In 2004, Best Buy received a lot of buzz for exposing its customer segmentation guidelines. CEO, Brad Anderson, said he wanted to get rid of “devil” customers, approximately 20% of Best Buy’s 500 million customers each year. These customers were seen as unprofitable – “loading up on the store’s loss leaders and discounted merchandise.” Best Buy’s “angel and devil” strategy was quickly re-branded as its “Customer-Centricity” model – sounds much better, don’t you think? – aimed at five specific customer segments.
Best Buy, however, isn’t the only retailer to categorize their customers by profit levels – just one of the only ones to expose it publicly. One of the common tools to do this categorization is the Customer Lifetime Value (CLV) model. According to Wikipedia, CLV takes into account the “present value of future cash flows attributed to the customer relationship.” But can this same tool be used for online merchants?
Last year, we used the CLV methodology to look at customers for a popular online subscription-based merchant. The findings were the about the same – approximately 13% of subscribers accounted for 50% of all profits; and about 21% of subscribers were not profitable. But, before you dismiss the 21% of customers as “devils”, think of this:
These “non-profitable” customers:
- Were most “involved” with the website. They logged on more often and took advantage of more features on the website.
- Had the second-longest subscriber length
- Had the highest amount of activity for the subscription service
- Were more likely to be recruited online
And the “angel” customers?
- Engaged in the service the least – in this case, they rented merchandise less (if at all)
- Were the least involved with the website
- Were more likely to subscribe via a brick-and-mortar store
The “angel” customers were basically those that forgot they even had a membership. You’ve done that, haven’t you? Signed up for a gym or tanning membership, and never (or rarely) used it?
And, the non-profitable customers were those that we had hoped to attract in the first place. They were actively involved with the service – of course, that also meant more shipping costs, more help desk calls, more broken merchandise – all of which led to their non-profitable status.
We need the “angel” customers – they account for 50% of our profits, but how do you attract people that are basically blind to the charge hitting their credit card each month? You can’t make service improvements or add more web widgets – they rarely log into the website.
Using Customer Lifetime Value methodology to rank customers of subscription-based services can be misleading. Each business needs to take a close look at their customer segments compared with their business model. Don’t assume that your “angels” are your best customers. You may need to re-think your pricing model – I know, you’re probably laughing, thinking “we’re here to make money.” Yes, but it’s very risky business model to rely on people who have no loyalty to your product or service.
Do you know who your best customers are?