![]() ![]() By applying statistical models, they can predict not only when each customer is likely to make a future purchase but also what he or she will buy and through which channel. Companies can draw on databases that tell them how much each customer has purchased and how often, which they may supplement with detailed demographic profiles. The technology for managing customer relationships has gotten fairly sophisticated. Your Champions are already producing maximum value here’s how to boost total value for the other segments: Target Your Marketing Strategies by Segment Champions, who are both excellent buyers and marketers Affluents, who buy a lot but don’t market well Advocates, who don’t buy a lot but are strong marketers and Misers, who neither buy much nor market well. Since a high customer lifetime value doesn’t necessarily predict high referral value, segment customers based on how they measure up on both forms of value. The value of a type-two referral is the savings in the cost of acquiring the new customer, since no direct marketing effort was needed to get him. In calculating CRV, you also must include the value of type-two referrals-people who would have become customers anyway, without the original customer’s referral. Calculate Each Customer’s Referral ValueĮach existing customer’s referral value (CRV) includes an estimate of the lifetime value of any type-one referrals-people who would not have become customers if they had not been referred. Kumar, Petersen, and Leone recommend this process for improving your marketing ROI: Calculate Each Customer’s Lifetime ValueĪ customer’s lifetime value (CLV) is an estimate of how much that customer would spend on your company’s offerings if he continued purchasing at the current rate for some designated future period, minus the cost of marketing to him. Armed with that data, you can tailor your marketing efforts more precisely to boost each customer’s total value to your firm. ![]() ![]() How can your company encourage customers to make profitable referrals? The authors’ technique enables you to segment customers into four types: those who buy a lot but are poor marketers for your firm those who don’t buy much but are strong marketers those who both buy and market well and those who do neither well. What accounts for this counterintuitive phenomenon? High-purchasing customers who say they’ll recommend your firm to others often don’t bother. According to Kumar, Petersen, and Leone, your most valuable customers are those whose word of mouth brings in the most profitable new customers, regardless of how much they themselves buy. Your most valuable customers are those who buy the most, right? Not necessarily. Rather than waste funds encouraging big spenders to spend slightly more while overlooking the power of customer evangelists who don’t buy enough to seem important, you can reap much higher rewards by nudging big spenders to make referrals and urging enthusiastic proponents of your wares to buy a bit more. The power of this tool is its ability to help marketers decide where to focus their efforts. Both companies reaped returns on their marketing investments greater than 12-fold-more than double the normal marketing ROI for their industries. Offering purchasing incentives to Advocates, referral incentives to Affluents, and both to Misers, they were able to move significant proportions of all three into the Champions category. In a series of one-year experiments, the authors demonstrated the effectiveness of this segmentation approach. Knowing both enables you to segment your customers into four constituent parts: those that buy a lot but are poor marketers (which they term Affluents) those that don’t buy much but are very strong salespeople for your firm (Advocates) those that do both well (Champions) and those that do neither well (Misers). In this article, the authors present a straightforward tool that can be used to calculate both customer lifetime value (CLV), the worth of your customers’ purchases, and customer referral value (CRV), the value of their referrals. Those are the conclusions of professors Kumar and Petersen at the University of Connecticut and professor Leone at Ohio State University, who analyzed thousands of customers in research focused on a telecommunications company and a financial services firm. What’s more, your best marketers may be worth far more to your company than your most enthusiastic consumers. The customers who buy the most from you are probably not your best marketers.
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