“We don’t have customers who spend that much”. “All our customers spend roughly the same”. “Our average customer is very representative of our entire customer base”.
These are shockingly common misconceptions I hear almost all the time from brands talking about their own customers. Then when I start looking at their data, I always uncover the same patterns:
- There are in fact huge variations in spend behavior, not to mention other dimensions of purchasing behavior (frequency, repeat rates, product mix, etc.).
- The CLV distribution systematically follows some kind of 80/20 rule, i.e. the top 20% of customers make up about 80% of the brand’s revenue.
There is a very simple way to address these misconceptions and start the journey toward fully-fledged customer segmentation: building good old customer deciles.
Simply put, deciles are the division of a group (in this case, our customer base) into ten sub-groups of equal size. However, the grouping is not done randomly, but rather based on a metric we’re interested in (here, CLV).
When I do this with clients for the first time, something happens without fail: everyone in the room is surprised by the numbers! When I shared the slide below, my client’s team couldn’t believe that only 10% of customers were responsible for 61% of their revenue. And yet..
These patterns matter in more ways than one from a strategic standpoint:
- when 10% of your customer base drives 60% of your revenue, you better make sure they keep coming back! Lose half of them and that’s 30% of your revenue gone. Retention strategies ought to be focused on your most loyal customers, something very few brands do well.
- deciles 7, 8 and 9 are an untapped source of potential growth. What can be done to turn these customers into decile 10 ones?
- on the other end of the spectrum, if the bottom half of your customers drive less than 10% of your revenue, is it really worth it trying to retain them at all? Maybe resources are better utilized to try and grow customer acquisition?
So please, do yourself a favor: build customer deciles (or call me if you don’t have anyone in house who can do it). I can guarantee that you will learn something you didn’t know about your brand and that it will change your strategic outlook on customer acquisition and retention.
