“Describe your most valuable customer (MVC).”
Even the most savvy fashion executives will begin by touting metrics surrounding recency of purchase or loyalty status. Closely followed by frequency of purchase, with that coveted shopper set who has bought more than eight or 10 times firmly holding the executive’s trophy for MVC.
“Yes, but who is your most profitable customer?” The discussion will most likely shift toward lifetime value versus cost of acquisition. There may be a discussion of multiple channel purchases or return patterns, but suddenly the “greatest of all time” is much more challenging to pinpoint.
The reality is that true profitability at the customer level has become incredibly complex to understand in this cross-channel-shopping, mobile-first, return-anywhere era of retail. Certainly, some of your longest-term shoppers and most frequent buyers are your core, profitable customers who will continue to build your company’s adoption and financial success for years to come. These loyal brand advocates, if properly understood and engaged, will be instrumental to informing what success looks like as a truly customer-centric organization.
However, a portion of those ever-so-loyal customers are also those who have become accustomed to purchasing with a discount, have been trained to wait to shop during your well-established seasonal sale pattern and without a doubt, expect free and expedited shipping. When you dig a bit deeper, you may even learn that there is a subsegment of those loyal customers who are in fact frequent returners, nimbly stack your promotions and take advantage of mismatched prices and policies across your web, mobile and store channels.
For many retailers who do not have the connected data, data scientists and are strapped for time to investigate, this subset of customers look like probable MVCs. But with each passing week in retail, it’s essential to correctly identify, understand and take action on every customer type quickly.
Dr. Peter Fader, professor of marketing at the Wharton School of Business at University of Pennsylvania, and codirector of the Wharton Customer Analytics Initiative, takes a strong stance on this subject. “Customer centricity is a strategy to fundamentally align a company’s products and services with the wants and needs of its most valuable customers. That strategy has a specific aim: more profits for the long term. Not all customers are created equal. Not all customers deserve your company’s best efforts. Because in the world of customer centricity, there are the good customers and then there is everybody else.”
Customer Centricity: Focus on the Right Customers for Strategic Advantage
So, who holds the MVC trophy in North American retail?
The DynamicAction Retail Index, a study of more than $8 billion in consumer transactions, indicates that thus far in 2018 in North America, it is neither new shoppers nor the longest-term loyal buyers who are driving the greatest profitability. The most profitable group of customers in 2018 is actually the second-to-fifth-time buyers. This group has proven to be 3 percent more profitable than first-time buyers this year and 15 percent more profitable than shoppers buying more than 11 times.
Ideally, in a customer-guided and data-led business, each Monday morning meeting would begin with a candid discussion of what customers want and how they are interacting with the brand, rather than the minutia of what did or did not sell. But, how does an organization radically shift their mind-set to digitize the business, with a focus on customer and profitability at the core of decision-making?
And there’s still no “I” in “team.”
If you’ve read it once, you’ve read it a thousand times. But, the reality is: removing silos and aligning the organization around a common mind-set and shared goals is paramount to creating remarkable experiences for (and selling more profitably to) your customers. Customer centricity is not the responsibility of any single department. It is not solely CRM or the customer insights team’s job to understand the customer. Being customer-centric ultimately requires a deep commitment to coordination across design, production, allocation, merchandising, planning, marketing, customer insight, fulfillment, etc.
Clearly a healthy, customer-centric organization focuses on designing product the customer desires, producing the ideal amount to satisfy those desires and/or drive scarcity, allocating it precisely where customers want to purchase, merchandising it profitability, marketing it to the appropriate customers and delivering the expected in-store or shipping experience. Yet, because profitability can be lost at any of these stages and customers can be disappointed at any of these points, forward-thinking retailers need to rely on regular, customer-centric and data-driven conversations across all areas of the business, aligned around common goals. Furthermore, in this new retail environment, with expectations from customers heightening daily, an organization’s focus can no longer be solely stacking profitable products, but rather attracting and keeping profitable customers — true MVCs.
Many thriving retail organizations are shifting from measuring customer value centered on revenue to centering it on potential profitability. However, this takes a connected organization where new metrics derived from customer data point to fast action. Just a few of the metrics being utilized in this new operating mind-set include:
• Profitability by customer recency and frequency
• Count and attributes of new and retained customers needed to make profit goals
• Percentage of negative net profit customers (accounting for promotional abuse, returns, etc., the percentage of active customers in your base that do not generate profit)
• Profitability by key customer attributes (e.g. loyalty status, retailer credit card holder, gender, age, etc.)
• Repurchase risk ratio (e.g. customers who you would have expected to purchase again by now, but haven’t)
• Profitability by customer’s first purchase, by category, brand and product
Executing through this lens will successfully deliver a deeper understanding of how to identify and leverage addictive products and brands, utilize the proper mix of channels, personalize at every step of the buying process and create customer-informed promotions that won’t negatively impact the bottom line — from curation to exclusives, sampling to styling.
The changing retail economics, shifting customer behaviors, rapid technology advancements, exploding amounts of data to consume and act upon and intense pressure of Amazon-level expectations require a new operating mind-set. Brands and retailers getting this right and growing profitably are those with an organizational passion around understanding the customer and operating with data-backed insights that allow them to identify, understand, delight and multiply their MVCs.
Sarah Engel is the chief marketing officer at DynamicAction.
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