Published May 5-11, 2020
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. The right 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.
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?
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.
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.
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.
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:
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!