Vilfredo Pareto, the influential Italian economist from the 19th and early 20th century, showed in a study of Italian land holdings that roughly 80% of the land was held by 20% of the population. Later in the 20th century, that principle became what is commonly called the Pareto Principle – but it’s also well known as the 80/20 rule.
That is, 80% of the sales or profits come from 20% of customers.
This concept jumped to mind while reading research from Bain and Company which said that new marketing technologies available today must have “the foundational goal of knowing who your target customers are, what they’re worth to the ﬁrm and how they behave.”
In “Customer Lifetime Value: A Better Compass to Guide Your Marketing Automation”, Bain analysts Laura Beaudin, Brian Dennehy, and John Grundowski argue that:
“If a customer has a high potential lifetime value, it’s worth pulling out the spending stops to persuade him or her to make a ﬁrst purchase with the brand, which, of course, would likely hurt short-term ROI. Without that perspective, companies might waste money acquiring low-value customers or targeting prospects who are unlikely to make a purchase.”
The Pareto Principle
There’s also a little bit of Jeff Bezos here too. Speaking in Washington recently, Bezos explained that the “secret sauce” to Amazon’s success has been its “obsessive compulsive focus on the customer as opposed to obsession over the competitor.”
Which is what Bain and Company’s Beaudin and her colleagues suggest marketers can do if they “train their machines, metrics, and minds to improve customer lifetime value.”
The authors say a recent study by Bain and Company of almost 500 companies found marketing leaders exhibit the following characteristics which set them apart from the bottom 25% of companies. Leaders are:
- 3.5 times more likely to embed employees in marketing who specifically focus on understanding the customer’s end-to-end experience;
- 1.9 times more likely to align their strategy with customer needs rather than channel needs; and
- 1.9 times more likely to scrutinize customer lifetime value in addition to more traditional last-touch metrics such as ROI, customer acquisition cost and click-through rate.
“Shifting to a customer focus leads to better economics. That ﬁnancial beneﬁt ﬂows largely from creating more promoters among the customer base—people who spend more with the company, stay longer and generate more referrals,” Beaudin and her colleagues say.
How the marketing leaders Bain and Company identified achieve this goal and take advantage of the economic benefits is to break the process “into manageable pieces, and hone skills in three key steps”.
- Build smart, targeted segmentation based on a customer’s overall value;
- Use technology to develop a deeper understanding of customers’ priorities and experience at each step of their relationship with the company, and;
- Make data-informed hypotheses about which technologies to use in order to acquire and retain the customer.
The takeaway from the research is that to generate these market-leading relationships and economic results, companies must use their data and analytic framework to identify who are the high-value customers, define their lifetime value, and use the data to build a profile of their priorities and interests.
Then marketers can decide which media levers they wish to pull. And that too is a key point the authors make.
Marketers are still important, as the whole process can’t be automated.
“Machines alone cannot build strong relationships with target customers; the care and feeding of relationships require human intervention, as the experiences of these companies attest (see Figure 3). Marketing staff will still add value by hypothesising what variables to test and what stories to tell, and the most powerful marketing will bring together the machines, metrics and minds,” they say.
For more granular details of how to follow the steps outlined, you can access the full report from Bain and Company here.
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