The key to identifying Best Customers for Velvet Rope Marketing (VRM) is in identifying their Customer Lifetime Value (CLV). As Peter Fader explains in his book, “Customer Centricity”:
Customer Lifetime Value (CLV) is a forward-looking, predictive measurement that is calculated by modelling and projecting the following:
- How long the customer relationship lasted (for churned customers) or is likely to last (for active and future customers)
- Number of transactions
- Value of the transactions
- Other non-financial activities the customer may engage in. Eg. visits to website, willingness to try other products, posting ratings and reviews about the company’s products, and/or referring other prospective customers
There are many other benefits of using CLV:
- Higher revenue, greater satisfaction, lower churn
- Differentiation in customer service
- Better targeted marketing spend
- Move from cost per acquisition to value per acquisition
- Quality retention – 5% increase in customer retention can increase a company’s profitability by 75%
- More accurate sales forecasting
- Better information for product design and planning
- Better project prioritisation
- Refunds and other such decisions
Here are three things you can do to get started:
- Calculate CLV based on transaction data for each of your customers
- Segment your customers into Best (top 20%), Rest (next 30%), Other (remaining 50%)
- Create your own Velvet Rope Marketing program to provide a differentiated experience to your Best Customers – using a combination of martech and adtech solutions
In a nutshell: VRM is about making choices. Companies should not try to treat every customer the same. They should create an amazing experience for their Best Customers who are likely to contribute to a majority of the revenue and a disproportionately large share of profits. In times when hard choices will be required of marketers and enterprises, VRM can be the answer to retaining the right customers and growing profits.
Tomorrow: Velvet Rope Marketing (Part 4)
Hi Rajesh, I run an educational institution and how this applies to us (Schools & Colleges) where almost every customer is long term and charged similarly. Any thoughts on those cases.