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Know your customers

How to identify good and bad clients, and focus your efforts

Spotting the Difference

Most businesses have a mix of good, better and best customers. Unfortunately, there are bad customers as well, and they can be a time and money drain.

Good customers might be good because they spend lots of money. They might be good because they come back often. It might simply be that they're easy to look after.

Bad customers are the ones who are never satisfied and almost always cost you more to serve than they spend.

The trick is in identifying the best customers, and determining what characteristics differentiate these profitable customers from all the rest. Then you focus your promotional strategies on the segments most likely to produce your new best customers. This information can come from quite innocuous questions. Families with new babies, for example, often change their car to something more practical. A manufacturer of baby goods could build an effective mailing list by surveying people just to find out which drivers had changed from a sportscar to an estate.

Here's how to do it.

Get to Know Your Current Customers

What do you need to know about your current best customers in order to find others like them? Answer: Geographic location, demographics and purchase history.

Anyone providing consumer goods or services probably already has much of the purchase history information required in their own sales records, and a wealth of consumer information is available through census data.

Bring these bits of information together and turn your hunches into sound data to guide your product offerings, promotional programs, and overall marketing strategy.

Geography: It's not surprising that people tend to live in neighbourhoods of people like themselves. Geographic location analysis reveals clusters of people with similar demographic characteristics. Purchasing behaviour is remarkably consistent within specific geographic areas, reflecting shared demographic and lifestyle traits.

Demographics: Consumer behaviour varies with age, sex, education, income, occupation, marital status and family size. These are typical demographic parameters that describe a consumer.

Purchase history: When did your customers last make a purchase? How often do they buy? And how much do they typically spend? You will be able to divide customers into value categories like good, better and best on the basis of how recently they spent money with you, how often they bought something and how much they have spent.

When you combine what you know about current customers with the information available to you about geography and demographics in your trade area, your search for new customers narrows in on those most likely to be profitable.

Collect Information About Your Customers

Businesses that serve only a few customers generally try to get to know each one of them personally. Businesspeople with a small customer base can treat individual customers to a lunch or social outing. Whatever the event, it's not entirely social, of course. One objective of these interactions is to quantify the customer's need for the product or service being offered as well as what benefits or features might be important.

But for anyone providing consumer goods or services to hundreds or thousands of potential customers that strategy is clearly impractical. Your objective is also to get to know the customer, in order to determine their needs and preferences so you can market to them more intelligently. But your means of surveying them will be entirely different.

How do you collect that information? Customer surveys are a common method. You can either survey your own customers or hire a third-party research firm to perform a survey on both customers and non-customers. To find a reputable market research firm, start with the Market Research Society or the British Market Research Association. The Market Research Society also publishes The Research Buyer's Guide, which is invaluable in both finding suppliers and helping you ask them the right questions to get a service that's right for you. There are lots of online survey tools available too, like ESurvey, Zoomerang and Survey Galaxy

Study Characteristics of your Customers

One clothing retailer decided to make a game out of it. She asked customers at the check-out to put a pin in a wall map showing approximately where they came from. People who spent a lot of money were given a special colour pin. It became pretty clear after a couple of weeks that high-spending buyers lived in an area just north of the shop. What was so special about that part of town? It was because that area was laden with high-income professional workers who had chosen to live there.

The wall map showed the retailer her trade area. The demographics of that neighbourhood to the north gave her new insight into her best customers.

The clothing retailer's next step was to find other parts of the area with similar concentrations. She found two likely neighbourhoods using demographic information, but they were several miles outside the trade area indicated by the pins in the map. She mailed an introductory coupon and a map showing the shop's location to addresses in the prospect neighbourhoods she'd identified. The coupon rewarded these more remote prospects for driving the extra distance to the store.

In marketing terms, what did she do? The clothing retailer correlated geography and purchase behaviour to find her best customers. She then attached demographic information in order to identify promising new locations. This research powered her strategic marketing response - a plan to expand her trade area to include more "best-customer" neighbourhoods.

Focus your Promotions on Profitable Customers

Too often we engage in poorly targeted advertising that brings in only a few customers. As a result we make those few unprofitable just because it cost us so much to get them. It's wiser to focus our promotional plans on prospects whose geographic location, demographic characteristics, or purchase behaviour indicate they are likely to be profitable to us.

In the example of the clothing retailer, research on her current customers led to a better understanding of her profitable customers. This insight led to a new promotional plan, focused on her best prospects in a wider trade area.

What next?

We've produced a number of printed guides, showing you how to connect with your customers at the right time and in the right way. You can download or order them free of charge from our download centre.

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