The first step in implementing
a successful marketing strategy is selecting the right customers.
There are several reasons why customer selection is a crucial
step. First, the marketing budget of a firm is limited, and managers
have to make choices as to where and on whom they should spend
the limited resources available to them. Secondly, not all customers
are equally profitable. As shall be established in the future
chapters, an overwhelming share of profits is generated by a small
percentage of customers. This necessitates targeting those customers
with high profitability, and this is the basis of the customer
selection strategy.
Traditionally, firms
rank order customers based on their profits and prioritize their
resources based on this ranking. As described before, several
customer selection metrics have been used by companies for this
purpose, such as RFM (recency-frequency monetary value), SOW (share-of-wallet),
PCV (past customer value) and CLV (customer lifetime value). As
shown in the previous chapters, of these metrics, the forward-looking
CLV metric is the most successful in predicting future customer
profits.
The performance of
the traditional metrics versus the CLV metric in customer selection
has been compared numerous times with CLV always offering higher
levels of profitability. For example, in a recent study, customers
from a large high-tech services company were rank-ordered from
best to worst according to each metric. And the total revenue,
costs and profits from the top 15% of the customers were compared.
The total observation period of the study was 72 months (6 years).
The customers were rank-ordered according to each metric based
on the data obtained from the first 54 month period. The total
revenue and the profits generated by the top 15% of customers
under each metric were observed over the next 18 months, and the
results from this study are given in Table 1.
Table 1 Comparison of Metrics for Customer Selection
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