Becoming Chief Profitability Officer (Part 3)

Velvet Rope Marketing is about identifying and marketing to the Best Customers of a business. (For some businesses, it could be adapted to doing the same to incoming leads.) Let’s begin with the process of identifying Best Customers:

The first step is to collect data at every touchpoint. In the online world, this is easier since access is via a website or an app. In both cases, all customer actions can be captured. If a customer is logged in, then it becomes possible to link to a unique personal identifier (email ID or mobile number). If not, then it has to be tied to a cookie (on a browser) or a device ID (on the mobile). In the offline world, this is a much harder problem to address since a customer may not be identified until the point-of-sale. In the future, face recognition systems may allow tracking of customers from entry to exit, thus providing better insights into the customer’s interests. In the near-term, stores could use smart cards or mobile apps to identify repeat customers at entry to create an assisted or personalised experience.

The second step is to store all the data in a customer data platform (CDP). A CDP thus becomes the repository of all of the customer’s demographic data (name, gender, location), behavioural data (app and web interactions) and transactions. It thus becomes possible to create a unique profile for every customer.

The third step is to calculate customer lifetime value based on the transaction data. My earlier post on CLV explains this process. It is important to note that the CLV described here is a forward-looking, predictive measurement.

The fourth step is to segment the customers based on their CLV. 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.  If companies measure profitability, they will find that the biggest contribution comes from their Best Customers, followed by some from the Rest Customers.

The Test Customers are likely to result in losses if one factors in the cost of acquisition and servicing. (I call them Test Customers because they are ‘testing’ the brand and are not likely to do repeat transactions. They came in once, ‘tested’ the brand and then went away. We will discuss more about them in the section on Long Tail Marketing.)

The next two steps involve calculating the Customer Genome and from there decoding the Best Customer Genome (BCG), followed by the final step of using AI-ML to create a continuously evolving and learning process for analysing customer data.

Tomorrow: Becoming Chief Profitability Officer (Part 4)

Becoming Chief Profitability Officer (Part 2)

The path to profits runs through marketing. For most companies, marketing is the largest cost after wages and salaries. Hence, the pressure to cut marketing budgets is going to be intense. It is in this context that marketing needs to be re-imagined for the post-Covid future for the increasingly digital customer.

There are three themes around which the new marketing can be re-organised to drive profits based on the customer segments:

  • Velvet Rope Marketing for the top 20% (Best Customers)
  • Median Customer Marketing for the middle 30% (Rest Customers)
  • Long Tail Marketing for the bottom 50% (Test Customers)

Velvet Rope Marketing (VRM) is the most important because the contribution of Best Customers to revenues is much higher than the other categories. My earlier series and webinar on VRM discuss the ideas in greater detail. In this context, the four most important jobs for a Chief Profitability Officer are:

  • Identify Best Customers
  • Give them the Velvet Rope Experience
  • Acquire more like them
  • Help them become Best Customers faster

In this series, we will also dig deeper into how to implement VRM using the ideas of CDP (Customer Data Platform), CLV (Customer Lifetime Value) and BCG (Best Customer Genome). We will also expand on ideas for marketing to the Rest and Test Customers via Median Customer Marketing and Long Tail Marketing, respectively. While their relative contributions to revenue and profits are likely to be lower, they can serve as a fertile ground for identifying future Best Customers.

Tomorrow: Becoming Chief Profitability Officer (Part 3)

Becoming Chief Profitability Officer (Part 1)

“There are decades where nothing happens; and there are weeks where decades happen.” – Lenin

In the US, e-commerce penetration as a percentage of retail sales grew from 5% to 16% in the ten years from 2009 to 2019. And then came coronavirus. In 8 weeks, the 16% rose to 27%. A decade of change repeated in 8 weeks.

We are living through extraordinary times. In India, we have seen four successive shocks in the past two months. First came the pandemic. Then, the lockdown. This led to a complete demand collapse for many industries and businesses. And finally, the government actions (or lack of them) which have compounded the problems.

Now, two months after the lockdown, there is no sign of “flattening the curve” as cases keep rising across many parts of India. Much of economic activity remains shut down even as efforts are finally being made to open up the economy. (For the record, I had written about the urgent need to Unlock India early in April.) Migrants who had come to cities in search of a better life have been making their way back to their villages. Layoffs are now starting to happen. Work from home has become the new normal for many employees. Even as medical challenges overwhelm cities like Mumbai, the full horror of the coming crisis is slowly becoming apparent.

For business leaders, there is no playbook which could have prepared them for these times. The post-Covid future is now revealing itself. Capital is going to be constrained, profits are coming under severe pressure, marketing budgets are being minimised and the customer is going digital in the wake of social distancing norms. A new normal is emerging – one which is here to stay.

For Chief Marketing Officers (and in fact all CxOs), it is time to think of the 5th P of Marketing. To Product, Price, Promotion and Place, they all need to think of Profit. Because without profits, there will be no business. In the post-Covid world, we all must become Chief Profitability Officers.

Tomorrow: Becoming Chief Profitability Officer (Part 2)

Interview in Impact (May 2020 issue)

Dipali Banka from Impact magazine interviewed me about martech, entrepreneurship and Netcore. From the intro: “Rajesh Jain’s idea of creating differentiated experiences for your best customers through ‘Velvet Rope Marketing’ and creating ‘Proficorns’ rather than ‘Unicorns’ are concepts that companies can adopt in these difficult and uncertain times to ensure a profitable business. The Founder & Managing Director of Netcore Solutions is clear that this is the best time for a CMO to adapt and become a Chief Profitability Officer using marketing technologies on the existing customer base.”

A few excerpts from what I said:

  • I think one important shift, which even otherwise was going to happen, and has been accelerated due to the current situation is the shift from AdTech to MarTech. AdTech is about customer acquisition, while MarTech is about customer engagement. In these times, one of the first budgets to reduce is new customer acquisition. Rather than spending money on acquiring new customers, companies are going to focus on the ones they already have.
  • Generally companies focus on ‘median’ customer marketing. They don’t tell you to separate customers based on Customer Lifetime Value (CLV) segments which are there. There is a tendency to protect the customer churning. But when marketing budgets get minimised, the key idea will be to focus on your best customers and create differentiated experience for them, which I call Velvet Rope Marketing (VRM).
  • Marketers can actually be profit drivers of the companies at these times. The CMO should actually become the Chief Profitability Officer at these times, and use new technologies on existing customers and generate profits.
  • A Proficorn company has four characteristics: profitable, private, promoter-funded and having a reasonable valuation (say, $100 million or more). The whole mindset is towards profitable growth. In difficult and uncertain times, Unicorns fire and Proficorns hire.
  • At Netcore, we build a full stack marketing automation, including owning the channels of delivery, automation and analytics built into the system and then AI and ML, personalisation and CSM. That Netcore is in a strong position financially will help us differentiate even more…In business as unusual, we really want to expand aggressively in the US so probably this is a good time to look at acquisitions there.

Here is the interview on pages 18-19 of the magazine.

There is also a video of the interview.

Velvet Rope Marketing (Part 7)

We are now in a position to see how Velvet Rope Marketing (VRM) can help enterprises double their profits with the twin engines of increasing revenue from Best Customers and decreasing acquisition costs. Think of this as the instantiation of the 200-20 rule that Sunil Gupta had talked about – for 200% profits, focus on 20% of the customers, grow revenues by 20% and reduce media spends by 20%.

The table below summarises the approach that smart marketers should take in this quest to double profits:

The greatest impact can be made by shifting focus from the middle cohort to the Best Customers. Creativity needs to go in crafting the VRM programme – what non-cash experiences can be created that will make the brand’s Best Customers feel like royalty – so that they spend more, stay longer and spread wider.

The foundation can be laid by rebuilding the marketing stack centred around these six elements:

  • CDP (Customer Data Platform): to aggregate all customer demographic, behavioural and transaction data in a single place to provide a single unified view of every customer
  • CLV (Customer Lifetime Value): to segment the customers into Best (top 20%), Rest (middle 30%) and Test (bottom 50%), and thus lay the foundation for Velvet Rope Marketing
  • Martech: to automate all interactions with customers, with a special focus on Best Customers
  • +Adtech: to benefit from the integration with martech, acquire more profitable customers, and do 1:1 targeting
  • Omni-channel: to ensure reachability to customers across every possible channel (owned and paid) in a seamless manner
  • Personalisation: to create a distinctive, unique and memorable experience for every customer, and especially the Best Customers

The growth of devices, acceleration of digital and availability of data makes it possible to treat customers differently and recognise that some are more equal than others. Velvet Rope Marketing is the perfect business transformation idea – for today and forever.

A postscript for CMOs: While everyone else in the organisation is focused on cutting costs and conserving cash, Velvet Rope Marketing is the magic sauce that can transform you into profit doublers – the Chief Profitability Officer! 

Velvet Rope Marketing (Part 6)

The focus on Best Customers (identified by CLV) can also reduce advertising and customer acquisition costs. This is done by combining martech with adtech – ‘madtech’ as it has been termed.

The big idea is about using information about Best Customers (their demographics and behaviours) to prospect for more like them. Instead of scattering marketing budgets to acquire all kinds of customers, the smart marketers will use information from VRM to optimise their ad spends to acquire mirror images (‘lookalikes’) of their Best Customers. Given that ad budgets tend to be a large component of the overall costs of an enterprise, optimising media spends on customer acquisition can help increase profits.

The adtech-martech integration can yield two additional benefits:

  • Attributes of acquired customers can be passed on to the CDP/CRM at the time of acquisition – thus resulting in a better starting point and possible early identification of those who could be future Best Customers. Based on this, a better onboarding experience can be created for such customers – capitalism marketing at work once again!
  • It is very important for brands to have a continuous outreach and hotline with their Best Customers. In most cases, this will be through the brand’s own channels – email, app notifications, browser notifications, and so on. But at times, it may be necessary to do an outreach via paid channels through ‘madtech’ on Google, Facebook, etc. The incremental cost can be justified because of the higher CLV of Best Customers.

The full power of the integration between adtech and martech manifests itself across the customer journey as seen below to create a very powerful VRM flywheel:

Tomorrow: Velvet Rope Marketing (Part 7)

Velvet Rope Marketing (Part 5)

Best Customers can beget more Best Customers. They are valuable not just by themselves, but also for who they can bring in. They can become amplifiers of good experiences – what has been called “word of mouth.” With social media, this gets magnified even more – each of us today can reach hundreds through our posts on Whatsapp, Instagram, Tiktok, Facebook and LinkedIn. Best Customers can thus have a multiplier effect via their advocacy on social media platforms – something that was much harder to do in the past when the direct reach each of us had was limited.

By becoming advocates of the brands they love (both for the product and their experience), Best Customers can thus get more lookalikes into the fold – each of whom has a higher probability of being a future Best Customer. As a result, it becomes possible to grow revenues substantially on account of the Best Customers.

As my Netcore colleague Chaitanya Chinta explains:

Some brands carry an emotional identity with users and when connected effectively creates “Brand Fans” … like Apple, Starbucks, Under Armour, etc. These brand fans are usually powerful. For any commercial brand, identification and activation of these brand fans is essential for its short-term and long-term success. This is even more important in the coming few months due to Covid.

In fact, fans of any brand are the most engaged and profitable customers – Best Customers in the VRM Model. They are usually about 15-20% of the user base that the brand has, but contribute a significant portion of revenue.

The beauty of VRM is that it identifies and activates (via martech) their fandom – making them more attentive towards brands content, more likely to transact, share positive experiences and ultimately, influence others. That’s the bliss point for any brand.

This is exactly what brands like Google, Apple or any brand with a cult-like culture does. They identify and activate fans …and pull in more people into “fan club” using activated fans.

If a brand aspires to have a cult-like following (and more revenues and profits), it needs VRM.

Best Customers thus become magnets and super-spreaders, attracting others like them. This is another big reason to deploy Velvet Rope Marketing for the top 20% customers.

Tomorrow: Velvet Rope Marketing (Part 6)

Velvet Rope Marketing (Part 4)

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.

Tomorrow: Velvet Rope Marketing (Part 5)

Velvet Rope Marketing (Part 3)

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.

Tomorrow: Velvet Rope Marketing (Part 4)