If you want to keep your most valuable customers and you want to increase the value of your less valuable customers, how do you know which is which?
Unless you can answer this question you won’t know how to allocate your marketing resources.
You’ll be spending too little on customers that could be more valuable. You won’t be giving your best customers the attention they deserve. You’ll be spending too much on customers that are unlikely to increase their relationship with you.
In Drilling Down, Jim Novo recommends that you manage your customers (or buyers) as a portfolio of assets. Manage your customer assets just like other portfolios you own: stocks, real estate, products, or inventory.
Assets in a portfolio have a current value and an expected value
The assets in a portfolio have a current value. This is the price at which you could sell them today. Just like you could sell any stock in your portfolio at its price on the market today.
Assets also have a potential or expected value. This is the price at which you could sell the assets at some point in the future. Assets in a real estate portfolio tend to go up over time. Assets of machinery or inventory tend to go down.
Your customer (or buyer) base is an asset as well. The assets in your customer portfolio have a Current Value, that is, whatever value the customer has created for the business as of today. For customers the value is primarily the profit from their purchases to date. For buyers who have not yet made a purchase, the value is the cumulative engagement with your material – your website articles, blog posts, email subscriptions, and videos.
The Potential Value from your buyers or customers is the future stream of engagement or profits you expect from the buyer or customer for the duration of their relationship with you.
Current Value + Potential Value = Customer LifeTime Value
As Novo says: “The sum of Current Value and Potential Value is equal to the LifeTime Value of the customer; it’s the Total Value contributed by the customer to your business.”
Since the buyers in your portfolio all have a Current Value and a Potential Value, you can organize them into four groups. Your strategy and spending will vary between these groups.
High Potential Value, High Current Value: Keep these customers
Novo calls the customer assets in the upper right corner your “rocket fuel” customers. Only 10-20% of your customers fit in this category, but they deliver 80-90% of your profit (or in the case of buyers, 80-90% of your leads). These are your best customers. You want to keep them and make them happy. Pay special attention to them.
Low Potential Value, Low Current Value: Should you spend money here?
With the customers in the lower left corner of the quadrant you have the opposite situation, low current and potential value. These are the buyers who accidentally landed on your website or made a one-time purchase. Don’t go out of your way to spend a lot on them. In fact, by lumping them in with the rest of your customers, you’ve probably already invested too much of your marketing resources on them.
Low Potential Value, High Current Value: Grow these customers
In the upper left and the lower right you have customers with a mix of current and potential value. In the upper left are customers who have been good customers at one time but who are spending less with you and who are losing interest. Without programs to help them move to the upper right, they will fall down into the lower left and defect.
High Potential Value, Low Current Value: Grow these customers
Who are these customers? Possibly customers who have spent some money with you, perhaps they are new customers. Yet they have the possibility of spending much more with you. If you can realize this possibility, then they will rise to the upper right corner and become “rocket fuel.” Unlike the retention programs in the upper left, these customers require programs to help them engage further with you and increase the customer value.
By managing your customer assets as a portfolio, you can give each group the treatment that it needs. You can invest more in customers that have more potential, save customers that are losing interest from defecting, and stop wasting resources on customers that have little interest in you.