Marketing has largely been targeted to the median customer – not much differentiation being done in targeting different customers. Median Targeting (or Marketing) works very well in politics – where every voter has the same power (a single vote). But in marketing, the same approach does not necessarily deliver the right returns – since the Best Customers can deliver many times the value of the median customer.
The table below highlights the differences between customer segments and shows the importance in revenue (and consequently, profits) of the top 20% – the Best Customers. Loyalty is the keyword and Velvet Rope Marketing fosters exactly that.
Customer Lifetime Value (CLV) helps separate customers into the three buckets. As should be obvious by now, CLV distribution is not a bell curve (normal distribution) but one with an exponential decay, as this image from a Zodiac and Infotrust Webinar shows:
Best Customers constitute the “head”, with the bottom 50% constituting the “long tail.” Yet, most marketers are obsessed with the Median Marketing approach. For one, it is easy to do. Offers for all, campaigns for all, same website for all, same app experience for all, churn reduction for all, and so on. It is communism applied to marketing!
What smart marketers do is to think capitalism. There is inequality – and that’s a good thing. In an economy, what matters is not the quantum of inequality but the income of the poorest. Being poor in a rich country can still deliver a decent lifestyle. In marketing, what matters is the spends and profits from the Best Customers. Their CLV is what should be maximised. This is what Velvet Rope Marketing does. It is capitalism applied to marketing.
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.
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.
So, what can companies do for their Best Customers? Here are a few examples:
eCommerce: Give 3 free exchange opportunities to best customers; Design a special page based on customer preferences – combination of things they like, new season/ launches, offers
OTT: Ask best customers for preferences to recommend for the following week; Give early access or preview (music, tv shows, movies etc.)
Retailer: With data on items that the best customer searched for but weren’t available at the time, retail stores can give them the first chance to buy those or similar items when in stock; give offers for items similar to customer’s previous purchases
Multiplex: Predict what best customers are likely to order and place in the cart/ offer an easy buy option
Manufacturer: Give privileged opportunity to buy a new collection from company/brand or even design new products
Another way to think is along the three dimensions of Exclusivity, Envy and Access – as outlined in the book “The Velvet Rope Economy”. Here are some more examples of differentiated service examples:
Get premium samples free – from wishlist and new launches
Get a special page designed based on preferences – likes, new season, offers
Get notifications on topics of interest
Participate in product co-development
Cancel tickets or orders without loss
Pre-book a slot based on visit patterns, etc; get an assigned concierge
Get free exchange opportunities
Pick their own seats in advance (flight, theatre etc.)
Order service/product before arriving on-premise
Preferential treatment from customer service; first-in-line always
Get invited to media events celebrating the brand’s loyal customers, to get first-look at products
First opportunity to book an order for limited edition apparel
Offers for orders similar to previous purchases
An earlier opportunity to buy tickets for upcoming events
Which brings us to the key question: how does one identify Best Customers?
Over the next year or two, companies are going to see profits under pressure, marketing budgets getting minimised and capital being constrained. At the same time, business needs to continue. What can enterprises do to strengthen their market positions given these limitations? The answer: Velvet Rope Marketing.
I recently read Sunil Gupta’s book, “Driving Digital Strategy.” There was one idea that stood out (among the many excellent ones in the book): the 200-20 Rule. Here is what he writes: “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.”
I have also been thinking about another related idea outlined by Peter Fader in his two books on customer centricity – that of focusing on best customers to maximise profits. A few quotes from his books:
“The Customer” does not exist because every customer is different.
The customer is not always right. Theright customers are always right.
In the world of customer-centricity, there are good customers…And then there is everybody else.
Building on the concepts outlined and through conversations with marketers, I came up with the idea of “Velvet Rope Marketing” (VRM) – focus on creating a differentiated experience for the Best Customers as identified by customer lifetime value (CLV) to maximise profits. Best Customers sign-up early, stay longer, spend more, spread wider and are serviced easier.
For these customers, companies need to roll out the “velvet rope” experience to treat them like royalty. We have seen the velvet rope (with the red carpet) at airline first class and business class check-in counters, and at the exclusive entrances at Disneyland. It creates exclusivity, envy and a feeling of being special. VRM can help generate additional revenues, higher profits, loyalty and word-of-mouth.
The world of marketing is changing. One of the biggest shifts that I see happening is that the extreme focus on adtech (new customer acquisition) will move to martech (customer retention and development). For one, there are only so many new customers to acquire – unless one is starting up. Second, brands are going to realise that there has been limited focus on monetising their current customer base in the mad rush to acquire new customers at any cost. Third, in the post-Covid world companies will find capital hard to come by which means they will need to focus harder on making the most of the customers they already have. That’s where martech will play a very important role going forward. The 80:20 split between adtech and martech will flip in the years to come.
Customer retention and development needs a very different approach. While the temptation is to focus on all customers, CMOs must differentiate. The “best” customers provide disproportionate revenue and profits. Identifying who these best customers are must become a priority. This has become easier with the data trails that customers leave. Analysing transaction data to compute customer lifetime value (CLV) and thus identify the top 20% customers has to be the core of the martech strategy.
The next question is: what to do with the best customers? This is where I want to bring in the idea of “Velvet Rope Marketing” (VRM). One could also term it as red carpet treatment or white glove handling. In all cases, the theme is the same: how to create a differentiated experience for the best customers? VRM combined with omni-channel personalisation is the future of marketing. We will discuss more on this in future posts.
Mukul Pandya had interviewed me in Jan when I was at Wharton. In it, I spoke about the future of marketing (omni-channel personalisation, focus on best customers, maximising customer lifetime value), Netcore’s roadmap, the “profi-corn” mindset to build companies, and what India needs to do to counter the current slowdown (which will get worse after Covid-19). All of these are themes I will explore in my future writings. A few excerpts from my interview:
What should be the goal of marketing? What would I as a CMO love to do? I’d love to maximize the lifetime value of my customers, which means I need to identify from my current set, from my current cohort, who are my best customers. How can I get them to spend more? How can I engage with them more? Earlier, it was very difficult to do this. Every person was treated pretty much the same. The next question is: What are the characteristics of my best customers? How can I go out and acquire more such customers? A marketer now has the ability to almost craft the perfect company, the perfect organization, with a customer base of the best customers.
Twenty percent of your customers account for 200% of your profits, which means there are probably a lot of customers who are actually causing you to lose money. That may not matter today, but at some point in time it will. Companies will start realizing that all customers are not equal and that they need to start analyzing their segments and figure out which customers they should go after. Which are the types of customers they need to attract and engage?
Identify and engage with your best customers. That is the differentiated proposition that a company can create. That is the way to create valuation for their own businesses and incredible value for customers via omni-channel personalization. You can’t deliver that to every customer of yours. So focus on your best customers and give them omni-channel personalization.
….how we’ve architected the company…the word I like to use is “profi-corn.” Many of the unicorns have been burning a lot of cash. I felt we needed something new, a new way to build companies, the way we have built Netcore over the last 20 years.
A profi-corn has four characteristics. It’s profitable. It is private. It’s bootstrapped — there is no external capital, which ensures that the focus is on employees and customers, and not investors. And it has a baseline valuation — let’s say $100 million. Unicorns have a billion-dollar valuation, but the founding team is probably left with less than 10% of it. So if it’s $100 million (for profi-corns), and the founding team and the employees own 100%, it’s almost the same thing.
About a year-and-a-half ago, I put together an idea called Dhan Vapasi, which means wealth return. This is perhaps the most powerful idea to counter what we are seeing in India.
Our idea was that you can start monetizing all these assets…bring out all the idle land or idle assets into circulation. As we start generating money from these assets, the idea should be to return it to the people. This is the people’s wealth. The government only controls these assets. It’s the people who are the owners. To counter the slowdown on the demand side, our proposal was that every Indian family can be given back Rs. 100,000 (approximately $1,400) every year. This effectively doubles the median income of a family in India. As they start spending, it starts the virtual cycle of consumption, manufacturing and job creation. I think if the government can do this it will put Indians on an irreversible path to prosperity. Do it for 10, 20, 30 years — that’s the kind of wealth which is locked up in India. That’s how you can replicate the Chinese success. You can pull out a few hundred million people from poverty in the next 10 years.