In my earlier writings on Velvet Rope Marketing, I had created a framework to think about customers: Best-Rest-Test-Next. I wrote: “A possible approach can be to consider three segments: Best (top 20%), Rest (middle 30%) and Test (bottom 50%). This 20-30-50 split may vary based on actual numbers for different companies but is quite indicative of the 60-20-20 revenue contribution.” I added: “The Best Customers make up the head of the Customer Lifetime Value curve. The bottom 50% or so of customers in most circumstances make a negative contribution to profitability. These ‘Test Customers’ make up the long tail.” Next customers are the brand’s future customers.
A marketer’s focus for each of the segments should be as follows:
- Best: retention and revenue expansion. A term used for B2B SaaS companies – Net revenue Retention (NRR) – can be very helpful to measure success. An NRR of 110% means that there was a 10% increase in the revenues of the same customers even after factoring in churn. Velvet Rope Marketing is one of the themes I have explored in how to ensure the Best customers stay and spend. In fact, brands should create a separate business unit to focus on their Best customers because this cohort of 20% customers is likely to account for 60% of revenues and upto 200% of profits. Even a small increase in the revenues of these customers can lead to a substantial increase in profits.
- Rest: next best action. The 30% or so customers in this segment generate about 20% of revenue. They are familiar with the brand and many have the potential to become tomorrow’s Best customers. So, it becomes imperative to nudge them on what they should do next. This is where the Best Customer Genome can guide marketers on what is the next product or action that a specific customer should take in the purchase journey. The right recommendations can delight and deepen the customer relationship.
- Test: action and reactivation. The bottom 50% of customers are not yet loyal. They may have registered but not purchased or done a small number of purchases. Marketers do not know enough about these customers. From a relationship standpoint, this segment is either dormant or dead. Just sending repeated communications similar to what is sent to Best and Rest is unlikely to make an impact. A different approach is needed – what I call “action and reactivation”. The brand needs to be re-introduced to the Test customers and simple actions need to be targeted – opening an email, SMS or push notification, and clicking through to the website or app. This is where microns (micro newsletters/nudges/nuggets) can play a very important role.
- Next: targeted acquisition of Best lookalikes. Marketers spend a lot of money on new customer acquisition. This is the exciting part with big budgets and lots of ads. Here is where marketers are missing a trick. The focus tends to be on acquiring customers like the ones which are there rather than replicating the attributes of the Best customers in the new acquisitions. By narrowing the acquisition to lookalikes of the Best via an adtech-martech bridge, brands can reduce their marketing spend and get more profitable customers. Referral marketing programmes targeted at the Best can become another useful cost-effective acquisition vehicle.
The right implementation of the Best-Rest-Next-Test customer framework can improve customer relationships and boost profitability. My earlier essays have discussed many ideas to make this happen:
- Velvet Rope Marketing
- Becoming Chief Profitability Officer
- The One Number to Predict Profits
- Rethinking Referral Marketing
- How Velvet Rope Marketing can transform Customer Loyalty
- Best Customers and Velvet Rope Marketing
In this series, I will focus on the Test customers – how to drive action and reactivation. Money has already been spent in ‘acquiring’ them so they are a net loss if they cannot be driven to repeated transactions. Microns are the key to unlock value from Test customers.