Analysing customer value plays an important role when optimising an online seller’s scheduling and returns policy. However, determining customer value is also just as important for publicity planning.
By Phillip Smith, Country Manager UK at Trusted Shops
Read On:
How big data helps convert customers
How to retain global customers
How to make your customers happy
Below are several methods of customer evaluation that you should know:
When planning marketing, every online seller should consider extremely carefully which target groups he is going to invest his budget in.
In 99 per cent of cases, this group will, of course, be the high-value customers but this is not always the case. This also applies to the focus of both new customer acquisition and the activation and retention of existing customers.
But what criteria should be used to determine the quality of a customer? The traditional mail-order trade has seen the emergence of two fundamental principles, which are also of great significance in e-commerce.
• Real data from the customer history is correlated to the production costs of that customer
• The assessment is carried out on the basis of the expected future revenue from a customer (earning-capacity value).
Customer ratings using CPO
This approach assumes that an online seller incurs costs from advertising expenditure for customer acquisition, activation or retention.
The costs of these campaigns or measures are divided by the number of customers acquired or retained to create the Cost per Order (CPO). This way of looking at customer value is appropriate for the evaluation of
• losses of customers, for example through inadequate materials planning, returns or poor service. In this case, if the online seller wants to win this customer back, it is important to make a comparison with the CPO value at which the lost customer was originally acquired.
• the address database. If an online seller wants to sell his company or take over another, the value of the address database is a real company value. The online seller can use this evaluation, for instance, to determine whether he could acquire these customers himself at the same or lower of cost.
Customer rating on the basis of the CLV
Customer Lifetime Value (CLV) is the term used to designate a customer value analysis, which takes as its starting point the expected revenues from a customer. German mail-order expert Jan Thieme summarises the variables of CLV as follows:
The CLV is the sum of all expected profit margins discounted as of the point of acquisition minus acquisition investments.
This is how you would calculate the CLV of a customer:
The CLV is calculated using the profit margin Dt of the customer the period t and the life expectancy n of a customer as well as the arithmetical interest rate r and the investment in the acquisition of the customer at the start of period 1 (I1). The value I1 corresponds to the CPO.
The CLV should make it possible to allocate an expected sales turnover to each customer. However, as the profit margins are future variables, what often happens in practice is that the mean value of the total customer base, or a part segment thereof, is used.
The graph below clearly indicates this and how the CLV of a customer can be extended through reactivation.
CLV and database marketing
In order to minimise the wastage associated with an advertising campaign, direct marketing requires the careful segmentation of an address database. This applies equally to online and offline channels.
This is because a seller’s own customers vary with regard to creditworthiness and payment behaviour as well as their returns patterns.
Order volume, average order values and the revenue potential of the items sold are just a few more of the distinguishing features that influence this segmentation.
Effective database marketing needs proper segmenting of the database in line with customer value. This might, for instance, take the form of:
• customer segments for the acquisition of new customers with the highest possible CLV
• activation of existing customers with a high CLV
• different customer service priorities. For instance, in the event of supply shortages, new customers might be favoured.
• identifying of customers who still yield a good profit margin in spiteof a high rate of returns.
How do you analyse customer value? Let us know
Speak Your Mind