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Why Do You Have High-Value Customers?

By Apr 24, 2006

Everyone has customers who are more valuable than others. But why do you have them? Put another way, why did they choose to become a high-value customer?

It seems like an obvious question. But answering it is tougher than you might think. The answers get at the core of why you are succeeding (or not) as a company. It helps isolate the factors that have caused some portion of the population to choose to spend their money with you. The effort to find the answer will uncover a lot of hidden insights into your business. Think of it as a marathon, not a sprint, and you’ll have the right attitude.

Everyone is familiar with Pareto’s Law, otherwise known as the 80/20 rule. This distribution appears throughout nature and is especially apparent when looking at sales distributions among populations. What is critical is finding out why those 20% chose to spend with you and the other 80% did not.

A complete treatment of this subject would take up far more room that I have. So let’s look at the two key areas to focus on.

First, you are looking for variation between your high-value and low-value customers. This requires a fair amount of data concerning your customer spending, so that you can separate your customer base into a reasonable number of groups and still have enough response data to generate significant results.

Of particular importance is the difference between your highest and second highest segments of customers. It is likely you will find only a few differences in their responses to preferences, attributes, promotion, satisfaction, and so on. You’ll have to get specific. Don’t ask about just three or four areas–ask about 30 or 40. You may find that only two or three show enough difference to warrant further study. The payoff comes from attention to the details, however, so looking at the differences in very specific areas can lead to a big payoff.

Your lower-value customers will come into play as you look at your competitors, which is the second area to examine. Study how your customers rate your competitors on the same attributes and what their preferences are. It’s very likely that your low-value customers are high-value customers somewhere else. These customers have chosen your competitors for a reason, though, and the point of this study is to find out why. Create a cross-tabulated understanding of your customer groups by spending level across competitors, and see how your attributes vary within this grid.

How do your attribute scores line up with your competitors’? Does the competition beat you on price? At the same time, are your high-value customers less sensitive to price? If that’s the case, you can rule out price as a causal factor in high-value customer retention. That may leave you with 39 more attributes to test, but at least you can stop worrying too much about price as the determinant. From there, move on to the other attributes and put them through hypothesis testing and analysis. By comparing how your low- and high-value customers rate you and your competitors, you can systematically identify the attributes where your strengths match your best customers’ most important preferences, and how they line up with your competitors’ strengths and weaknesses.

For example, in a prior life I found that my most valuable customers rated my company highly on our customer service, both in terms of employee knowledge and related services. Most executives in my company were absolutely convinced this was the source of our competitive advantage. Problem was, my low-value customers felt the same way. In fact, my second-tier customers looked almost identical to my top tier in preference and key attribute ratings but spent far less.

The ugly truth we uncovered was that a huge portion of customer choice in our segment was driven by price and convenience, and our real estate was very thinly distributed. We thought we were pulling from a very wide trade area, but it was much smaller than we thought. So in many of our locations, there weren’t enough customers to support the store profitably. We used the research results to identify segments of customers who would be likely to shift spending to us if we improved on a few key attributes, mostly around price perception and inventory availability.

Your end result will be a fairly small set of attributes that explain why your high-value customers chose you vs. your competitors. You may find the breadth of vendors, the availability of odd sizes, or your exclusive products are the only significant attributes that your high-value customers rate highly that you offer and your competitors don’t. Keep at it. You may not be able to explain why your highest-value customers are worth so much right away, but give it time. Figuring out causality in this case could lead to huge gains down the road.

Michael Greenberg is vice president of marketing for Loyalty Lab, a San Francisco-based developer of customer loyalty programs for the retail industry, and writes a monthly column for CHIEF MARKETER.