Identifying your most valuable customer segments
The majority of revenue is now generated by a tiny percentage of users. By identifying and nurturing these valuable customers, brands can gain a sharper perspective on how to improve the overall shopping experience.
Summarize this articleHere’s what you need to know:
- High-value customers, a small fraction of your user base, drive the majority of your revenue. Focus on identifying and nurturing them.
- Less than 1% of customers typically drive 90% of revenue, yet customer acquisition often overshadows nurturing existing high-value customers.
- Five key metrics to identify high-value customers: average order value, customer lifetime value, purchase frequency, price sensitivity, and agony (customer support interactions).
- Engage high-value customers by understanding their motivations and personalizing their experiences. Conduct surveys and leverage personalization engines.
- Personalization is an ongoing process that requires continuous strategy and effort.
Italian economist Vilfredo Pareto famously implied that 80 percent of the effects come from 20 percent of the causes. That assertion was accurate… for the steam train era.
While the 80/20 rule certainly has benefits in framing our minds to efficiently prioritize vital activities over more trivial ones, the truth is that marketers today find themselves in a post-Pareto world, where the causes and effects of consumer actions are driven by an even smaller, elite minority.
The executives of a major media brand were recently shocked after reviewing an engagement audit conducted by our product team: only 2% of users were generating 50% of the site’s total pageviews! For a billion-dollar retail client, a mere 1% of customers were driving 67% of its annual revenue.
1%, not 20%.
These findings beg an important question for marketers: shouldn’t we be focusing our efforts only on those customers that are of vital importance? Shouldn’t we be determining which customers bring us the most value, double down on them, and delegate the rest?
Just look at the graph above, which was generated based on data from one of our leading customers in the US, a well-known eCommerce fashion and apparel brand. It is pretty clear that the 80/20 rule has become a much narrower one. In today’s marketing environment, less than 1% of customers are driving 90% of the overall revenue.
One issue is that customer acquisition often rents the corner office in the mind of a marketer. In other words, we expend so many calories figuring out ways to bring in new customers, when we should really be concentrating on enhancing the experiences of our most valuable, existing ones.
“Most valuable,” of course, is relative to an organization’s goals, yet requires precise definition here. Thanks to Data Management Platforms and advanced micro-segmentation tools, marketers can distill vast amounts of 1st / 3rd party data and measure value by taking a holistic view of the many minutiae decisions customers are making.
The following five metrics will help you identify your most valuable customers:
As Prashanth Ramanathan, a Services Senior Cloud Engineer at Discover Financial Services, said on Quora: “Normally companies tend to overlook super consumers because companies think that they have already acquired the super consumer’s market share. But the truth is the company would lose tremendously if they lose the market share of their super consumers.”
Metrics to identify your most valuable customers
1. Average Order Value
What is the average order value (AOV) on your site and which customers have a higher AOV than average? Although AOV is calculated irrespective of order source (i.e. sales per order, not sales per customer), customers who spend the most constitute as valuable. Keep in mind that while customers with high AOV may cost more to acquire than other customers, they may have a larger lifetime value.
2. Customer Lifetime Value
Value is a continuous evaluation: how much revenue will your top customers generate over time, over the course of their relationship with your brand? An effective way to gauge a valuable customer vs. an average customer is by segmenting different audiences and calculating customer lifetime value (CLV) according to total purchases made over a long period (six months to a year). Doing this will not only set a baseline LTV for comparison with new customers but will separate the heavier hitters from customers who made only one or a minimal amount of large purchases.
3. Purchase frequency
Your most valuable customers are ones who buy more and buy often. Alex McEachern notes that a customer has a 27% chance of making another purchase after the first purchase, but a 54% chance of making another purchase after the third purchase. Further, customers that buy frequently can help you acquire new customers at a far lower cost as word-of-mouth essentially does your marketing for you. According to a study by Bain and Company, repeat customers on average refer three people each to a retailer’s site after their first purchase and seven people after their tenth purchase.
P.S. On average, loyal customers are worth up to 10 times as much as their first purchase
4. Price sensitivity
Customers who frequently purchase, but only after prompted with a discount, should technically not qualify as ‘most valuable.’ In an ideal world, your value proposition, product features, and overall site experience would be enough to secure a full-price purchase (when’s the last time you heard of Apple having a sale?). Yet, there’s no denying discounts are attractive to all visitors. To isolate the pure bargain hunters from loyal customers looking to save, marketers can create a unique segment of shoppers who purchase only after being presented with a discount.
5. Agony
Those frustrated customers who took the time to reach out to your support team, waited over six hours without a response, and then wrote an insufferable review? They are invaluable to your business. Contact them, listen patiently, and embrace the criticism. Because while they are lecturing you on how and why you’ve failed them, you’ll learn about pain points you didn’t know you even had and exactly how to pivot (potentially recovering the sale).
How to engage your most valuable customers
Now that you’ve identified your most valuable customers, how do you engage them?
1. Reach out, survey, and learn from them (but actually)
This idea was inspired by Peep Laja of CXL. Start by asking yourself: why are these people driving the most revenue? What causes them to buy more frequently and spend more on orders? What traffic sources or campaigns are they arriving from? What products are they searching for? What story does their clickstream data tell? What pain points were alleviated? Do they have additional needs that are not being met?
Finding the answers to these questions will provide the foundation of a framework for creating audience segments and personalized experiences for your most valuable customers. Yet gut-reactions, guesses, and assumptions won’t get you very far. Have an executive or senior manager get in touch by phone or email and hear first-hand what these customers have to say.
In addition, you can use a tool like Survey Monkey to create a short, free-form survey for valuable customers who purchased more recently (six months or less), asking them to explain their experience with your site and products and understand how you can improve their experience.
Consider asking the following questions, adjusting as you see fit:
- How do you go about searching for and selecting products on our site?
- Is there any product you searched for but couldn’t find?
- Which aspects of our site/products do you like most?
- Which improvements in your life or business have you seen after using our product/site?
- If there was one thing we could do better what would it be?
The better you know your most valuable customers, the better you can engage them and personalize their shopping experiences.
2. Target different personas and audience groups with relevant experiences
We know by now that personalization can deliver five to eight times the ROI on marketing spend, and can lift sales by 10% or more. With the help of omnichannel personalization engines, marketers can leverage prior behavioral data and apply micro-segmentation as well as machine learning algorithms to personalize the buying experiences of their most valuable customers.
For example, a large U.S. fashion retailer with six major sub-brands encouraged visitors to browse through more products by converting every homepage component into a dynamic element that targets different audience segments.
Targeting different elements on the page to different audience groups. Read more about dynamically segmenting homepage experiences here.
Find more website personalization examples in our Inspiration Library.
Conclusion
Marketers are living and operating in a post-Pareto era where the vast majority of revenue is generated by a tiny percentage of users. By identifying and nurturing your most valuable customers, you will not only gain a sharper perspective on how to improve their shopping experiences but your entire buying experience as a whole.
And while micro-segmentation and machine-learning algorithms will enable you to distill your customer base and personalize the experiences of your most valuable customers, keep in mind that it’s not as simple as plugging in and running on autopilot.
Personalization is a continuous process, and the successful marketer is always thinking about how the segmentations they create fit into an overall strategy for revenue growth.