Focus: Customer Lifetime Value & Customer Data such as Recency, Frequency & Monetary Value
1. Implement and manage a Customer Database/CRM System that can give you the following types of historical information:
a. Customer information records
b. Type of customer such as NAICS code & demographics
c. Source of customer
d. Order history information of products ordered, dates, price, discounts
e. Order frequency
f. Source of order by selling channel
g. Which marketing promotions they were offered & which ones resulted in an order
2. From this information you can calculate customer average order size, order frequency and average lifespan in addition to how you obtained the customer, what types of sales channels they are managed by and what marketing promotion causes the customer to order. Determine what percentage of your customers are Active versus Inactive.
3. The Customer Lifetime Value (CLV) in the simplest terms is Average Order Size x Gross Profit x # of Orders per year x number of years retained. Example: Company A has an AOS of $200, your business gross profit is 50%, the customer orders 4 times per year and is retained for 5 years: $200 x 50% x 4 x 5= $2000. Please note that Net Present Value of Money and Cost of Retention play an important role in determining CLV.
4. The Recency, Frequency, Monetary Value (RFM) can be used to model your customer database to determine the customers with the highest RFM score. Customers who have ordered from your company most recently and who have a high order frequency and high monetary value/AOS will be the customers who will most likely order again and will be the most valuable customers. Both of these calculations must be done by segment.
5. Customer & order data is critical in managing your business, to forecast sales, to determine which customers to market to and how much to spend on customer acquisition & retention. Use this information as a modeling tool to determine which prospects to market to. The value of your customers also focuses on your organization on customer service and long-term customer satisfaction.