past revenue and according to lifetime value. Then compare both lists. Just make sure you're investing in customer appreciation programs that provide for high ranking customers on both lists.