In a global economy that's becoming more competitive each year, every customer (and customer's opinion) counts. Every customer interaction counts. Certainly, every dollar spent on keeping customers happy and coming back counts. That's why every leader needs a good working knowledge of customer analytics.
Once upon a time, your company may have been able to shake it off if you threw a marketing idea against the wall and found it didn't stick, or developed a line of products customers didn't seem to like. That's not true anymore. Companies can't afford to have “black hole” departments, like sales and marketing, for example, where costs and outcomes are fuzzy to those on the outside.
Your company's success and even its survival depend on attracting customers and keeping them happy—and proceeding on guesswork and assumptions isn't a viable strategy. Everything is measured and evaluated. Decisions across all departments must be made using solid research and hard numbers—and leaders must understand this data.
The bottom line? If you know what those numbers (also called metrics) are, how to collect them and how to evaluate what they mean, you will increase your understanding of what drives your customers. You'll also be better equipped to meet their constantly evolving needs. Here are eight things customer analytics can help you and your company do.
Develop products customers want.
Figuring out what customers want and what they will purchase is one of the holy grails of product development. If your company has been on this quest for years with limited success, fear not: Customer analytics can help you define and prioritize what features to include in your products.
One of these methods is a technique called “follow me home,” which I learned while working at Intuit. You literally follow a customer home or to his workplace and then spend the day watching him do his job. Look for pain points and problems that might shine a light on opportunities for improvement.
During one such “follow me home,” a team of researchers noticed retail customers were exporting transactions from point-of-sale cash registers into QuickBooks to manage their books. This extra step took time and could cause problems if done incorrectly. The developers came up with the idea of integrating QuickBooks with a cash register that eliminated a step for customers.
Conduct product usability tests.
Chances are, your company field-tests products before mass-producing and selling them. Customer analytics can help you collect the right metrics when working with volunteer test subjects and mine your findings for valuable information about product usability.
The customer analytics umbrella covers not just number-crunching but also facilitating a product usability test in the first place. Even the way a question is phrased can impact the quality of the participant's feedback. Instead of directly asking, “Why did you click that link?” it's better to ask, “What about the link led you to click on it?” This will get the participant thinking about motivations and mental models, whereas the first question might leave a defensive feeling. Small details like these really can make a huge difference in your company's product development, marketing and overall strategy.
Divide and Conquer: Seven Reasons to Segment Your Customers
You know not all of your customers have the same backgrounds, goals or buying patterns. And beyond simple curiosity, there are many good reasons to drill into how and why they differ. By grouping your customers into segments that share certain characteristics, you'll not only gain a better understanding of current customer demographics; you'll also discover hitherto-untapped opportunities for better marketing and product development. Here are seven things that thoughtful and thorough segmentation enables you to do.
Identify the most and least profitable customers. The Pareto Principle really does hold true: A minority of customers create the majority of profits. Identifying more profitable segments allows you to focus your efforts on keeping these customers happy while increasing their purchases. What's more, segmenting can reveal underserved customers for whom specially designed and marketed products or services can be created.
Improve marketing focus. Segments often have different interests, values, tastes, and reasons to purchase what you offer. Vastly disparate segments may not respond to the same marketing messages or campaigns. Learning more about what makes each of your customer segments unique will help you fine tune your marketing to meet their needs and expectations.
Predict future purchase patterns. Knowing that certain customers are more likely to purchase other products based on past purchases helps with planning and marketing. Think about what happens when you watch shows on Netflix or purchase books on Amazon. These companies tap into segmenting to predict and encourage future purchases with their "recommended for you" lists. This practice is called predictive analytics, and when done well, it can be quite accurate.
Price products differently. Why lose money by reducing prices if some customers (especially your most profitable segments) aren't motivated by price? By acquiring an in-depth knowledge of customer motivations and gauging how much they are willing to spend (price sensitivity), you can develop more effective pricing strategies.
Develop better products and customize products or service features. Segmentation doesn't just involve number-crunching—it's also about interacting with and surveying your customers. Listening to each segment's feedback can help you to answer questions like:
- Do you lose sales because your product lacks prestige for the target segment?
- Is the product's large number of features making its price prohibitive?
- Are customers more interested in the competition's product because it has better features?
- Do you need to develop a whole new line of products?
Build loyal relationships. Fully meeting the customers' expectations through customized service and uniquely designed products at a price they can afford helps build customer loyalty. In addition, segmentation may reveal what kinds of incentives cause each segment to choose your business over the competition over and over again. For instance, if you own a grocery store, you may find that some shoppers love your "local produce and products" section, while others appreciate the discount you offer when certain products are bought in bulk.
Create personas that help you with all of the above. A persona is a fictional person who represents the characteristics, needs and goals of a customer segment. They are used to improve product development and marketing decisions. For instance, a persona named Riley might represent a target segment you'd like to grow. Considering Riley as you develop products, pricing and marketing strategies will help you focus your thinking. Many questions you run into can be answered by considering: Would Riley do this? Would Riley prefer something else? What is Riley going to use this product for? Personas are powerful when they are specific.
Figure out which "touchpoints" are most effective.
Touchpoints are the places where customers learn about your company and products: commercials on TV and radio, ads on social media sites, newspaper coupons, brochures, word-of-mouth recommendations, etc. Customer analytics can help you pinpoint the number of potential customers each touchpoint reaches, how well the message resonates, and—perhaps most importantly—if the touchpoint motivates people to buy your product or service.
I once worked with a national advertising agency that placed ads in weekly newspapers. We wanted to find out if a coupon for Pier 1 Imports increased (or decreased) revenue. Controlling for differences in markets, we found that sales in cities that received the coupon did increase in a statistically significant way that weekend. We were also able to determine that the discount from the coupon was offset by the increase in sales.
Here's another example. I worked with Wikipedia to help measure the best banner ads to increase donations. The differences in success rates were often less than .05 percent. But because millions of people viewed each website monthly, differences this small translated to thousands of dollars. No matter your industry, it's easy to see how analyzing customer touchpoints can help you determine how much bang you're getting for your marketing buck.
Identify customer "pain points.”
Let's say your company manufactures and sells laptop computers. You may think you understand each phase the customer goes through when engaging with your organization, from the initial decision to buy a new computer to becoming a loyal customer. But how much of that "knowledge" is based on assumptions, incomplete impressions and wishful thinking? Where, really, are the barriers to making the sale? Customer analytics will tell you.
Let's say you thought price was your biggest barrier to improving sales. But when you really analyze the data, you find that 30 percent of prospective customers aren't aware of your company in the first place, over a quarter misunderstand the product's features and half feel the set-up process is too difficult. The point is, if you do not evaluate and measure each stage of engagement, you'll miss vital opportunities for damage control, improvement and innovation—and you might waste resources trying to alleviate pain in the wrong places.
Decide how much money to devote to customer acquisition.
As its name suggests, customer lifetime value (or CLV) is the total profit that a customer generates for your business between his or her first and final purchases. This metric is important because, among other things, it can help you evaluate how much money can reasonably be devoted to customer acquisition.
If it costs $1,000 to acquire a new customer through marketing, sales and production costs but that customer generates only $750 in revenue over the typical lifetime, that's obviously bad for business. And the longer the customer lifetime is, the less likely you are to come to this conclusion organically. Sounds simple, but unless you proactively gather the numbers and weigh acquisition costs against CLV—which many companies don't—you might not realize you have a losing strategy until it's too late.
Keep customers satisfied after they sign.
You may think that once a potential customer becomes an actual customer, your job is done. Not so. Now you have to ensure that the customer will return and, ideally, recommend your company. One of the most effective ways to understand what drives customer loyalty is to use customer analytics to conduct a key driver analysis.
Key drivers are things like quality, value, utility and ease of use. A key driver analysis tells you which features or aspects of a product or service have the largest statistical impact on customer loyalty. It can be conducted for all customers but also for each of your different customer segments. At the end, you'll be able to identify the most popular or unpopular features or aspects of your product or service and have customers rate that experience as well.
Identify and reduce bad profits.
How does it feel to pay the check at a restaurant where you had terrible service and bad food? Or how about paying $150 to change your airline ticket reservation? In these examples, companies financially benefit from a customer's negative experiences. However, they're "bad profits" because they lead to resentment, a decrease in customer loyalty, and, eventually, they impact profits negatively.
Customer analytics can provide an accurate picture of your company's bad profits. Even if you don't have access to financial data for your company or a competitor, you usually can estimate the percentage of bad profit revenue. When my company measured customers of consumer software products a couple years ago, we found that about 17 percent of Adobe Photoshop users were detractors. Assuming everyone pays around the same price for a Photoshop license, some 17 percent of Adobe's revenue from Photoshop comes from detractors.
ID your most and least profitable customers.
Some customer segments are more profitable than others. Depending on your industry, you may have "regulars" who do business with you on a weekly basis (or even more frequently), and others you see only once in the proverbial blue moon. But have you ever drilled down on what your regulars may have in common?
An examination of revenue by customer segment usually reveals that the Pareto Principle holds true: A minority of customer segments create the majority of profits. Identifying more profitable segments allows you to focus your efforts on keeping these customers happy while increasing their purchases.
Jeff Sauro is a Six Sigma-trained statistical analyst and pioneer in quantifying the customer experience. He specializes in making statistical concepts understandable and actionable.