Most B2C bands already do customer segmentation but it is very rudimentary. Segmentation is generally done on customer activity – number of transactions in a specified time or activity on the website or app. What brands need to do is start using customer lifetime value (CLV) as a way to segment existing customers into three buckets: Best, Rest and Test. The fourth segment is Next – for future customers.
The Best customers are the top 20% or so customers who account for 60% of revenue and over 100% of the profits. They have a very strong brand affinity and will have very good top-of-mind recall for the brand. They need much more than loyalty – they need an experience which befits royalty. It is what I think of as “Velvet Rope Marketing”.
The Rest customers are the next 50% or so. They will account for about 30% of revenue and some incremental profits. The focus with them needs to be identifying the ones who can become tomorrow’s Best customers. For each customer in this bucket, a “twin” needs to be identified in the Best category: a customer with similar characteristics who is ahead in the customer journey. The building block for this is decoding the Best Customer Genome (BCG). This way, the “next best action” can be correctly defined for every customer, incentivised by “Atomic Rewards”.
The Test customers comprise the bottom 30%. They account for 10% of revenue but cause losses for the brand after the cost of acquisition and servicing is factored in. These customers have made a purchase or two but not become regular or even infrequent buyers. They are inactive and in the red zone of churn. They have little or no attraction towards the brand. They perhaps came for a specific purpose and then went away. Brands keep trying to engage with them via push messages which they ignore. A different strategy needs to be considered. CMOs should not waste their time on these customers, and instead outsource engagement to a new class of martech specialists. It is what I call the “Red Ventures Model”.
There is a fourth segment – the Next customers. These are the future customers the brand is acquiring via the adtech spends. There is room for significant optimisation here. By leveraging the data of the Best customers, brands can improve their acquisition process, and reduce the wastage that typically happens. As most CMOs have seen, only a fraction of the leads result in activations, and most app downloaders tend to uninstall fairly quickly. This is the huge leakage that needs to be plugged. This is what drains away the profits of the business and passes them on to Google and Facebook. An excessive focus on indiscriminate acquisition just ends up making CMOs as collection agents for Big Tech!
A smart strategy for CMOs is to consider four internal teams. The two most important are the ones focused on the Best and Rest customers. The other two oversee outsourced agencies: a martech agency for Test customers, and an adtech agency for Next customers. This will mean a big shift from the current structure where the Best, Rest and Test teams are all clubbed together under “Growth” and first-party data does not flow to the adtech team (and agency) to rationalise spending. The singular goal of the two internal teams will be on the 4 Rs of Martech: retention, rewards, reactivation, and referrals.