Businesses tend to think the more customers the better. And mostly that’s true. Certainly, I wouldn’t normally advocate throwing someone out of your retail business, but there are many cases where you don’t want to encourage them to come in the first place. This is the concept of CUSTOMER LIFETIME VALUE (CLV).
The premise behind this concept is that all customers are not created equal. You probably already know this. A customer might come in and buy $300 of merchandise while another might come in, ask lots of questions, take up enormous amounts of your time, quibble about the price, denigrate the quality, and only spend $8.95. The first customer is valuable, while the second customer may represent a net loss to the firm. This is especially true, since the second customer is likely to generate negative word of mouth either by sharing their low opinions of your business or by creating negative opinions among other customers who overhear their negative opinions or because they had a bad experience while your staff were busy with the second customer.
The question is: How do you keep bad customers from doing business with your firm?
There are 2 answers to this question. First, don’t advertise for this type of customer. Second, use yield management (often called revenue management) to discourage them from frequenting your business.
Let’s start with the easy one: yield management. This is a means of charging customers who cost more to service more for the service. An example is casual travelers for an airline. They demand the lowest fares, aren’t experienced so they’re slower stowing their luggage, unlikely to use less costly electronic check-in, and want special services that cost money, like on board movies. In response, airlines charge them for luggage (Spirit is now charging for carry-on luggage too) , headsets, alcoholic beverages, and other amenities. One airline is even charging customers to use the lavatory. This improves the bottom line for the airline and also discourages casual travelers from using additional services that cost the firm money. Your business can do the same. Charge higher fees for customers who buy in smaller quantities, reduce costs to these customers (for instance, eliminate mailing brochures or catalogs), or limit availability of products to them.
The harder task is to not advertise to them in the first place. This is harder because most firms don’t intentionally advertise to bad customers. Despite this, your message may be something that appeals to bad customers more than good ones. Walking the thin line between attracting customers and attracting the wrong ones is a critical skill for successful businesses. I recently worked with a services firm who sought clients from Craig’s listings. He was disappointed because these clients were demanding and negotiated lower fees. By using a free service to solicit bids, it was likely these firms didn’t understand the value of what they sought or even understand what they were asking for. Thus, it was a natural outcome that they would be bad customers.
Underscoring the concept of CLV is knowledge about your customers’ buying behavior and your costs. It is critical to develop an internal marketing information system capable of providing this input into the CLV process. This takes a different kind of marketing person than in years past. Our topic for next week will deal with what skills you should be looking for (or developing) in your marketing staff or consultant.
Meanwhile, please send me your questions or suggestions for future columns.