Customer Profitability

By: EconomyWatch   Date: 30 June 2010

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EconomyWatch

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In order to understand customer profitability, we first need an accurate customer database that can tell help us to profile our customers by demographics, sector, psychographics, behavior or by other meaningful parameters.

We then need to analyze revenues, costs and profits for each segment to understand our most and least profitable groups.

Not all customers are created equally. Traditional Direct Marketing techniques can lead us to ignore customer segments who are unprofitable at the first sale, but who may become extremely valuable at a later date. Customer Lifetime Value metrics help us to build fuller value-based models.

Metrics Covered: Retention Rate/ Churn Rate.

Note: The Key Customer Lifetime Value (CLV) metric is covered in the next page of the Dummies guide. New customers normally cost more to acquire, while repeat customers usually cost us less to service.

Retaining customers and nurturing relationships is therefore often a critical component of customer profitability.

Metrics: Retention Rate/ Churn Rate

The Question:

How many customers do I keep or lose a year?

Approach:

Repeat customers/ cancelled customers as a percentage of total

Commentary:

Understanding retention and churn rates are vital for subscription-style businesses, but are useful for almost all businesses since the costs of acquiring a new customer are usually much higher than the costs of keeping a current customer

The Formula:

Retention Rate (%) = Repeat Customers / Total Customers

Churn Rate (%) = Lost Customers/ Total Customers

Sales & Marketing

Marketing for Dummies Guides

Measuring, Marketing, Metrics & KPIs

Online Marketing/ Digital Marketing


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