Our Thinking

The value of target marketing your very best customers

By Seth Hirsch. Posted in Insight

June 18, 2014

If you work in a sales-driven environment, you may have heard the 80/20 rule. That rule says that 80 percent of your business comes from 20 percent of your customers.

That statistic may not be entirely accurate in retail – those who work in the industry might argue it’s more like 70/30 – but the point is well made, nonetheless. A retailer’s most frequent and most loyal customers have the biggest impact on the success of the company. It’s therefore crucial to plan business strategies around their spending habits.

To better understand the opportunity that a retailer’s top customers represent, consider the following numbers. (But take your time reading this — there’s a lot of math to process.)

Let’s say a business conducts a study and finds that 20 percent of its customers represent 50 percent of its business. (This ratio would be common for many large American retailers.) If the yearly value of that business’s sales is $100 million, then those in the top-20-percent customer group are worth a whopping $50 million.

Now let’s say that top-20-percent customer base represents 50,000 people. That would mean each person represents $1,000 in spending.

Yet, if traditional spending patterns hold true for this retailer, 60 percent of those in the top-20 group (or 30,000 people) will drop their spending over the next year by 50 percent. In other words, 30,000 people will reduce their spending from $1,000 to about $500 from one year to the next.

Now, to find out how much money the company is at risk of losing, simply multiply 30,000 by $500 (the value that each person is expected to reduce their spending by). You’ll find that the company stands to lose $15 million in sales.

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If the company does nothing, that $15 million is almost surely gone over the next 12 months. However, a target marketing campaign aimed at keeping those top customers spending at their typical rate can offset that projected loss.

A successful marketing campaign that can identify top customers who are at risk of dropping their spending and intercept their behavior at the right time would likely save the company 15 – 25 percent of the projected loss. That equates to $2.25 million to $3.75 million a year, or roughly 3 percent of sales.

This is just one example, using round numbers that are easy to calculate. Consider that a much larger retailer, one with $1 billion in annual sales, could win (or lose) 10 times as much under the same formula.

All big businesses that rely on loyal customers are likely to see their sales increase or decrease significantly year over year. The direction they go will be determined by the actions they take.