Customer Analytics

80% of your sales come from 20% of your customers. As a small business owner, even if you’ve never heard of the Pareto Principle, you know this rule of thumb intuitively. You’re in business largely because of the support of a fraction of your customer base: your best customers.

From a marketing perspective, it makes sense to put in the effort to understand the characteristics and preferences of your best customers for at least two reasons: 1) to continue to provide this group with what they’re looking for and keep them as customers, and 2) to target your marketing efforts toward prospects who resemble your best customers.

By targeting your acquisition marketing through insights into your best customers, you attract customers who are likely to respond to the strengths of your small business and remain loyal to it. Instead of moving random customers up loyalty ladders, you focus instead on getting the right customers, customers who will be loyal from the start.

But, before you can start to understand your best customers, you first need to identify them. And that’s where a simple database marketing tool called recency, frequency, monetary analysis (or RFM) comes in handy.

The Harvard Business Review article by Daniel Yankelovich and David Meer contains some interesting thoughts on the use of market segmentation. Some highlights:

• If properly applied, market segmentation guides companies in tailoring their product and service offerings to the groups most likely to purchase them.
• Psychographics is very weak at predicting likely purchases.
• Segmentation, as currently practiced, takes an excessive interest in consumers’ identities. This distracts marketers from the product features that matter most to current and potential customers of brands and categories.
• Segmentation places too little emphasis on actual consumer behaviour, which is unfortunate because behaviour definitively reveals consumer attitudes and helps predict future business outcomes.
• Practitioners are guilty of an undue absorption in the technical details of devising segmentations. This estranges marketers from the decision makers on whose support their initiatives depend.