ORC #3: All or Best Customers
Other than airlines, banks and hotels, which verticals provide differentiated experiences to some of their customers? We, as customers, will be hard pressed to come up with answers. Yes, many brands have loyalty programs but they are more for giving discounts on future purchases rather than crafting extraordinary experiences for those customers with the highest customer lifetime value (CLV). In fact, few marketers would be able to predict CLV for their customers, and without CLV it is difficult to segment their customers, and without segmentation, it is impossible to go the extra mile for some customers.
A few quotes from Peter Fader: ““The Customer” does not exist because every customer is different…The customer is not always right. The right customers are always right…In the world of customer-centricity, there are good customers…And then there is everybody else.” And this from Sunil Gupta: “According to the familiar 80-20 rule, 20 percent of the customers provide 80 percent of the revenue. However, research shows that if we focus on profitability instead of revenues, the rule would be 200-20, where 20 percent of the customers provide almost 200 percent of the profit! How is that possible? Because the remaining 80 percent of customers actually destroy profitability.”
Just think about our own experiences with brands where we are loyal and thus very likely to be among their Best customers. Have they done anything special for us – other than (in some cases) running a loyalty program with rewards linked proportionate to our spending? Book publishers, multiplex owners, restaurants, retailers, online marketplaces – almost every business treats us all the same. In most cases, they have no idea about us. But isn’t that what a marketer should do? Convert the anonymous into the identified, and the identified into intimate. Our digital devices and footprint can make all this possible. And once the data is available, algorithms can predict CLV and lay the ground for what I have termed “Velvet Rope Marketing.” VRM is the answer to the marketer’s conundrum of separating the Best from the mass, the profit drivers from the lossy engagers.
As I wrote in Velvet Rope Marketing: “Velvet Rope Marketing (VRM) is much more than a loyalty program. In a loyalty program, anyone can sign-up and collect points. In a VRM program, it is the brand that decides which customers are eligible for the differentiated experience. Many companies have a loyalty program, but very few do VRM. By missing out on deepening relationships with their best customers, they are losing out on opportunities to increase their profits – because Best Customers can be many times more valuable than the median customers.” I added in Best Customers and Velvet Rope Marketing: “[Brands] have the data, and yet they treat everyone the same. Not just same, it is like everyone is visiting their site or store for the first time and will never come back. Brands are thus missing on the most obvious opportunity to grow revenue and profits – in fact, create a flywheel that can lead to accelerated growth. Because Best Customers (top 10-20%) are many times more valuable than the Rest Customers (long tail). The lifetime value of the Best Customers, their lesser propensity to switch, their ability to get more customers like them – all can become high value generators for brands. And yet, few brands do this in practice. This is the big mystery in the modern marketplace.”
This conundrum has a simple answer: create a separate business unit for Best Customers. As I wrote: “VRM needs to become much more than a marketing initiative – it is a powerful weapon the CEO can deploy for boosting profits. By getting more from existing customers who have the highest spend, the business also takes away revenue and profits from competition – thus denying them the oxygen needed for growth. This can create a profits flywheel – Best Customers spend more because of the great experiences they get, which in turn can help beget more Best Customers (either from the Rest, referrals or targeted new customer acquisition), which in turn drives even more profits. This lays the foundation for building an invincible business – with the twin moats of extreme customer loyalty and maximising industry profits.”
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Conundrum: Focus on all customers or create differentiated experiences for a few
Insight: 20% customers bring in 60% revenue and 200% of profits
Solution: Velvet Rope Marketing to use customer lifetime value to craft extraordinary experiences for Best Customers
