The Most Important CRM Metric You Might Be Missing

Virtually every organization we have worked with in the past year is working on managing, improving or optimizing their relationships with customers. This work falls under the umbrella term “Customer Relationship Management” or “CRM.” It is, of course, the oldest “new thing” that marketers have focused on, en masse, for a long while.

CRM keyVirtually every organization we have worked with in the past year is working on managing, improving or optimizing their relationships with customers. This work falls under the umbrella term “Customer Relationship Management” or “CRM.” It is, of course, the oldest “new thing” that marketers have focused on, en masse, for a long while.

“CRM,” as it is, is a term that means many things to many different organizations and to different individuals in those organizations. This has created some confusion and leads to missed expectations in organizations.

Through meetings and executive interviews with brands, we have found that the majority of marketers will eventually describe the primary purpose of “CRM” initiatives as growing the value of customers who do business with them. We say “eventually,” because the initial responses to the question “what is the objective of your CRM initiative” gets quite a few answers including:

  • Know our customer better
  • Improve communications with our customer
  • Grow customer relationships (the most common response, and also the least actionable)
  • Decrease the usage of promotion
  • Reduce the volume of emails sent

These are just a few of the ways the organizations we work with begin to define their CRM initiatives; but to really make a difference in the business, CRM needs a clearly defined vision:

Intelligently managed customer relationships grow customer value. It drives incremental profit by either reducing the cost of promotion or driving incremental profitable revenue. CRM requires ongoing testing and learning, which can strategically inform customer acquisition and, in turn, increases the quality of the business.

“Intelligently managed customer relationships grow customer value. It drives incremental profit by either reducing the cost of promotion, or driving incremental profitable revenue.”

Can You Really Grow the Value of Your Customers?
Given the continuing trend of technology and data-driven CRM, it often comes as a surprise that few organizations have a heavy concentration of high-value customers. In fact, it’s the norm.

In a study Kaplan and Anderson published in the Harvard Business Review, the following was found across all industries:

  • 10 to 25 percent of customers drive 100 percent of profits
  • 50 to 60 percent deliver no profit at all
  • 10 to 25 percent deliver negative profitability

Some may find the magnitude of these facts surprising, perhaps even alarming. Not surprisingly, these profitability metrics correlate entirely to our experience across many dozens of organizations in working with their customer databases. What is sometimes an “uncomfortably large” percentage of revenue and profit is driven by a small group of the most valuable customers. In the luxury segment, where some brands have created an “accessible luxury” segment, the results grow even more staggering.

One example where we’ve seen this is among premium luxury brands that have grown “more inclusive” in their customer base. The concentration of customer value in the organizations is often almost exclusively in the top 10 to 15 percent of customers. When we have revealed this insight and evidence, the very business model may need to be rethought. To be sure, across all segments, customer value is a very big deal to all organizations — and, therefore, CRM.

Do Brands Have ‘Bad’ Customers?
This is a topic that is also hard to engage on. Often, marketers dedicate many hours and PowerPoint slides to focusing on the successes, and how good our customers are for our business. That’s an entirely intuitive point. These great customers also have an inverse; that is, customers whose value isn’t quite so great.

Some of these organizations have a material number of what might be called “bad customers,” altogether. But given that customers are the key element to realizing value in every business, how then can they be “bad”?

Let’s be clear, “bad” may carry a visceral sense of judgment. That’s not the point here, at all. The point is to meaningfully differentiate between customer groups or segments that naturally exist today in your database. “Good” or “bad” for the data-driven marketer really means how profitable the group is, or if it’s profitable at all. Simply put, a “bad” customer” must exist if a “good” or “great” customer does. Perhaps more “PC” — all customers have value, yet the value they hold for an organization is very, very different.

“All Customers have value, yet the value they hold for an organization is very, very different.”

You may even have a term for a segment of your customer base that you can’t afford to service well as “cost-control” customers. This happens in financial services, for example, where cost control may mean higher fees and online self service only. While that specific model does not necessarily apply to every business, all businesses have various segments of customers by value — both realized, and potential.

An Example: The Luxury and Accessible Luxury Categories
In the luxury category, brands sometimes become “more inclusive” (for example, in 2008 and at the depths of the Great Recession), which often means either markdowns or a product line for the “accessible luxury” category. As a result of this, customer value inevitably declines. In our experience, that decline was driven by decisions years earlier to scale at the cost of customer quality.

In these scenarios, if you were managing a CRM initiative, you’d have what’s known as a “dual-universe” problem — you can’t manage the value of these very different customers the same way. They may require a different P&L to account for them, and understand their value to the business.

A simple starting point in understanding a “dual universe” goes like this: Segment out your customers into the two groups — those who buy your true premium product, and those who have bought everything else. Analytics can then be leveraged independently across those groups.

The key to understanding if you have good and bad customers is, of course, the speed and dexterity you have to analyze customer data and your ability to measure and monitor changes in customer value by cohort. That’s a tall order for a lot of organizations today. Most are still focused on revenue through acquisition, rather than a strategic view where customer value is crafted first through the unique kind of customer acquired.

Good Customers — The Heart of Your Business
Good customers typically have longevity. Good customers purchase frequently, they have higher order sizes, or monetary value to your organization, they tell their friends about you, and while they appreciate a product they like on sale, they can also pay full price to get what they want.

Most importantly, while great customers generally cost more to acquire, and are harder to come by — good customers are quite profitable.

When a customer is considered good in most situations, they sometimes have the potential to become great ones. And therefore the mission of the CRM practitioner becomes, in simple terms, to ID the similarities and differences between them, make communication more relevant, and shape the value of each sale systematically. Growing customer value for your “good customers” can fill several of these columns, and we’ll put a series on migrating the good customers to great ones. (leave me a comment, or email me if you’d like to see those in the next couple of months).

Great Customers, or ‘Gold Customers’ — The Backbone of Your Business
The challenge for these “great customers” is they are often few and far between. If you’re in a business, where you have many great customers, you are either very, very fortunate, or you have not created a meaningful stratification of customers by value! This is one of the reasons that an intelligent segmentation of customers by value is an eye-opening engagement for most marketers and CRM practitioners.

Great customers, in most cases, are not only few in number but — counter to what may be one’s “gut feeling” — they quite literally carry the business. If you were to assume the contribution of customers to your bottom line followed a normal distribution, (think the bell curve, with a big fat middle), you would be quite surprised by what it most likely looks like. That contribution is stacked heavily to the top standard deviation, or way to the right side of the curve.

The insights we glean over time and across industries on organizations’ “Gold Customers” is the genesis and the reason CRM as a practice exists today.

“The Insights we have gleaned over time and across industries on organizations’ ‘Gold Customers’ is the genesis for and the reason that CRM as a practice exists today.”

The Best Way To Influence your CRM and Customer Value — Smarter Acquisition
This comes as a curveball to many CRM practitioners, especially those early in their CRM careers and experience. Nothing but nothing will change the performance of your database more meaningfully than adding more customers with higher potential value.

Put another way, great — or “Gold Customers” — are the backbone of a business, in that they are primary drivers of profitability, and they are the reason we’re engaging in CRM. So it’s imperative that we not only treat them differently and market to them wisely — but very simple math suggests we must also be acquiring more of them to increase the value of our database, our customer base and our business.

The Most Important Metric of Your CRM Strategy: Potential Value
There are many ways to measure your customers, their behaviors and their value. Concurrently, the most strategic way to grow your business and the value of your CRM initiatives is to collaborate with and inform your customer acquisition; that is to say, you can sculpt potential value through who you market to in the first place.

Customers who can’t afford you, don’t have the habits, beliefs, credit or lifestyles that your great (most valuable) customers do simply won’t or can’t buy like those who do. Those who do are your MVCs (Most Valuable Customers) and those who are ever further from this ideal are your least valuable.

Therefore, there is nothing we can do as marketers and as CRM practitioners that will improve the value of customers now and over time more so than acquiring more of the right ones. The strategy to how we do that is covered in another important article I’ve published as part of the body of work in this column on, “How to Scale-up Customer Acquisition Smarter.”

When you take a holistic view of your marketing, and place the appropriate value on the role of customer intelligence from CRM into your customer acquisition approaches, you can have an ever greater impact on the No. 1 metric we discuss herein — the potential value.

A high-potential value in the customer database then can be translated into ever-greater revenue and profitability, in a scalable and methodical fashion. While potential value is unlocked through all of the strategies and tactics we engage with through CRM — it all starts the most important “inputs” to your CRM — the customers themselves; moreover, acquiring the right ones.

Creating Luxury Appeal for Any Brand

So why do many of us spend $55,000 and more on a luxury car that Consumer Reports says won’t perform as well as a much cheaper brand?

So why do many of us spend $55,000 and more on a luxury car that Consumer Reports says won’t perform as well as a much cheaper brand?

And what makes women buy that $40,000 Gucci crocodile handbag when, functionally, it does the very same thing as a $40 knock-off from Target?

According to my friend, Harlan Bratcher, who has been creating and defining luxury as a C-level executive for labels such as Calvin Klein, Armani and Reed Krakoff, it’s all about emotion.

“We don’t necessarily buy a luxury product because of how it’s made, or even its style, but more so because of how it makes us feel,” says Bratcher. “When you drive that $55,000 car, or carry an Hermès or Gucci handbag, consciously, but even more unconsciously, you feel you have achieved your aspirations, even if that aspiration is as simple as feeling good about yourself.”

As the lead personal shopper for Neiman Marcus in the early 1980s at the beginning of his fashion lifestyle career, Bratcher recalls helping women try on $15,000 gowns, watching them slumping as they looked in the mirror. After spending time getting to know them, and helping them feel beautiful inside and out, suddenly that $15,000 dress was worth even more.

If luxury is defined by how a product makes us feel, as suggested by Bratcher, then is it possible for any brand to become a “luxury,” or something for which consumers are willing to pay a premium?

According to the Merriam Webster dictionary, luxury means:

  • a condition or situation of great comfort, ease and wealth
  • something that is expensive and not necessary
  • something that is helpful or welcome and that is not usually or always available

Per the above definition, its seems a product or brand can call itself “luxury” if it makes consumers feel pampered, extravagant and exclusive.

Bratcher offers a different definition:

“A brand becomes a luxury when it becomes aspirational to the consumer. Aspiration can manifest in many ways, from elevated self-esteem, confidence and sense of self; to a personal statement you believe you deserve to make about yourself.”

While aspiration can traditionally be defined as our hopes, dreams and exquisite goals for life, its connection to luxury is taking on a new meaning in today’s consumer-driven climate. Luxury is not just about exclusive products that one in thousands might own. It is about the experience that elevates the perceived value of the product and brand.

“As CEO of Armani Exchange, my mission was to build a highly relevant experience for our customers that made them feel beautiful, energetic and happy, and in ways that helped them associate those feelings with our brand. One way we did this was to research our customers’ favorite music, and then play it loudly at each of our stores, creating that Friday night dance club feeling. Sales and customer loyalty soared.”

Beyond feeling young, urban and sexy from the purchases we make, today’s consumers are demanding a new sensation: altruism.

Research from both Cone Communications and Edelman shows that more than 80 percent of today’s consumers, from Gen Y to Baby Boomers, choose brands which can show the positive social impact they are having on the world. Aligning with social causes – not just fashion trends and glamorous living – is now becoming an essential part of branding for luxury brands in all categories – from designer apparel and vacation resorts to auction houses like Christie’s.

“Consumers today are seeking actualization in all they do, and they do this by finding purpose in their daily lives, from the deeds they do to the products they purchase, “ says Toby Usnik, Chief Social Responsibility Officer for Christie’s in New York City. “Luxury is now about a bigger brand statement than just the product itself. It’s about shared values, a higher purpose and a sustainable community.”

For Christie’s, Usnik has helped contemporize a 250-year old brand through new initiatives for giving back. This includes the creation of Bid to Save The Earth, a coalition charity auction on behalf of four leading environmental groups: Oceana, Natural Resources Defense Council (NRDC), Central Park Conservancy, and Conservation International. Over three years, this program earned several million dollars to support its causes, and substantially helped to further Christie’s profile as a luxury brand with far-reaching values.

While some might be tempted to up their price, bling their packaging and call their brand ‘Luxury,” the chances for successfully transforming a great brand to a luxury brand are greater if you follow these simple steps.

Create authentic experiences

  • Armani’s nightclub atmosphere was authentic and spot-on for creating a strong dose of the emotions that make us feel powerful, awesome and in a mood to shop.

Tap into feelings that matter

  • While feelings in a nightclub might be fleeting, especially when you wake up the next morning, the overall consistent feelings of belonging and self-esteem you can create with every shopping experience, service interaction, follow-up communications and events are what maintain a brand’s luxury status.

Preserve the Perception

  • Once you’ve broken out as a brand above the cluttered fray, its critical to maintain your sense of luxury. You can do this not just with exclusive experiences, and short product runs for really amazing items, but with your pricing strategies. As Bratcher and Usnik both suggest, lowering your price, or offering discounts, just reprograms the status of your brand and you may never get back the status you once had.

Engage Customers in Sincere Altruism

  • As Usnik says, long gone are the days when a company buys a table at a charity gala or donates here and there. Leading brands are putting a stake in the ground based on their values and communities. They have skin in the game — creating programs that support those values, having their employees volunteer for related non-profits, sharing their platforms with others committed to the same cause. Doing just that made Warby Parker a huge force in the eyewear industry, because its customers’ purchases give free glasses and vision to disadvantaged people globally.

Albeit trite and cliché to say, luxury is still in the eye of the beholder. But now more than ever, it’s in the heart, as well. Building a brand around authentic values and causes that make people feel they are one step closer to actualization, social and personal aspirations, will help elevate your brand in ways much more powerful than you can imagine.

What are the aspirations or hopes you can associate with your brand to secure loyalty and attract high-value customers? You don’t need to open up shop on Fifth Avenue in NYC to succeed. Instead, focus on the dreams, hopes and core values of your customers, and tell your story in a way that makes them want to be a part of it, and pass it on to others.

Bratcher sums it up:

“No one really needs luxury. It’s nonessential. That’s where the dream and mythology come in. And this is why my career has been about anthropology – making dreams for the moment – more than product lines.”

No One Is One-Dimensional

If anyone says to your face “You’re one-dimensional,” you would be rightfully offended by such statement. It would almost sound like “You are so simple that I just figured you out.”

If anyone says to your face “You’re one-dimensional,” you would be rightfully offended by such statement. It would almost sound like “You are so simple that I just figured you out.” Along with that line of thinking, you should be mad at most marketers, as they treat consumers as one-dimensional subjects. Even advanced marketers who claim that they pursue personalized marketing routinely treat customers as if they belong to “1” segment along with millions of other people. Sort of like drones with similar characteristics. Some may title such segments with other names, like “clusters” or “cohorts.” But no matter. That is how personalization works most times, and that is why most consumers are not impressed with so-called personalized messages.

Here is how segments are built through cluster analysis. Unlike regression models, clusters are built without clear “target” (or dependent) variables (refer to “Data Deep Dive: The Art of Targeting”). Considering all available variables, statisticians group the universe with commonly shared characteristics. A common analogy is that they throw spaghetti noodles on the wall, and see which ones stick together. Analysts can control the number of segments and closeness (or “stickiness”) of resultant groups. I have seen major banks grouping their customers into six to seven major segments. Most commercial clustering products by data compilers maintain 50 to 60 segments or cohorts (I am not going to name names here, but I am sure you have heard of most of them). I was personally involved in a project where we divided every town in the U.S. into 108 distinctive clusters using consumer, business and geo-demographic variables. The number of segments may vary greatly, depending on the purpose.

Once distinctive segments are created through a mathematical process, then the real fun begins. The creators get to describe characteristics of each segment in plain English, and group smaller segments into higher-level “super” clusters. Some creative companies name each cluster with whimsical titles or dominant first names of each cluster (for copyright reasons, I wouldn’t use actual names, but again, I’m sure marketers have heard about them). To identify dominating characteristics of people within each cluster, analysts use various measurements to compare them against the whole universe. For instance, if a cluster shows an above-average index of post-college graduates, then they may call it “highly educated.” If analysts see a high index-value of luxury car owners, then they may label the whole cluster with some luxurious-sounding name.

Segmentation is an age-old technique and, of course, it still has its place in marketing. Let me make it clear that using segments for target marketing is much better than not using anything at all. It also provides a common language among various players in marketing, binding clients and vendors together. Marketing agencies, who cannot realistically create an unlimited number of copies, may prepare a set number of creatives for major segments that their clients are targeting. With descriptions of segments in front of them, copywriters may write as if they are talking to the target directly. Surely, writing copy for a “Family-oriented young couple with dual income” would be easier than doing so for some anonymous target.

However, the trouble begins when marketers start using such a “descriptive” tool for targeting purposes. Just because there is a higher-than-average index value of a certain characteristic in a segment, is it justified to treat thousands, or sometimes millions, of people in the target group the same way? Surely, not everyone in the “luxury” segment is about luxury automobiles or vacations. It is just that the cluster that someone happened to have belonged through some statistical process has a higher-than-average concentration of such folks.

Then how do we overcome such shortcomings of a popular method? I suggest we reverse the way we look at the behavioral indices completely. The traditional method defines the clusters first, and then the analysts put descriptions looking at various behavioral and demographic indices. For promotions for specific products or services, they may examine more than 50, sometimes more than a few hundred index values. Only to label everyone in a segment the same way.

Instead, for targeting and personalization, marketers should commission independent models for every type of behavioral or demographic characteristic that may matter for their campaigns. So, instead of using one “luxury segment,” we should build multiple models. For example, for a travel industry like airlines or cruise lines, we may consider the following series of model-based “personas”:

  • Foreign vacationers
  • Luxury vacationers
  • Frequent business travelers
  • Frequent flyers
  • Budget-conscious travelers
  • Family vacationers
  • Travelers with young children
  • Frequent theme park visitors
  • Bargain-seekers
  • Adventure-seekers
  • Wine enthusiasts
  • Gourmets
  • Brand-loyal travelers
  • Point collectors
  • etc.

This way, we can describe “everyone” in the target universe in a multi-dimensional way. Surely, not everyone is about everything. That is why we need a system under which one person may score high in multiple categories at the same time. We all have tendencies to be bargain seekers, but everyone has a different threshold for it (i.e., what length of trouble would you go through for a 10 percent discount?). If you have multiple descriptors for everybody, you can find the most dominant characteristics for one person at a time. Yes, one may have high scores in “luxury vacationers,” “frequent flyers” and “frequent business travelers” models, but which characteristic has the highest score for “him”?

Imagine having assigned scores for these “personas” for everyone. I may score nine out of nine in “frequent flyer” (and that is for certain, as I am writing this on a plane again), score six out of nine in “luxury vacation,” and score two out of nine in “family vacationers” (as my kids are not young anymore). If you have one chance to show me something that resonates with me this second, what would be the offer? Even a machine can decide the outcome with a scoring system like this. Now imagine doing it for millions of people, all customized.

Last month, I wrote that personalization is not an option anymore, and further, marketers should aspire to personalize their messages for most people, most times, through all channels, instead of personalizing only for some people sometimes through some channels (refer to “Road to Personalization”). Because “personas” based on statistical models will not have any missing values, we can achieve that ambitious goal with this technique.

With new modeling techniques and software, this is just a matter of commitment now. We are not operating in the 80s anymore, and it is time to move ahead from simple segmentation methods. Yes, using segments would be much better than no targeting at all. But with a few more tweaks, we can build more than 20 personas in the same time that we would spend for developing segments using a clustering technique, which isn’t exactly cheap even nowadays.

Another downside of a clustering technique is that, once the statistical work is done, it is very difficult to update the formula without changing existing marketing schemas. By nature, segments are very static. It is no secret that even some data compilers chose to stay with old models, as they are afraid of creating inconsistencies with newly updated ones. Some are more than a decade old.

Conversely, it is very easy to update personas, as it is not much different from refitting the models one at a time. And we don’t have to update the whole series every time, either. Just watch out for the ones that do not validate very well over time. With real machine learning techniques around the corner, we can even consider automating the whole process, from model update to deployment of messages through every channel.

The hard part would be imagining the categories of personas, but I suggest starting small with essential categories, and then keep building upon them. Surely, teenage apparel companies would have a very different list than business service companies that sell their services to other businesses. Start with obvious ones, like bargain seekers, high-value customers and specific key product targets.

Connecting personas to actual creatives will require some work in the beginning, too. However, if you plan the categories with set creatives in mind from the get-go, it won’t be so difficult. Again, start small and see how it goes, along with some A/B testing. Ten categories will be plenty for many businesses. But having more than 100 personas won’t take up much space in supporting databases, either. Once the system gets stable, marketers can automate much of the process, as most commercial software can take these personas like any other raw variable.

So, if your marketing team is committed enough to have purchased personalization engines for various channels, get out of the old segmentation method and consider building model-based personas. After all, no one is one-dimensional, and everyone deserves personalized offers and messages in this day of abundant data and machine power. This is not 1984 anymore.