Changing Good to Best, Bad to Good

It’s not reasonable to expect that you will profit off of all or even most of your subscribers.   What you can expect is that a few of your subscribers will pick up for the majority of your list members.  We call them your best customers and you must value them as a precious commodity if you expect to make a living or turn a profit out of your line of work.  When you begin to lose any of your best customers you will know it because it will impact your bottom line.  The majority of your customers are good customers and this is equally true of your subscriber list.  However, you’re never going to be profitable relying on good customers alone.  You can expect to be marginally profitable off of good customers at best.  A hard truth you will have to live with in whatever you do is you will have bad customers no matter how right you run things.  If you have spent any considerable amount of time doing customer service the notion of a bad customer does not sit right.  But there have been times where you approach a situation using logic and reason.  You provide answers or explanations that are helpful or point in the right direction.  You spend considerable time and energy focusing your attention on a person and their concerns.  You give everything you have and no matter what you do you know it won’t matter.  That’s what’s meant by bad customer.

If you are running things the right way this number should only come down to a handful.   Still it only takes a few bad customer to demoralize your employees with excessive complaints or demands. If they are not dealt with properly they can hurt your business with negative word of mouth.  Also, they can be a drain on your resources and not allow you to focus on your best customers who you depend on to remain profitable. As someone looking to protect your bottom line,  especially in tough economic times,  you must always be on the look out for ways of turning good customers into best customers. At the same time you need to be cognizant of handling bad customers and looking for ways to turn these customers into good customers.

The 80/20 Rule

The 80/20 rule is often referred to as the Pareto principle after the Italian economist Vilfredo Pareto.   He described the unequal distribution of wealth in his country as coming down to 20% of the people owning 80% of the wealth. Since then the 80/20 rule has been used as an organizing principle for understanding everything from time management, to running a business, engaging content in emails,  SEO, and of course managing your subscriber list.  This number is not set in stone but it can be used as a guiding principle for segmenting your list.

The exact breakdown of your numbers is going to be specific to your list and business.  What you are going to want to do is to find out which portion of your list accounts for most of your profits.  This is usually anywhere from 10% to 20%.  Find out which part of your list is marginally profitable or breaks even.  Should be between 60% or even as high as 70%.  Next identify which portion of your list you lose profits from.  This is the bottom end of your list which can be anywhere from 10% to 20%.   Now you’re going to want to find ways of moving some of those marginally profitable subscribers up your list so that they are more profitable and therefore best customers.  That way even if you lose a best customer your bottom line is not effected.  You are also going to need to decide what to do with the 10% or 20% that you’re losing profits from.  You’re going to want to find out if there is anything you can do to at least break even with them.

There are advocates for firing a bad customer and sending them off to a competitor.   How you deal with these customers depends on your business.   However, information spreads quicker than ever before.   How you conduct your business in circumstances that are difficult is noticed.  If you take the high road even in a circumstance where you know you are going to lose no matter what you may be surprised to find out you can gain the respect of even a bad customer.  Tell them you are sorry that things did not work out and that you wish them the best in their future endeavors.  Think of it as a breakup in any relationship.  Do not give them any reason to say anything bad about you.  Never burn any bridges.  Just like in relationship you never know but this person can come back in your life in a positive way.  Word of mouth spreads quickly. If nothing else the bad customer might be impressed with the way you conducted yourself and give you good word of mouth by telling people about that.

RFM Analysis

Although we never formally referred to it as RFM (Recency, Frequency, Monetary Value) we discussed this when we talked about targeting your best customers.   Doing a RFM Analysis is a great way to find out where your subscribers fall in line with the 80/20 principle.   It will also allow you to create a marketing strategy that is based on what kind of customers your subscribers are.   You can increase profitability by treating subscribers that make infrequent big item purchases differently from subscribers that make frequent small item purchases. Recency refers to how recently a customer made a purchase from you.   Frequency is how often they made purchases from you.  Monetary Value is how much a customer spends.  RFM Analysis gives you a way of quantifying your best customers based on their past purchasing behavior.

Lets show you how RFM Analysis works by opening up our own online music store.  We’ll assume that you worked out a licensing agreement with all the major record labels and each song costs only 99 cents and albums cost $9.99.  Because buying an individual song is only 99 cents we’ll count it as nothing until you get to 10 songs which is near the equivalent of an album.  We’ll use a 3 point system for the sake of simplicity.   3 points for customers that make the most recent purchase, 2 points for those that fall in the middle, 1 for those that have not made a recent purchase, etc.

Recency Score

  1. Purchased at least 10 songs or an entire album more than a year ago.
  2. Have not purchased within the quarter (3 months) but have within the last year.
  3. Purchased within the quarter.

Frequency Score

  1. Purchased 10 songs at 99 cents or an entire album with the last year.
  2. Purchased at least 100 songes or 10 albums within the last year.
  3. Purchased more than 10 albums within the last year.

Monetary Value

  1. Average purchase amount is at least 10 songs an album at $9.90-$9.99
  2. Average purchase amount is between 20 songs or a couple of albums at $19.80 – $19.98
  3. Average purchase amount is greater than $19.80-$19.98.

Anyone scoring a 3 falls within the top 20% in regard to Recency, Frequency, Monetary Value.  Those that score of 2 are within the middle 60% while anyone scoring a 1 falls at the bottom 20%.  Anyone that scored a 3 on all categories is a best customer.  Those scoring a combination of numbers either fall in the middle 60% or the bottom 20%.  Pay attention to those scoring any variation of 3s and 2s as they are your low hanging fruit.  You should implement a marketing strategy that offers these customers an incentive for moving up to best customer.  RFM analysis is useful for identifying who your best customers are and for giving you an idea of what you need to do to turn good customers into best customers and bad customers into good customers.

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