The Most Valuable Asset
One of the most valuable assets you, as a retailer, have is the relationship between you and your shoppers. Building and maintaining such relationships have become the focus of many functional roles within larger retail organisations because many have started calculating the value of a shopper differently.
The traditional paradigm was to think of immediate sales as a proxy to how much budget can be allocated to marketing and advertising dollars but this paradigm has shifted. We now think of the value of a customer as an entire life cycle and the possibility of future revenues streams.
So how should you think about this?
Before thinking about the calculation methods, you need to lay the groundwork. Do you have a CRM system in place? One that can gather and store reliable transaction data?
If you do, you can start segmenting these shoppers into different clusters. Depending on what you is important to you, this could be done based on their demographic information or perhaps their spending habits.
The last step would be to call/e-mail some of your shoppers in the different segments and ask why they bought from you and not someone else. I know it is tempting to skip this step because it seems like a huge waste of time but this might be the only thing that really matters.
When you speak to your shoppers, ask about their motivations- why were they looking at your products and what would keep them coming back? If you can identify a pattern, you can double down on that strategy. Number-crunching only matters if you are a 100% sure that the metrics you are measuring really matters to your shoppers.
To give an example- say you are a fashion retailer and you are tracking the rise in the number of dresses sold over a three month period. You got all the customer data and you start more email campaigns to engage these shoppers but they don’t come back. Why? Maybe it was because they only need that type of clothes for a holiday trip or perhaps they were only purchasing for a friend. Either way, you would have never known if you didn’t speak to your shoppers.
Shopper Lifetime Value
When you start calculating the shopper lifetime value (LTV), you start realising why understanding your shoppers’ matters. In essence, shopper lifetime value is a function of average spend, the frequency of visit and stage in relationship lifecycle.
- Average Spend– dollar amount spent every visit and the margin you have on the merchandise category
- Frequency of Visit- the number of times per week/ month/ quarter a shopper returns to make a purchase
- Stage in Relationship- whether they are still in the discovery phase and are they still within your target group
- To illustrate this, if you are selling maternity clothes, you have a very short window to engage your shoppers but if you also provide clothes for babies, you can extend that life cycle.
Example of Application:
- A silver tier customer stays with the brand for about 18 months
- She visits once a month
- She spends an average of $70 per visit
- Or $80 the first six months
- $70 the next six months and
- $60 the last six months
- A discount rate of 0% (just to make calculation easy)
This would mean that this shopper is worth 18*$70 = $1,260 to you.
Why it matters
Cost of acquisition
- With the knowledge that this shopper is worth $1260 to you, you can spend $200 on advertising to acquire this shopper and you will make it make in ❤ months
Extending the life cycle
- If an average of 18-month life cycle gives you $1260, how much is it now worth to you to double it? Or modestly increase that by three months.
- If an angry customer wants to return $70, you might just want to accept it if it could extend the life cycle by >1 months
Increasing the average spend
- With an average spend of $70, how much does this impact your bottom line if you can increase that to $100?
- After a margin analysis, how much resource can you deploy to increase that average spend?
Some extra variables…
- Lower Price Sensitivities
- Resistance to counter offers from competitors
- Word of mouth (or other virality effects)
- Trends or actions taken that lead to premature exit in the life cycle
Investments into Customer Loyalty
There are multiple proxies that one can use to gauge customer loyalty- repeat patronage, the percentage of budget allocation, amount of switching or purchase likelihood. If you are just starting up, there is a good chance that you don’t have the ability to track all these data points.
Start with the one that you can- repeat patronage.
The easiest way to do this is to run a correlation on transactional patterns to see how often the average shopper repeats versus how often the top 10% of shoppers repeat. The repeat frequency should differ across merchandise categories- e.g. groceries should have a higher frequency as compared to textbooks.
Now that you have a rough idea of the frequency, is it good enough for you? If not keep reading…
Investments into Customer Satisfaction
For this particular purpose, given that shoppers have already bought something, it would be safe to assume that you should be focusing your attention on the post-purchase experience.
- Did your product follow-through on its promise?
- Did it align with your brand?
- How did it make the shopper feel?
The main reason that shoppers become unsatisfied is because there was a dissonance between what they expected and what actually occurred. Even if the execution is sub-optimal, if shoppers knew about it beforehand, at least they have a choice before making that purchase
Take the example of ordering something online. If you know the likely delivery time is between 7-14 days, don’t promise a 7 day delivery time. We all have some experience buying something online so we know this feels- don’t make your shoppers have to go through that.
The easiest way to address this is to look through all the collaterals you have. Was there a time whereby you over-promised? If you did, it is time to correct it. I know you are worried about the immediate impact it might have on sales, but think of the longer impact. Some may forgive you but the vast majority won’t react well and they will likely never trust you again.
Analysing the Customer Relationship
With a proper CRM system in place, you can start thinking about different options to segment your shoppers. There are many variables to choose from, to give some examples:
- Age, Gender
- Purchasing Amount
- Price Elasticity
- Product Categories
- Average Time Spent in Store
- Receptiveness towards Promotions
- Inbound from Google/ Twitter/ Facebook
With these segmentations, you can…
- Identify differences in receptiveness towards promotions
- Price products differently depending on local context
- Offer services to those who spend more
- Reach out to shoppers on the mediums that they are the most receptive
- Recommend merchandise based on what they bought before
Shoppers are the lifeline of your business- treasure them. In order to engage them, you first need to understand them.
Given how easy it is to collect and analyse shopper data, if you are not doing it, your competitors will. In the long run, your shoppers are going to appreciate them more because your competitors are reaching out to them through the channels that your shoppers are on and recommending products them products that they actually want.
If you follow through this post, you have a rough estimate of the value of each shopper. Can you afford to lose her?