The 3 most important factors in determining the value of your customer base
The value of your customer base says a lot about the financial health of your business. But even more importantly: this value helps you make substantiated choices in order to increase the revenue from your existing customers or to expand your customer base. But how do you determine the value of your customer base? Below you’ll read which insights you need for this.
1. The number of active, passive and ex-customers
In my last blog, I explained that you can only carry out substantiated (marketing) actions if you have insight into the big picture of your customer base. An important first step towards seeing this big picture is charting the number of active and passive customers in your database. Do you for instance know how many active customers there are in your customer base? And how many customers haven’t made a purchase in a while?
We define an active customer as a customer who recently made a new purchase. Whether you consider a customer active is entirely dependent on the industry in which you operate and the frequency with which your goods or services are purchased. Customers return to a bakery more frequently than a car dealer.
In determining the number of active customers, it could be a useful addition to make a distinction between different kinds of products. For example, a baker can distinguish between bread – something he sells to the same customer several times a week – and a birthday cake, which a customer would at most purchase a few times a year.
Passive customers are those who haven’t made a purchase in a while and who therefore aren’t as reliable. Still, you can often easily make them more loyal customers with targeted measures.
The number of ex-customers is the ‘waste bin’ of customers: these are customers who have not made a purchase in a long time. These customers no longer need your product, or a competitor offered them better conditions.
2. The revenue per customer segment
A second aspect which allows you to determine the value of your customer base is the revenue for which a customer or customer segment is responsible. You do this by dividing your customers into large, average and small purchasers. This shows you which part of your customers or customer segment is responsible for the largest share of your revenue. A common proportion is that roughly 20% of your customer base is responsible for 80% of your revenue. This proportion indicates the best way to treat your customers. In this case, you’d want to pamper your most important group of customers: a message on their birthday, invitations to exclusive events, a fixed contact person, regular discounts, etc. This seems excessive, but in reality, these measures are effective. It’s important to keep an eye on the development of these customer segments. If you for instance see a number of your large customers leave, this is more worrying than a similar decrease in small customers. Not every customer is equally essentially to the survival of your customers.
On the other hand, a situation in which 10% of your customers is responsible for 90% of revenue isn’t ideal either. The chance that an essential share of revenue is lost due to one top customer leaving is very significant in this case.
A large base of smaller customers means a reasonable spread of risk: customers can leave without hugely affecting your overall revenue. The disadvantage of a lower proportion, such as 50/50, is that it’s harder to determine a target group to pamper in order to achieve extraordinary revenue or for whom you could develop new products.
3. Extraordinary expenses in sales and marketing
If you would like a complete picture of the value of your customer base, you should also map the costs of the marketing and sales activities you undertake for customer acquisition and retention. It’s important to include these expenses in determining the value of the customer base: it’s fairly normal that new customers only cost money in the beginning, but there must be a certain recovery period for this. So, don’t be startled if you see these expenses lead to a negative result in the first year. In the following years, the expenses will decrease as customers remain for longer. As such, it’s about keeping the multi-year plan in mind.
An example: Your company succeeds in acquiring new customers by raffling a car every year. Unfortunately, this campaign is attracting less and less support. You therefore decide to cancel the campaign and replace it with a different one. You know that you’ll lose a lot of existing customers because of this – they remained loyal to you because of the annual raffle. But through targeted sales efforts, you’re convinced that your expertise will convince new customers. This example as such represents a customer base with customers from whom you will virtually never recover the expenses. It could lead to more active customers, but it’s not good for profits. These customers will have a very long (unrealistic) recovery period.
The value from your customer base can thus be mapped from multiple angles: from the perspective of quantity (the number of active customers), quality (how much revenue do these customers generate) and expenses (how much do these customers cost you). Only with these insights can you further expand your customer base and help your company grow.