Customer Categorization Tips for Identifying “Good” Customers
by David Loshin
Originally published April 25, 2013
How do you characterize what makes a customer a “good” customer? In one of my previous articles, we looked at some example variables contributing to calculating the value of a customer, some of which described the revenue potential associated with the customer, some described costs, and others evaluated levels of different kinds of risks. But aside from using these variables to calculate some quantifiable valuation, we can also look at how the values of the collection of these variables contribute to segmentation of the customers into different “qualification” strata. There are two aspects to this segmentation: defining the customer categories and their characteristics, and developing methods for classifying customers into those categories.
Table 1: Example criteria to qualify "good" customersFor example, consider the variables and measures shown in Table 1. In this approach, any customer whose measures meet or exceed all the threshold values is considered a good customer, while all others are not considered to be good customers. There are some drawbacks to this simple model that limit its usability, such as:
Granularity – This example only showed two types of customers, but in reality there may be multiple levels of qualifications and classifications.Ultimately, one clear objective is to be able to not just classify the customers, but also determine the percentages of value that are attributed to each customer segment. There are some ideas for refinement, including:
Additional Levels – Suggesting additional customer categories and corresponding thresholds. Instead of dividing the customer community into good and not good customers, provide some tiered categories such as “Best,” “Good,” “Mediocre,” or “Bad” customers, all determined based on threshold scores for the defined set of measures.All of these ideas must be framed within the corporate vision and provide measures that are mapped to the customer categories in ways that are optimized to maximize the company’s key performance metrics such as customer profitability (how much money you make by customer), accounts receivables turnover (how quickly your customers pay their invoices), cost to serve (how much is spent in maintaining the customer), or customer satisfaction. For example, you may designate your best customers as those whose profitability is at least 150% of the average customer’s profitability, who have the longest 5% customer lifetimes, and 20% of the average cost to serve. The next tier (“good”) would be defined using lower levels for the same sets of measures, and so on for each subsequent level.
The end result of this process is a set of measures used for customer categorization, but it is only useful in the context of the existing customer base. The next step would be to identify the demographic variable values the customers in each customer category share that can be used in a number of ways for improving value, as we will see in my next article.
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