The Customer’s Economics

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Had an interesting chat with Swee Yeong (entrepreneur and angel investor in the Malaysia tech scene) earlier this week. He mentioned about 2 very important metrics that businesses, especially e-commerce businesses should look into:
1) Customer Acquisition Cost
2) Customer Lifetime Value

Companies often tries very hard, and I believe that’s an understatement, to acquire customers. And when these would-be customers convert into real customers, these very same companies usually do nothing to keep these customers happy. And then, the customers leave. And the whole cycle repeats again.

I believe a lot of this is contributed by one key factor- the performance metrics. Here’s the ugly truth- most company evaluate their performance on how much sales they get over a period of time. And if they go a bit more further, the profits they make out of the sales. And that’s the easy part of the game, and most company can provide this sort of reporting to ‘The Management’ without any problem. How difficult can that be? Just sum up all the sales from all channels, and then minus away the expenses incurred. Job’s done.

And there’s always this tinge of excitement when it comes to signing up a new customer or opening a new account. Comparatively, there’s very little mention going to the channels that sells to the same customer, over and over again. Much worse, when a customer stops buying, companies usually go straight into denial mode.

This largely happens because the customer’s lifetime value is not so easy to profile. It’s not impossible, but it’s just not as straightforward as the standard sales/profit metrics mentioned earlier. And profiling customers according to their buying frequency and volume required more clicks in the reporting system.

It’s also very likely a supply-demand thing. If ‘The Management’ never needed to know about the values of each customers and what they can do to increase this metrics, nobody is going to go through the trouble of generating these reports.

In the world of e-commerce, where your competitor is only a click away, it becomes a battle to the death to get customers to stick around. Losing them after their first purchase is not only going to cost you money, you are also probably losing them for good. Of course, there’s a reason why they are leaving but it’s very likely they are not going to tell you, especially if their most recent experience with you hasn’t been a pleasant one.

Swee Yeong also mentioned that it’s indeed a painstaking process to get these critical customer metrics. You can know which street your customers stay, male or female, fat or skinny and married or single but that’s all there is to it. All the demographics and profiles you have about your customers only helps you to understand more about their personal life, but it doesn’t reveal much about how they response to your marketing strategies. You want to know did they click on your last email campaign or did they even opened the email? If they hadn’t, what would make them want to click? Is RM100 voucher enough to buy them over?

There are many things you can start doing once you have a very detailed information of your customer’s responses to your marketing techniques. As Swee Yeong puts it, “This is when things start to get interesting.” You can start segmenting your customers into various tiers. The shopaholics and the bargain hunters. The click-happy customers and the untouchables. And with these custom segmentations, this is when you can get creative with your marketing messages and use your advertising dollars most effectively.

I would love to hear if you have any other metrics that you feel is important when it comes to understanding your customers.

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