Best Customers and Velvet Rope Marketing

Published May 4-15. 2021

Data Flywheel

In a recent MartechBrain conversation, Kedar Parikh, my colleague at Netcore overseeing product management and machine learning, explained about the Data Flywheel using this graphic:

Data to Insights to Intelligence to Decisions, which leads to further enrichment of the Data. And that’s how the flywheel turns. Faster and faster. With more and more data. Creating better customer experiences. Omnichannel and personalised.

Customer data will be the new engine, differentiator and moat for B2C companies. As the share of digital rises, more and more data is being generated. Every click, every swipe, every action, every transaction is now available for analysis and reaction. Until a few years ago, even if a marketer collected a lot of individual-level data, it was very difficult to analyse and come up with actionable insights in real-time. This has all changed with the available of cloud computing and AI-ML.

Data can be sent, stored, and analysed in the cloud in real-time to create differentiated experiences. Campaigns, journeys, personalisation across all engagement channels can be done at a scale that was unimaginable just a decade ago. Software-as-a-service (SaaS) is now combining with the Data Cloud to take Martech to its logical next step – omnichannel personalised experiences.

There is a lot of room for improvement. Today’s customer experience leaves a lot to be desired – especially for the Best Customers.

The Broken Best Customer Experience

I buy a lot of books and some random stuff from Amazon. I have been a customer pretty much from when they started operations in India – possibly a Best Customer. (This is for Amazon to decide based on what they think my Customer Lifetime Value is.) Amazon’s home page is therefore prime estate to target me. They are supposed to have amazing algorithms to target me based on my purchasing history. This is what I saw the other day on the home page:

I have little interest in starting my parenting journey with Amazon – my son is 15 years old! And I have no interest in ACs, washing machines, TVs and fridges. Show me books, books and more books. To be fair, book recommendations did show up later on the page (second scroll).

I have over time learnt to ignore the home page. I invariably never scroll down. I just use the search bar to get to what I want. The home page is a significant lost opportunity for Amazon to sell one of their possible Best Customers a lot more. Here is another screenshot of wasted sales moments:

Netflix is another company which is supposed to have very good targeting algorithms. And yet, I find myself seeing much of the same content that I have ignored for many months. I have seen those recommendations and I am not interested. There is no way for me to tell that to Netflix. It knows I have not clicked on those shows or movies, and yet I have to wade through them. While the recommendation engines are good to targeting me based on what I have watched, they don’t seem to understand what I am not interested in, and therefore not waste screen real estate showing me those recos for the 258^th time.

The purpose of these rants is to show how brands miss moments for monetisation (either revenue or attention). I can understand brands not doing it for everyone – but not doing it for Best Customers? Unforgivable in a world where they track not just every transaction but every click and perhaps even eyeball movement.

And it is even worse when it comes to the physical retail stores.

Do You Know Me?

Just after the lockdown was lifted, I wanted to visit a retail electronics store near my house with my son to check some of the new gadgets and devices. It is right across my house. We have been there many times over the past years. Since access inside the store was restricted due to the coronavirus regulations, circles had been drawn outside the store. We were on the fifth circle outside the store. A few minutes of waiting and I realised that we would have to wait for 20-25 minutes before we would be left in. I walked up to the person at the entrance and said, “I am your Best Customer. If you check my purchase history linked to my mobile number, you will find that I have spend a couple lakhs in the past two years with you to buy a smart TV, iPads, phones and more. Don’t you think I should be given priority access to get inside?” I think we all know the response! I walked away and took my business elsewhere.

In the pre-corona world, the experience was not very different at multiplexes. I have watched dozens of movies at Inox at Nariman Point with family. They should know. And yet every experience from booking to buying food is exactly the same each time. It is like I am a new customer for them each time I visit. So, I have to go the app to book tickets and compete with everyone else to get the best seats. And in case I miss the Thursday morning window for popular movies, I may not even get seats adjacent for the three of us.

Imagine instead if Inox sent me an email on Thursday morning stating, “Dear Rajesh. You are part of our Velvet Rope Marketing (Best Customer) programme. We have reserved three seats for you and your family for this new movie releasing tomorrow which we know you will like. These seats are for the Saturday 5:30 pm show which we know is your favourite show time. The seats are in the second last row on the left aisle which we also know is where you prefer to watch. We will hold the seats for the next two hours. Just click here and pay, and the seats are yours. Hope to see you at Inox soon.”

What an experience this would be! Instead of splitting watching between Inox at Nariman Point and PVR at Lower Parel, I would give Inox all my entertainment spend which means they would double revenues from me, making me even more of a Best Customer for them.

I can give more examples but we get the idea. We have all been through these experiences. A decade or two ago, online and offline brands knew very little about us so they had no way to differentiate our experiences. But now, they do. All our actions on websites and apps are tracked and stored forever. Our purchases in offline stores are linked with our mobile number. And yet, the actual experience hasn’t changed much except perhaps in earning some loyalty points.

The retail and ecommerce industries have much to learn from airlines and hotels.

Welcome Back!

Airlines have different classes (economy, business, first) with very different experiences. They also have had frequent flier programmes for a long time. They combine these two to create magical experiences for frequent flyers travelling in business or first class. I still remember the time (pre-2001) when a Cathay Pacific steward walked up to my wife and me and said, “Ma’m, Sir, would you like to spend some time in the cockpit as we land in Hong Kong? The pilot and co-pilot would be delighted to have you join them.” Which of course we did! I later asked why we had been chosen. The reply – because we were frequent travellers. Sitting in the cockpit behind the pilots and watching the plane touchdown at Hong Kong airport was an experience of a lifetime – something that created even more brand loyalty towards Cathay Pacific.

The best hotels do the same. While everyone gets the smile and quality service, the best is reserved for the frequent travellers. Loyalty brings forth differentiated experience (the room facing the sea, the softer pillow) which in turn begets more loyalty – and perhaps, word of mouth.

(Ironically, it will probably be some time before most of us are able to experience airlines and hotels again.)

We all have memories and stories that we can share of these “Welcome back” moments – where our brand loyalty gets rewarded not just in a higher tier but genuinely differentiated experiences – what I have termed Velvet Rope Marketing. Just like the velvet rope with balustrades at the side create for experiences which are very different at places like airline check-in counters or Disneyland’s special entrances for rides for its premium customers, some brands are extraordinarily good at rolling out the red carpet for their Best Customers.

And yet, most don’t. They 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.

The Mystery

For many businesses whether they know it or not, the power law curve is at play. Also called the 80-20 rule, it means that a small percentage of customers will generate a large chunk of revenue and perhaps an even greater contribution to profitability. While many CEOs and CMOs may know this, their actions do not suggest this.

In the past year, I have written extensively about Velvet Rope Marketing:

I have also done more than a hundred presentations to marketers. I found very few actually implementing the idea of differentiating experiences for their Best Customers. Many of them did not even have a good method of calculating forward-looking CLV (customer lifetime value) beyond just summing up past purchases and extrapolating.

This was a mystery to me. Here was an idea which would do wonders to their profitability. Why would it not get used? They could call it by VRM or whatever name – what mattered was the experience for their Best Customers. Some said they had loyalty programs – which is not good enough because anyone can join a loyalty program and earn points. What is needed is for the brand to proactively identify their Best Customers and then invite them to be on a VRM-like program. The CEO then needs to ensure that every department in the organisation works in tandem to create magical and memorable experiences at every touchpoint for these Best Customers.

All we have to is to think about our own lives as customers. Think which brands you believe you are a Best Customers of. What do they do differently for you? Do they recognise you on their site or app or in the store? Do they treat you differently? Do you get greater access, ease or exclusivity in your interactions? Do they make you feel so special that you want to monopolise your spend with them?

This is the transformation that marketing needs. And I realised that I needed to bring this idea to life by actually showing the impact on profits. Just showing some theoretical calculations was not working. I decided to create a VRM Calculator which with just a few inputs could show how a small increase in revenue from Best Customers can have a massive impact on profitability. Seeing is indeed believing.

The Math

We have made a very simple VRM Calculator. Only a few inputs are needed to get started: the revenue and number of annual transactions for the 10^th percentile customer. One can go with defaults for the rest.

Let’s take a business with 100 customers. If it is a business where customers tend to repeat transactions (retail, commerce, broking), the likelihood is that a small number of customers will account for a large percentage of revenue. Let’s take this split to be 20-60 where 20 customers account for 60% of revenue.

The 20-60 split is true for many businesses (except the subscription businesses like Netflix or the large single purchase ones like buying an automobile or a home). The 20-60 split in retail is well-known. (ome other businesses like gaming or broking may have an even more extreme skew like 10-80. We created a model for that also in the calculator. For the calculations here, we will go with the 20-60 model.

Let’s further assume we can model the revenue of each customer in the preceding 12 months into two components: the average value of each transaction and the number of transactions.

If we assume the 10^thcustomer (ranked in order of customer value from high to low) does 4 transactions with an average value of 1000 units, for a 20-60 business the customer value curve will look something like this:

The area under the curve is the total predicted revenue. As can be seen this value is concentrated towards the left of the curve (the head). The head (top 20 customers) will generate about 60% of revenue. In this case, the top 20 customers will generate about 106,000 units of revenue, while the long tail (remaining 80 customers) will generate about 81,000 units of revenue.

The average revenue of the top 20 customers is 5 times more than the average revenue of the other 80 customers. As a marketer or business head, it is obvious that the customers in the head are many times more valuable than the long tail. Some customers are indeed more equal!

Let us now assume that a set of marketing initiatives targeted at the top 20 customers help grow the revenue by 15%. Thus, the 10^th customer now does 4.2 transactions of 1100 units to generate 4620 units annually (vs 4000 units earlier).

In all likelihoods, the efforts directed at the top 20 customers will have a rub-off effect on revenues from the other 80 also. All the gross margin generated by the additional revenue will flow to profits. Guess what the increase in profits will be? 93%.

Because of the high contribution of the top 20% to overall revenue, the EBIDTA of the business almost doubles. (I have assumed 60% gross margin and costs at 50% of revenue. Post-VRM, I have assumed the same costs since much of the VRM ideas can be delivered via tech and not adding extra people. In fact, implementing VRM well can lead to lower ad spends because the targeting for new customer acquisition can be much more selective and linked to the attributes of the Best Customers.)

Here is how the full picture looks:

A small increase in revenue…leading to a giant increase in profits. This is what VRM can do for businesses. And yet – few actually make this magic happen.

Revenues and Profits

One of the questions I wondered during my VRM presentations was this: why were marketers not excited by the doubling of profits? Here was I giving them a theoretical construct which showed that just a 15% increase in revenue focused on their Best Customers could lead to a doubling of profits. The calculation was straight-forward: if revenues went up by 15 and gross margin was 60%, the additional 9 would add to EBIDTA. So, if the EBIDTA was 10% of revenues, the post-VRM EBIDTA would go to 19. Why would they not jump at this?

The only answer I could come up with was than marketers are tasked with a focus on revenue. Profits were not really their concern. And just a 15% revenue increase would not be seen as good. Marketers have many other metrics like new customer acquisition to worry about. In all this, the power of VRM to do ‘more with less’ is lost.

Any change would require an intervention by the business owner / CEO, who needs to therefore understand the value VRM can bring for the business. For a CEO, five themes need to come together:

All customers are not equal. Customer value follows a power law. Some customer are much more important than others.
A small change in customer value (even by 10-15%) for the 10-20% Best Customers can lead to a doubling of profits
Therefore, as a business, the focus must be on these customers and creating differentiated experiences. This is where VRM comes in.
To make VRM a success, multiple departments of the company need to work together. It is almost like creating a separate business unit focused on the Best Customers.
The foundation to make all this happen is the combination of data and ML (machine learning). Data must be connected at every touchpoint and ML needs to be able to identify patterns which can guide marketing. The data flywheel is what will drive the profits flywheel.

It reminded me of what I had once told my team about email marketing. Focus on our top (enterprise) customers. And identify more ‘moments’ when they can send emails. If we could grow our revenue from the top customers by 10-20% by creating additional campaigns for their customers, it could give a big impact on the business profitability.

That is why 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.

What Next

Once a business owner or marketer is convinced that this is for real, the next step would be to start thinking about actual VRM interventions that can make the revenue and profitability boost a reality. Here are some starting ideas.

First, identify your Best Customers. This is best done using a model that can calculate CLV (customer lifetime value) for all customers. Also decode the Best Customer Genome (BCG) to identify their attributes and behaviours.

Second, put in place a pan-company initiative for VRM. How can Best Customers be treated like royalty? For example, going back to the Amazon and Netflix examples at the start, can completely different personalisation algorithms be applied to these customers so they see only what’s relevant – more signal, very little noise? Can separate helpline numbers be set up for them? Can a chat window with the best agents be opened when a Best Customer is on the site? Can an alert be generated when a Best Customer visits a store so that customer is identified at entry and not at exit (checkout)? Can a referral program be set up just for Best Customers – because the Best will get more like them.

Third, you can use technology like marketing automation and personalisation platforms to implement targeted campaigns and engagement with Best Customers. While some human interventions are needed and will help, software can do wonders in deepening the brand-customer relationship. Rather than thinking one-size-fits-all, enterprises need to think of the Best Customer cohort as a separate class of customers and use martech platforms which can convert customer-centric ideas into memorable experiences.

To end, here is another personal experience. My family is a loyal Sony TV customer. Recently, a Bravia Smart TV bought a couple years ago stopped working. I checked the bill – the warranty was for only a year. I was quite lost so to what to do. I realised that Sony did not know me at all. I had no way to identify myself as a likely Best Customer. If only Sony knew – and realised that I probably had a very high CLV. Sony makes no efforts to build a relationship with me – I bought the TVs from Croma. The situation with Sony is perhaps not very different for many products that we buy. How many companies go beyond the standard single product short-term warranty to build direct relationships with their customers, identify the likely Best Customers and go the extra mile for them? This is the opportunity for smart manufacturers and retailers.

Even as phygital and omnichannel are the new buzzwords in marketing, what marketers need to think about is how they can become the CEO’s profitability partners. This is where VRM comes in. It is marketing going back to its roots – segmentation, differentiation, selling experiences. The change this time around is that customers are giving marketers copious data which AI-ML engines can now process in real-time. A new world beckons where the organisation transforms its processes and offerings around the needs of the Best Customers – because they are the true growth and profitability drivers. If marketers do not do it, all they need to remember is that their today’s Best Customers are their competition’s Next Best Customers.

Best Experiences

Let’s imagine how a world with VRM would look like for Best Customers.

Amazon completely customises its home page and app for me. I just see the world of books.
Mint offers an exclusive monthly interaction with their editorial team to discuss the economy and key trends
The new Disney movie is releasing on the weekend. Inox reserves three tickets for me and sends me an email offering to hold the seats for the next two hours while I decide
Samsung offers me an early use of their new smartphone. I can use it for a month and then decide if I want to pay for it.
Sony sends me an email with a special number I can call for any problems that I may face going forward.
Kotak Securities offers me a periodic assessment of my portfolio and a 30-minute consultation with their investment team
Myntra opens up a chat window with a customer service representative when my wife visits their site. They also offer not just free shipping but also the ability to have any three dresses sent home for trial each month and my wife can pay later for only those that she keeps
Nykaa would send my wife a “what to buy next” recommendation every week – with a lowest price guarantee
Kellogg’s would offer to get me my favourite cereals (which they don’t sell in India)
Amazon offers me insights from any book that I browse in the form of a 7-day micron series

The list can go on. All it requires marketers to do is to walk in the shoes of their Best Customer – and envision the royalty experience that would ensure a monopoly of their spends with the brand. In a world where everything is a click away, this is the extreme loyalty that brands must strive for.

2020 has forever changed the way our lives as customers. In this digital world, marketers must now recognise that they can know individually about every one of their customers, understand that customer lifetime value follows a power law where a small number of customers are very valuable, and start crafting experiences that are distinctive and differentiated to maximise loyalty and spend from these Best Customers. Winners in tomorrow’s world will be defined not only by their products but also the experiences. And at the heart of these experiences is the secret sauce of VRM as the accelerant for the data and profits flywheel.

A Tale of Two Experiences

Rahul is a first-time visitor to a sports goods website. He has no previous history with the company. He enters his mobile number / email ID and gets the base version of the site. The only recommendations are based on popular purchases and categories. As Rahul’s browsing increases, so does the personalisation.

Shalini is a Best Customer of the same brand. She is auto-logged in when she visits the website. The home page shows a curation of products just for her. Her previous purchases are also shown and complementary products are listed for each purchase. A chat window opens up with a service agent who is familiar with her transaction history. The agent guides her to the next possible purchase ideas. Shalini can also interact with other Best Customers like her as part of the ‘Community’ option. She wants to buy new sports shoes but is not sure of the fit. The agent tells her that she can try them out for free and return in 15 days for an exchange in case the fit is not perfect. She is also entitled to expedited shipping and will get the shoes the next day. Shalini will only be billed after she is completely satisfied – a feature available only for Best Customers.

A few months later, Shalini goes to one of the outlets of the same sports brand. She enters her mobile number on a keypad at the entrance. She is immediately recognised as a Best Customer, and a customer service assistant comes to provide her to guider her through her shopping experience. The assistant has full access to her online purchase history and knows her preferences, and is able to ensure speedy service. When Shalini is ready to checkout, she is guided to the front of the queue for priority billing. Shalini is also told of a new fitness community that the brand has set up for their Best Customers, and she now has exclusive access to it. She can connect with others like her.

A week later, Shalini gets an email saying that one of her friends, Neha, has become a customer. When Neha made her first purchase, she mentioned Shalini’s name as her referrer. Shalini earned 100 points and will now get a small commission on Neha’s purchases. Shalini did not have to send any link or code to Neha – all Neha did was mention Shalini’s name when she did her first transaction.

A couple months later, Shalini gets an email saying that a new product is being launched, and she can get it before it becomes available to the mass market. All she has to do is to click and pay. Her size is already known so the entire transaction is frictionless and done in seconds.

With such a wonderful experience, it will be no surprise if Shalini maximises her spend in the sports goods category with the brand. There is very little reason for her to consider alternatives. For the brand, her ‘extreme loyalty’ also yields rich dividends. Customers like Shalini make up just 20% of the entire base but account for 63% of revenue. A small increase from such customers is the key to doubling profitability. Shalini’s experiences, shared with her friends on Instagram and in 1:1 conversations, also gets the brand more customers like Shalini – who become future Best Customers, thus creating a profits flywheel which maximises the industry’s highest spending customers with the brand. This drives even higher profits and more importantly it also reduces the profit pool available for competitors. Customers like Shalini thus create a moat that lays the foundation for the brand to build an invincible business.

Profits Flywheel

Shalini’s experiences with the sports brand can be replicated by every brand in every industry. And yet, very few do it – as we ourselves have experienced. Our experiences with brands and businesses with whom we spend the maximum are for the most part ordinary and not extraordinary. It is little surprise then that we tend to switch – and the brands don’t even notice. When has any brand called us saying, “We miss you. Why haven’t you shopped with us?” Mind you, its not an automated email – that can go to everyone else. Why would brands not call up their Best Customers who may be on the precipice of churn?

Even as Best Customers contribute 60-80% of revenue, their profitability is likely to be 200% since many of the Rest Customers (the long tail) will likely be negative in their contribution if acquisition and servicing costs are factored in. That is why businesses need to create two SBUs (strategic business units) – one for Best Customers, and one for everyone else. Only then will the focus be sharp on retention and experience differentiation for the Best Customers.

VRM should be the lifeblood of the Best Customer SBU. It is just like airlines who have a separate ground and inflight staff – the best and most experienced – to service Business Class customers. There is no request which is too small to service – as I found out on a Delta flight a year ago. I was flying Business Class from Atlanta to La Guardia. Given my dietary restrictions, I could not eat the in-flight meal. (I had changed my flight at the last minute to an earlier one since my previous flight had landed early and hence they could not process my special meal request.) I asked the hostess if they had a banana and if I could get a hot chocolate. Both were non-standard requests. When I did not get anything immediately, I thought my request had been forgotten. About 20 minutes later, I was served both. The hostess apologised that it took time, but she had got it from the economy class crew. A seemingly small request from a Best Customer (she may have known I had been flying Delta for more than 20 years) to create an experience that the customer (me) will remember. That is how extreme loyalty gets built – one great experience after another.

It is the tragedy of modern marketing that one only gets these experiences 35,000 feet above Earth! This is the opportunity for brands. Most industries are not focused on Velvet Rope Marketing – preferring the “all customers are equal” mindset to “some customers are more equal”. In the omnichannel world that is upon us with its deluge of customer data, VRM can be the key to building loyal customers who are they key to future profits. VRM is the big idea that needs to be a must-do for CEOs because it can provide lasting differentiation in a world getting increasingly commoditised. Marketing’s power law can be the CEO’s profit lever – a 10% increase in revenue from the top 20% customers can increase total revenues by 5% and profits by 33%. Done right, VRM can actually do much more – not just drive higher spends from Best Customers, but also help identify tomorrow’s Best Customers early, ensure the right New Customers are acquired, and get better referrals from Best Customers. Taken together, the compounding effect of all this can be a profit doubler.

Summary

Think of your favourite businesses. These are brands you love and buy a lot of products from. Businesses where you are very likely among their top 20% customers. Think about whether you get a differentiated experience. Think of they have asked you for referrals to your family and friends so they get more customers like you. Think if the business will know if you switch to competition – will they call you?

We are all Best Customer of many businesses – either in terms of what we spend each year or the longevity of our relationship with the business. And yet, few created those customised experiences that show they know us and value us – as their Best Customers. For most businesses, we are just like every other customer.

Would we not spend more with businesses that provided us ease and exclusivity in our experiences? Would we not recommend such businesses to others? Why then do our favourite businesses not recognise us and make us feel special? In a world where we leave such a big data trail, why do they not personalise experiences for us, their Best Customers? Why are they okay if we churn to an alternative? Why do they not practice Velvet Rope Marketing?

For businesses, VRM is about creating differentiated experiences for the top 20% (Best Customers). It does not mean ignoring the long tail of 80% (Rest Customers). It just means that there is a disproportionate focus on ensuring the Best Customers are identified, retained, pampered and persuaded to maximise their spend. In fact, Best Customers can even be encouraged to drive referrals to get others like them.

Marketing technology (martech) can today automate many of these activities. Integrating martech with advertising technology (adtech) can also reduce the cost of new customer acquisition (Next Customers) – instead of acquiring everyone, the focus can shift to acquiring Next Customers with attributes like the Best Customers. This can create a “profits flywheel” with even greater growth in future profits.

Implementing VRM right is the secret to creating an invincible business. By building a double moat of getting the industry’s Best Customers and then maximising revenues from them, it becomes possible to create a profits monopoly (profipoly) which can cut off the oxygen that competition needs to grow.

The idea of VRM is not new. What’s different is how technology can now automate many routine customer engagement tasks to create magical customer experiences that treat Best Customers like royalty to drive greater loyalty and spending. VRM applies whether you run a B2C or B2B business. Even if your business has characteristics where every customer pays the same (a subscription business), you can use surrogates like engagement to identify who your Best Customers are and then give them a better experience that fosters upgrades, longer lifetime spending and more word-of-mouth marketing.

Think of VRM as Very Real Magic – accelerate the turning of the data and profits flywheel to create an invincible business and an enduring great company.

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