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Marketers like you and I know that every single sale adds up and counts towards the success of a business. Yes, every drop matters. However, is every drop equally important for the business?

Customers come in various shapes and sizes. Bargain hunters shop only when you have a sale going on. Coupon clippers track every promotion that you release obsessively and combine every possible coupon to maximize their savings. Impulsive shoppers walk by your store, spot something interesting and spend a neat sum on just a whim. Regular customers shop with you as a matter of choice, not driven by the temptation of a sale or a passing fancy.

Which type of customer would you focus on, if you were the business owner?

The regular shoppers would be my long term bet.

How to Identify Your Most Valuable Customers

This is a fundamental question that sets the stage for a successful business. Once you know who your most valuable customers are, you can then focus on providing this segment with an experience that will keep them coming back over and over again.

You may now argue that, as a business owner, you’d want to offer great service to each and every customer who walks through your doors. I beg to disagree.

While it’s important to offer good service and user experiences to all customers, customers who have the potential to become long-term, profitable partners for your business deserve extra special treatment.

Besides, a business would be stretched to its breaking point by trying to offer the ultimate in customer care to every single customer. Even the brands that are leaders in customer care like the Marriott Group of Hotels or Zappos.com offer differentiated service levels to customers based on the segment they belong to.

So, we agree that we need to identify our valuable customers so we can offer them an extra special experience with us. This is where our troubles start.

Research shows that 56% of marketers have no clue who their most valuable customers are. Another study by Loyalty 360 and Acxiom showed similar findings. Even though a large proportion of businesses recognize the importance of identifying their valuable customers and treating them differently, very few actually end up doing so.

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No wonder marketers around the world crib about fleeting customer loyalties and lack of brand stickiness. If you don’t even know who your star customers are, let alone treat them special, you can’t expect to be their brand of choice.

There are different variables that can be used to measure the value of a customer to a business.

An ideal customer is not price sensitive, does not cost too much to acquire, is not very high maintenance, shops with you frequently, has a decent average order value and refers friends and family to buy from you.

While this picture seems too good to be true, every business has users that fit this description in varying degrees. Two of the most popular methods used to identify these diamonds in the rough are:

  1. The RFM Method
  2. Customer Lifetime Value

The RFM Method

‘RFM’ stands for ‘Recency, Frequency and Monetary value’ in this method of identifying customers that deserve your undivided attention.

The RFM method segments customers based on how recently a customer shopped with you, how often she shops with you and how much does she spend each time she shops.

You need to set scoring levels for recency, frequency and monetary value in order to grade each customer and assess their individual value to your business. These scoring levels can be on a scale of 1 to 3, 1 to 5, or 1 to 10 – whatever you think works best for your business. My advice here would be to go with a median scoring chart, to avoid the number of segments from getting out of hand.

Let’s understand this with an example.

My scoring charts for R, F and M variables are on a scale of 1 to 3, where 1 is the poorest score and 3 is the highest. A customer who shopped with me last month gets a score of 3 for recency while someone who shopped 6 months ago gets a 1 for recency. Someone who shopped 6 times in the last year gets a 3 for frequency, while one who shopped just once in the whole of last year gets a 1.

The logic here is that customers that have the highest combined R, F and M scores are your brightest stars who deserve all your care and extra attention.

The RFM method is a simple, tried and tested method that lets you zero in on your valuable customers. Studies have shown that customers who score highly in the RFM metrics are the ones who tend to stick around longer with a company and are also more profitable for the business compared to others.

Customer Lifetime Value

The Customer Lifetime Value method tries to calculate the profit that your business will make from a particular customer or segment of customers during their entire relationship with your business.

The CLTV method looks at customers’ average spends with your business and their frequency of purchase as important factors in the calculation. However, this method also looks at what it costs to acquire the customer, the cost of servicing the customer, your average profit margin and average retention rate.

In a simplified form,

Customer Lifetime Value=(Average Order Value per Customer) x (Number of Orders per Year) x (Customer Retention Rate) – (Cost of Acquiring the Customer)

Harvard Business School’s Customer Lifetime Value Calculator is a quick tool that you can use to determine CLTV for your business in a jiffy.

While the final choice of which method to go with rests with you and the specific constraints of your business, CLTV does seem to have an edge over RFM and other methods of identifying your start customers.

Researchers R. Venkatesan and V. Kumar from the University of Connecticut found that Customer Lifetime Value (CLTV) trumps nearly all other variables used to measure a customer’s value to the business. They found that customers segmented based on their CLTV tend to be more profitable in the long run.

Retaining Your Most Valuable Customers

So, now that you’ve discovered the customers who make your world go round and are oxygen to the survival of your business. What next?

Next, you embark on a journey to build a meaningful relationship with these customers who mean so much to your business.

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Image source: The Curious Brain

Communicate regularly

A customer may be a regular at your store, may spend huge amounts with your each time he shops too. However, staying top of mind is still a huge priority. Remember, your business does not operate in isolation. There are umpteen competitors out there waiting to steal your star customers away. Avoid the ‘out of sight, out of mind’ phenomenon by keeping in touch with these customers using the medium of their choice – email, SMS, your blog, social media, direct mail – whatever works.

Communicate even when it’s not about you

No relationship is built on mere monetary consideration. A customer needs to really connect with your brand; he needs to know that you are thinking of him without asking him to buy some new product or the other – that is the foundation of relationship marketing. Reach out to customers on their birthdays, anniversaries and other times of the year that are important to them and tell them how you value their patronage.

Give them special benefits that other don’t get

Just saying that a particular customer is special does not help the customer in any way. Demonstrate how special a particular customer or customer segment is through your actions. Offer them benefits that a normal customer might not be able to enjoy, such as a table by the window even when they show up without reservation, free shipping on all purchases with no minimum amount, or direct access to a human with zero wait time when they call up your customer care.

Dish out partner perks

Go one step beyond. Your customer is not just your customer alone. She consumes hundreds of different products and services in the course of an average day. Show your customer how much you care by tying up with like-minded brands that your top customers prefer and offer them special discounts or privileges when they shop with these partners. For example, you could cater to high value customers’ convenience with unique payment options like bitcoin on your ecommerce site or Apple Pay in your physical store.

To reduce the cost to your own marketing budgets, work out these privileges as a barter deals with partner brands, where their top customers may enjoy exclusive treatment with your company and vice versa.

Build a “best of the best” community

Who does not like feeling special? Top dollar customers are no exception. Create clubs or communities that bring together these valuable customers and offer them a feeling of being a part of something exclusive. Besides offering a sense of closeness to your brand, these communities of loyal customers could act as a common meeting ground for customers to build relationships with each other.

Remember, relationship marketing is a continual process. You can’t just go halfway, get bored or too stretched for time (or resources) and give up. Invest your efforts in your valuable customers. They’re the reason your business still exists.

Closing Thoughts

We’ve all heard of Pareto’s Principle that talks about 20% of your customers being responsible for 80% of your revenue. While the ratios may vary from business to business, this fundamental business principle has proven to be as universal as the principles of gravitation in physics.

So, stop spreading yourself too thin. Identify your star customers and spend that extra TLC on pampering them into becoming lifelong assets for your business.

Rohan Ayyar works for E2M, a premium digital marketing firm specializing in content strategy, web analytics and conversion rate optimization for startups. His posts are featured on major online marketing blogs such as Moz, Search Engine Journal and Social Media Today. Rohan hangs out round the clock on Twitter @searchrook – hit him up any time for a quick chat.