> Chapter 3
Customer Value Optimization Methodology
Table of Contents
Welcome to our inspection of the Customer Value Optimization methodology.
What is Customer Value Optimization
It’s an ongoing process that starts from analyzing the customer database and ends with improving acquisition strategies, branding, messaging and website performance.
The Customer Value Optimization Methodology
The Customer Value methodology will completely change the way you look at your business. However, it pays off in the long-term.
Step 1. Change the way your company defines “success”
Each company has its own ways in which they measure “success” but the key here is to realize that growth or success does not mean checking growth generating factors on a daily basis.
Your revenue might look fantastic in the profit and loss statement, but if you do not pay close attention to your customers’ feedback by doing qualitative research and to your customer retention KPIs through quantitative research, you are missing out on opportunities that can benefit your business in the long run.
One important aspect to remember is that customer value is a company-wide measure of success and not a marketing KPI.
If you want to fully understand customer value, you need to determine the impact of customer retention on your business and teach its importance to your employees as well (try an interactive workshop, for example). After all, they are the ones dealing with the customers and they should always be on board with the changes in company culture.
Step 2. Monitor CLV and the KPIs that are affecting it
Customer value optimization is a process that starts first by analyzing the customers’ performance and coming up with insights to improve the entire Customer Journey.
The Customer Journey consists of several stages:
- Purchase & Reception
Online businesses monitor the first step of the funnel too much and too little the bottom of the funnel.
When in fact, if you focus on retention and advocacy, you can easily improve the other stages as well and create an organic flow.
Customer Lifetime Value is the metric that monitors the performance of the last stages: Retention & Advocacy, but not only. It also reflects the health of the business and the performance of the other stages.
Customer (Lifetime) Value is of course influenced by some factors that will become your KPIs:
- Customer Experience (including here product reviews, the Net Promoter Score or the Customer Effort Score)
- Customer Retention Rate
- The RFM distribution
- The Margin
- Cohort stickiness
- New Customer Stickiness
In no particular order, let’s analyze them a bit.
It’s essential to segment your customers to discover your valuable customers and how they transform over time. The result is building and targeting specific clusters of customers with more relevance to their particular behavior. In conclusion, you can create increased loyalty (which means better customer lifetime value) and, of course, higher rates of response.
Based on the Average Days Between Transactions and the customer distribution for Recency, Frequency & Monetary values, you adjust and decide over the number, score levels (from 1-5) and components of the RFM Groups.
The RFM segmentation can split your customers into:
- Soulmates: these are your most valuable customers. They bought the most often and have spent the most in your online shop. Their latest order has been recently placed.
- Lovers: these are active customers who have placed a couple of orders, the last one having been placed recently.
- New Passion: these customers placed 1-2 orders of average value.
- Flirting: these customers are active on and off. They’ve placed a couple of orders of high value orders, but are inconsistent.
- Potential Lovers: they’re active customers who placed a couple of high value orders. They have the potential to become Lovers.
- Platonic Friend: these customers are active, but placing very few orders of small or medium value.
- About to Dump You: these are inactive customers, having placed their last order more than 6 months ago.
- Don Juan: these customers have placed only one order but of high-value
- Ex-lovers: these are your former True Lovers or Soulmates, who have abandoned your website and are now inactive. You probably don’t know why they stopped buying.
- Apprentice: these are the new customers who just placed their first order
- Break-up: these customers are inactive, they hunt promotions, hitting your margin. They used to place low-value orders.
RFM segmentation use case
You are currently looking at your customers as a big group that has the same characteristics and you are treating them like this. Imagine you have a group of customers who are about to forget your brand, but still, you have the last chance to reengage them. RFM helps you to determine this group of customers and ultimately to send them a re-engagement campaign.
Moving even further, an RFM analysis reveals customer anomalies that will allow eCommerce managers to understand the most important groups of customers when they balance the customer acquisition cost with the margin they generate.
Many eCommerce owners realize after applying RFM segmentation that the Pareto Principle applies to their customer distribution: 20% of their repeat customers bring 80% of their margin which makes you wonder what happened to the other customers?
At first glance, customer experience might seem difficult to be correctly measured. However, there are some KPIs that can provide you enough clarity over your store performance.
- Product Reviews – Keep an eye on what people say about your products and create a habit for monitoring this.
- Product Return – Watch out for a high product return rate, as this can be translated as a problem with your products or insufficient information about them.
- Resolution rate – This determines how effective your support in resolving customer problems is.
- Net Promoter Score – Deliver an NPS survey pre- and post-delivery and you’ll be able to determine whether your customers are satisfied or not with your product or service.
- Customer Effort Score – This score will show how hard it is for a customer to use the product, find information or solve a problem.
Customer Retention Rate
The customer retention rate calculates the percentage of customers with more than 1 order out of the total customer base. Calculating your retention rate periodically will always tell you if you are doing a good job of nurturing your customers and targeting the right people in your campaigns.
Customer retention rate use case
This graph specifically shows you an increase over time of the Retention Rate from September 2019 to September 2020. During this period, customers returned and were convinced to place at least 1 more order.
New Customers stickiness
By analyzing your cohorts, you will discover what campaigns brought you repeat customers over time or just one-time purchases. It’s an essential report for customer acquisition that every eCommerce should monitor.
Cohort Analysis use case
Cohort analysis is an ideal report to figure out which type of campaigns are most profitable. Taking the graph above as an example, you can see that a campaign launched in September 2019 managed to retain only 0.05% of the customers, meaning that only 0,05% of people who bought thanks to that campaign returned to your store to buy again during 1 year. Comparing this campaign to the one launched in December 2019, you will see a greater retention rate (0.08%) in September 2020.
The take from this is to analyze the targeting strategies you used in those campaigns and go for those who brought you more repeat customers.
Last week, we were talking about part 1 of the CVO methodology, where we presented steps 1 and 2:
Let’s continue with the second part from the CVO methodology.
Step 3. Carry out qualitative research for each RFM group
Once your RFM groups are done, you have a better understanding of how your customers are distributed. However, you soon discover that it isn’t clear why some of them bring so much value while some of them did not buy from you after the first order and so on.
This is where Qualitative Research comes into play. This process reveals the reasoning behind buying and the barriers in relation to products and services.
For each RFM group, there is a set of questions you can address: such as NPS, barriers, demographics, reasons to buy, reasons for not returning and other custom questions based on the business case and goals.
On one hand, you can send the surveys via email. On the other hand, for smaller RFM groups, you can choose phone interviews. The NPS scores are sent separate from all the other questions, for on-going monitoring.
Step 4. Find customer anomalies
After you gathered insights from the previous step, it’s time to look at other parts of the story to spot gaps and anomalies.
Anomalies will give you hints of what differentiates a certain group from the others and allows you to discover toxic brands or categories, cities with loyal customers and so on.
Step 5. Find your ICP by doing RFM segmentation and analysis
After introducing the RFM model and discovering your best customers, you should next identify your ICP (Ideal Customer Profile) after mixing the quantitative and qualitative data you collected, along with the buying patterns that are revealed while performing the RFM analysis.
The ICP should include the following information:
- Who the customers are (location, gender, age)
- When the customers buy (their buying habits)
- What the customers buy (product assortment anomalies)
- What keeps the customers coming back (their reasons and barriers)
- What the customers need further (perform qualitative research)
Step 6. Optimize Customer Journey Mapping
Armed with so many insights, you can finally look at your business and marketing goals, and analyze your Customer Journey by mapping the touchpoints as they are right now, every interaction that a customer has with your business. Find out what is working and what is not.
Here is a depiction of the customer journey map:
Last week, we were talking about part 2 of the CVO methodology, where we presented steps 3-6:
- Step 3. Carry out qualitative research for each RFM group
- Step 4. Find customer anomalies
- Step 5. Find your ICP by doing RFM segmentation and analysis
- Step 6. Optimize Customer Journey Mapping
Let’s continue with part three and the last one from the CVO methodology.
Step 7. Developing the retention strategy
Once you manage to map all the touchpoints and characteristics, it’s time to create the customer journey to-be, as you want to happen.
By applying the ideal customer findings across the entire journey, you then create an infinite loop that – almost on autopilot – drives conversions and supports repeat orders.
The best tactics to implement include:
- Building better nurturing campaigns (email, ads, SMS, website personalization)
- Acquiring more customers like the ICP (custom and lookalike audiences)
- Creating a better product assortment
- Providing better Customer service for the best customers
In the first phase, your potential customer discovers their needs or runs into an ad that makes them realize that they have a need. Your purpose is to target those lookalike audiences of your ICP and market the needs your product can cover.
The research phase determines the creation of choice-reduction campaigns, positioning campaigns and re-engaging campaigns. The preferred channels to be used are similar to the ones you use in the need phase, but you can now add email marketing, forums or comparison platforms.
In the third phase (Select product), you should be prepared to generate back in stock campaigns, browse recovery campaigns, promotions and lapsed purchases, all through the same channels as before.
The purchase phase presents new horizons to check – the order status, the Thank You page and NPS insights – and to prepare cart abandonment campaigns. In this situation, the marketing, fulfillment and customer service departments should join forces and implement these activities over email, SMS, phone and ads.
The fifth phase (Receive) is all about customer satisfaction. The channels to be used for marketing activities are email, SMS and phone, to make sure everything is in place and the customer’s needs and wants are met.
In the product use phase, upsell campaigns, together with review, educational materials and NPS campaigns are the proper methods to implement. Again, you can use email, SMS, phone and ads.
Customer retention is most evident in the seventh phase, which is the maintenance of your customers. Be sure to generate nurturing and service campaigns, reactivation and prevention campaigns and even birthday and anniversary campaigns. The marketing and customer service departments must work hand in hand to communicate with the customers via email, company website, social media and offline stores.
The last phase is the summit of your customer journey, where activities like referral campaigns can help you evaluate the interest of your customers and their willingness to spread the word about your products and brand. Email, website and social media are still the best channels to tackle in this situation.
Step 8. Ongoing optimization
At the end of a Customer Value Optimization journey and thorough analysis, constant improvement is the only thing that should be on a company’s mind, because CVO is an evergreen process on the road to reaching goals and milestones.
In short, the following points are the next steps to consider for long term growth:
- Loyalty programs
- Referral programs
- Customer acquisition
- Continuous cohort A/B testing
- Website experimentation
- Email orchestration
Step 9. Build ongoing personalization campaigns across all channels
Ongoing personalization keeps the customer engaged not only on the website, but in other mediums like social media, email, SMS, in search engines and other visited websites where they are targeted.
The more valuable the customer, the bigger efforts in making the experience unique. Make sure you remember the RFM groups to continuously segment your customers every time you are performing personalization.
For example, a valuable True Lover customer:
- receives access to a new range of products earlier than the rest
- is gifted with limited edition products catered to their taste
- is invited to special events
In general, ongoing personalization should include special treatments via email, ads, website, SMS, special product delivery, personalized offers with custom audiences, welcome screens and special customer support.
Ongoing personalization will allow for each individual customer to have a completely unique and personal experience on an eCommerce website, increasing the likelihood of them converting. The aim is to both make the experience unique and entice via offers built through the loyalty program.
Check out our next chapter where we’re posing a question and an answer to why you need Customer Value Optimization!
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