Value is something that humans instinctively do not measure. Think of phrases like “beauty is in the eye of the beholder” or “one person’s trash is another’s treasure.” While each person may measure the worth of something’s value to themselves, they do not place it on a grand scale like marketers would quantitative and qualitative data.
What if there was a way to quantify value, though? When it comes to customer value, you can. The following are ways to do so, and while they might not work on everything in life, they are valuable tools your brand should be utilizing as part of its customer value management methodology.
It’s impossible to quantify this data without a thorough understand of the basics. You can find countless articles online or rely on your communications specialists here, but this section covers the basics you need to understand before quantifying.
All businesses run on value creation because they offer products or services that consumers find valuable in their lives. In turn, the business sees economic return through sales. Identifying why and how consumers find your business valuable is vital for sustainable, profitable growth.
By identifying value, you can create incrementally increasing customer revenue streams by simply focusing on customer value as determined by your customers. Placing that idea first, alongside creating value through customer relationships, is the key to success.
A Little Factoring
With the basics out of the way, there are a few key factors that go into quantification. You probably already know that high-value customers buy frequently, buy more items, and buy higher priced items. To begin quantifying customer value, ask yourself these questions based on those behaviors:
· What is your customer defection rate?
· What is the likelihood a customer will buy again, according to them?
· Which of your current customers buy repeatedly and how often do they do so?
· How can you segment buying habits by frequency, volume, and variety of products sold?
The Value Index
Next, you’ll need to create a customer value index to dig deeper. Each answer to the questions above can be scored by number, which you can use to determine the customers or segments that are most worth investing in. Creating this index includes seven variables, which are:
· Number of purchases over a customer’s lifetime
· Purchase frequency
· Average purchase value
· Time between purchases
· How many products are purchased at a time
· Referrals customers generate
· Length of time as a customer
Each of these are a single number for a customer, with each representing a value for your business, which you can add up to create a single number. You could use a scale from one to ten or one to 100. As long as you can put these variables into a weighted value, you’re on the right path.
The Asset Score
With each customer weighted on the value index, you can begin the customer asset value score. This tells you the propensity for consumers to spend more in the future, or continue to generate profits. All you need to do is subtract the related costs of investment in each consumer from projected future profits.
The goal here is to determine where your marketing budget is best spent, which is always the highest value customers. There are five variable to consider when making an asset score, helping you identify the highest ROI. Those are:
· Purchase frequency and recency
· Current streams of revenue
· Share of wallet – relative to competitors
· Referral rates
· Potential future revenue
With all of this information in hand, you can effectively map the score of each customer on a multi-tiered scale. This allows you to prioritize your resources accordingly and build a profile of the idea customer. It’s a bit of work, but quantifying customer value is an incredible way to boost your bottom line.