Understanding customers real value, or LTP (Life Time Profitability), to your business is a crucial measure which should underpin much of the interaction with your customer base. Being able to differentiate which particular customer contributes to your profits (proportionally and absolutely) more than others allows you to target and merchandise effectively. Incentivising and promoting to your returning customers is a tried and tested way of keeping them and well understood to be a solid retention strategy, so it is wise to ensure they really are profitable.
Conversely, having a view of customers who contribute negatively to your profits, particularly over a number of purchases, should trigger a change of your approach towards them. However, the reality of measuring profitability accurately is far less common than you might imagine, and it is not unusual for businesses to use a sales revenue measure for value rather than a customer’s induvial profitability, as this is much easier to get hold of.
Even when a more accurate view of life time value is used instead of sales revenue it frequently uses an averaging approach, which flattens out the data and exposes your business to incentivising loss making customers and missing the real valuable VIPs. Typically, customer LTV is calculated by taking:
Average order value x Frequency x Gross Margin / Churn rate
This is a good measure only when looking from 10,000 meters at the broad base of shoppers. Not for dealing with individual customers. It should not be used as is to drive personalised customer strategy or interaction.
Instead, retailers should use Easycom’s true profitability analysis which provides a tool to look at single customers, with all the positive and negative costs attributed to them and accounted for across their life time engagement. This view of an individual’s lifetime profitability including the post purchase fluctuations and adjustments provides a much more powerful mechanism for valuing a customer. Furthermore, when a time constraint and frequency of shopping algorithm is applied to the true profitability view, easycom can segment customers with weighted profit and recency factored in. This dynamic ‘value-tier segmentation’ provides a new type of customer list to be used throughout the business.
At one end of this segmentation there are VIP customers whose value to the retailer is vital, they contribute more profits than anyone else and must be the focus of merchandisers and loyalty promotions. The bottom end of the segmentation covers the low profit and negative or lossmaking customers. Dealing with these customers is far more nuanced and needs to be actioned based on a deeper analysis which considers other factors such as returns behaviour/costs and frequency of purchasing.
In the middle of the segmentation sit the unknowns. These are the customers who are either new to the business, where historical data and profitability is absent, or the customers who have previously shopped with the retailer, may have a positive LTP, but who last shopped so long ago that they should be viewed as net new. A simple and prudent risk approach here is to view customers in this segment as potentially positive but to do so without the benefits (yet) of the VIP segments above them.
Easycom provides this view of customer LTV as a real-time updating analysis, available via API for integration to any business system applicable. We see retailers using this information in marketing, finance, customer services and management. Both as a tool for action/intervention and planning/forecasting.
To find out more please contact easycom.