For my 250th blog, I thought I would write about one of the more accessible 1:1 Marketing strategies, that being Lifetime Value modeling. Under the right conditions for a large organization, Lifetime Value Models can be extremely valuable. And, if you understand the principles, you can simplify this method of evaluating your clients/patients so you can grow and refine your business all at the same time.
The basic principle here is the recognition that each customer is more than a transactional value. So many times we get caught up in cash flow that we don’t take time to look at the big picture, where we can begin to see a customer for the total value they are worth to your business in a lifetime. This includes the transactions they make with you and the referrals they bring to you. If you set up your data management properly and take the time to sort and examine your data, then you can determine who has been of the most value. From there, you can look for similar characteristics and use that profile to seek out customers who are of higher value.
That is a basic application of Lifetime Value. A more sophisticated way of using this strategy that can affect the entire trajectory of your business is to use this method to eliminate the low value customers from taking up your time and resources. In a great book on 1:1 Marketing, Enterprise: One-to-One, they make reference to the Below Zero customer (BZs) who actually cost you money. The following method of marketing helps you identify and eliminate the BZs as well as stabilizes your business for long-term success.
Say you have 100 customers. You divide them into 5 groups of 20, ranking them 1-100 in terms of how much they have spent with you for as long as you have been in business. Then, if you can quantify who referred who, add the value of that referral to the the referring party’s value. This will give you five groups (quintiles) that list all 100 customers in order of the value they have yielded with a gross value, grouped into 5 groups of 20. Now graph the quintiles according to the percentage of the total value of all the customers combined..
The first quintile will have the greatest percentage of the total value and will therefore be the highest on the graph. The second will likely be the next highest but will likely be a significant step lower than the first. Same with the third. The fourth and the fifth will likely be much lower. Now, here is where the business stabilizing effect comes in: Our goal is to equalize the percentage of value in each quintile.
Think about what this means. If you have more customers with higher value, the total value will be distributed more evenly across your quintiles. Seeing your customer value like this has the tendency to make you realize how much you rely on a core few for your business’ survival. It is great motivator to broaden your base of higher value relationships.
Think of the strategies needed to do this. If you identified people in Quintile 2 and 3 that are good customers but could be better if you were able to sell them more value, focusing on improving their value would redistribute the percentages across the model. In doing this, you are not devaluing your leading value customers, you are just focusing on an area of improvement that stregthens your entire model. By simultaneously doing this and identifying your BZs and eliminating them from your customer base, you can achieve a more evenly distributed value model.
This is not a strategy that can occur over night. It is a long-term process but working the process keeps you focused in many ways on things that can make your business healthy. If you have any questions about Lifetime Value Modeling or 1:1 Marketing, please email me at donald@dogstarmedia.com.
