Customer lifetime profitability is one of the holy grails of analytics, and companies are often surprised when they see data that goes against what they assumed was gospel for their business. Like when a bank discovers that its high-income customers aren’t the most profitable. Or the insurance company that extends discount rates to hang on to marginal customers that end up defecting to a low-cost Internet provider anyway.
The question is, how do you know when a customer costs more to keep than to simply let go? There's conventional wisdom, or a sacrosanct rule of business, that the name of the game is expanding and acquiring as many new customers as possible. Analytics is seen as the way forward to cracking open new markets, but analytic tools can also show you where you may be better off closing markets.
Tibco's Brett Stupakevich recently posted an interesting perspective on this role of analytics that goes against the grain. He points out that new analytics technology—embedded within customer relationship management solutions—can scale down your reach to certain customer segments as much as it helps to scale up sales.
Brett provides three key metrics that help determine whether a customer is worth chasing:
- Cost to acquire: “Does a customer’s buying patterns justify the cost to acquire him?” CRM analytics can quickly provide actionable insight from disparate data sources to answer this question.
- Cost to retain: “It might be time to fire one of your customers if the cost to maintain his business—through excessive use of your call center or a record of paying late—exceeds the money he spends on your goods or services.”
- Cost to woo: “CRM analytics can show a marketing department if its campaigns are paying off.”
The bottom line is that by using analytics to unearth unprofitable customers, energy and resources can be spent on segments that are generating most of the revenue. It sounds like sales and marketing 101, but until now, the gut reaction has been to try to keep every customer as long as possible. Data analytics has changed the game.
Joe McKendrick is an author, consultant, blogger and frequent INN contributor specializing in information technology.
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