Not All Leads are Created Equal

Do you know which leads are most likely to convert to high-value customers? This morning, I attended Know Thy Customer 2011, an event hosted by SAS and Forrester, two of the big names in customer data mining and intelligence. The event, which took place in several cities including Montreal,  spotlighted major companies who are successfully mining customer data to improve marketing, merchandising, distribution, and HR practices. Dave Frankland, Forrester Research’s VP Research Director, led an interesting session highlighting some key points related to customer segmentation. Among them:

  • While the vast majority of businesses are measuring transactions and performance at the campaign level, only 75% are currently measuring customer retention, and even fewer – only 64% – are measuring customer lifetime value (LTV).
  • Businesses across various segments have used modelling to discover an interesting twist on the old 80/20 principle: The top percentage of customers (5% in one case study) drive the overwhelming majority (90-95%) of all profits.
  • And the corollary to this: The bottom segment of customers may be a tax on your business. Larry Selden of Columbia University is quoted as saying that “The bottom 20% of customers can drain profits by at least 80%.” This will vary by company and by industry, but the point here is that there are some customers that you either don’t want, or that you need to convert to being profitable in order to justify having them at all.

What does this mean for businesses who are looking at their acquisition efforts? Most businesses are blindly focusing on increasing the number of leads that they generate, without really understanding which leads are high-value, which ones are just average, and which ones they might be better off not acquiring in the first place.

One of the things we look at when setting up ROI models for a customer acquisition strategy is which products, services, lines of business, or customer groups are the most profitable. But things can be taken a step further. Tracking and analytics tools, when used properly, allow us to establish goal and conversion funnels that track a customer from initial contact through to conversion, retention and lifetime value. For example, we could identify which keywords in a pay-per-click campaign drive the most profitable leads in the long term, and optimize our search efforts accordingly.

Why aren’t more companies doing this? Depending on the type of business, it may be difficult to know what a customer does after becoming a lead. It isn’t always evident how to connect the dots between initial research, offline and online influencers, purchase, and long-term behaviour. Retailers can track online sales but cannot always track in-store sales, despite an increase in the number who ask for a phone number or some sort of customer identification at the cash. Brands who sell via third-party retailers or B2B distributors sometimes have an even tougher time gaining a window into this behaviour.

Frankland made the very excellent point during his presentation that “we’re not data-poor; we’re information-poor”. Companies track metrics across thousands of data points, but pulling the two or three key actionable points from that mess can be a bit like finding the diamonds in the rough. For companies who believe they have a lot of customer data but are having a hard time establishing a conversion funnel or a convincing ROI model, it is necessary to take a step back and examine whether the fundamentals are in place. Some questions for businesses to ask themselves with respect to lead generation include:

  • What’s the lifetime value of your most profitable customer segment?
  • What do the customers in this most profitable segment have in common? What makes them unique?
  • How do customers in your most profitable segment find you? How does this differ from the way other customers find you?
  • What keywords or search terms are specific to your most profitable segments?
  • How much would you be willing to spend to generate a lead in this most profitable segment, compared to a regular lead?
  • Which leads are converting to negative-value customers that just drain resources from your business? Can you afford to cut back on what you’re spending to recruit them, and redirect those resources elsewhere?

The more of these questions we can answer, the better we can optimize our marketing efforts to bring in high-value customers and drive return on investment.  

Sari Stein, Digital Strategic Planner

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