In a challenging economy, many organizations incorrectly choose to arbitrarily cut customer marketing programs to preserve income levels. In actuality, the better strategy would be to invest in your customers to make your customer portfolio stronger now and in the future. This is when an organization should be identifying, understanding and catering to your best and high potential customers thus increasing their value to your organization. You still spend less, but it is skewed toward your better customers. If you don’t, your competitors will be targeting and possibly wooing your best customers during the slow economy and immediately afterwards in the recovery period.

The first step is to define customer value for your organization. Whatever the definition, it must be consistent and quantifiable over a long period of time. Many companies use customer profitability, which is helpful for a short-term view of a customer since profitability is a ‘snapshot’ of the customer’s value at some point in time. It does not account for the value of a customer over the life of their relationship with a company. Additionally, there is always the argument of how much overhead to burden each customer account with. Some organizations allocate the entire company or division’s overhead to each account while others have allocated only customer servicing costs. I tend to prefer the latter since it more accurately reflects the cost of doing business with your customers.

Lifetime value is probably the best definition of customer value because it views customer’s value over a long-term relationship. Lifetime value is the expected value (or profitability) of the customer over the length of their expected relationship with the company. If product stages or lifestages are applicable to your organization, then they should also be included as a dimension of lifetime value. For instance, if you know your customers progress from the low margin product or service A to the high margin product or service E, losing a large numbers of customers when they are at the product D stage can be detrimental to a company’s stability. In the banking industry, the lifestages a customer typically goes through is from single, to married, to children, to college for children to retirement. During each lifestage, a customer will have specific product needs. Demographic data will be necessary to supplement your transactional data for this analysis.

Applying your definition of lifetime value to all of the customers in your portfolio will enable the company rank order customers to identify their best customers and their high potential customers. A further analysis of these groups will yield a better understanding of their needs and their relationship with the organization, i.e., how they purchase, how often they purchase, etc., enabling the company to treat and communicate these customers accordingly.

Increasing customer value is first a matter of motivating these customers to maintain the value they currently have with your organization to a positive customer experience enabling you to retain them.  The next part of the strategy is to motivate them to either increase your share of wallet by purchasing more of the same products; to upsell by purchasing higher margin products; to cross sell by purchasing other products sold by the company; or improve their loyalty by increasing their propensity to buy your product or service – maybe not now, but in the foreseeable future.

By focusing on improving your relationship with your best customers, instead of cutting marketing programs across the board, your organization will be able to increase the value of your customer relationships in a down economy. These are the customers who make the greatest contributions to your organization’s income in the short and long-term. Your best customers are also the ones your competitors will be going after now and when the economy turns around. By focusing your marketing strategy on your best customers during a slow economy, an organization can save overall marketing dollars, while continuing to increase value.

This targeted marketing strategy can also be applied to customer acquisition programs. Given that you know what a good or high potential customer looks like, use some demographic analysis to determine who in your prospect pool has the same profile, or potentially will have the same profile. Through better targeting, clients have been able to reduce their mailing costs significantly while increasing their response rates.

This strategy will also work whether your business is business-to-consumer or business-to-business. In fact, some of these strategies work better for B2B since it is sometimes easier to determine the lifestage of a given business.

I hope you enjoyed this discussion. If you have any questions, please send them to me directly or post them on our blog. If you need further assistance implementing any of these strategies, please call me at 847-821-0975, so that we can help you.