Marketing budgets are the first to take a hit for businesses across the world with the economic slump as a result of the pandemic. While this is an unprecedented situation worldwide, brands shouldn’t be caught off-guard with their digital strategies. But shouldn’t digital businesses be spending more on digital marketing now with more netizens online? Yes & no. Getting more eyeballs for a brand doesn’t really translate into more profits overnight, and that is the key to survival during these tough times – profitability.
If businesses review their data, they’ll find that their most loyal customers generate maximum revenues for them with bigger spends, consistently over time and even driving referrals. Such coveted customers fall under the best category. Such customers need to be showered with all the love that a brand can offer them now with Velvet Rope Marketing (VRM).
While some customers may not be significantly adding to the revenue pile, they could fall under the good category with sporadic big-ticket purchases. Such customers need to be nurtured to become brand loyalists. However, there also exists a category of customers who can be detrimental to revenues for a brand. VRM strategies are a strict no for this category.
Simply put, VRM is a strategy which provides an elevated experience for a brand’s most loyal customers with exclusivity in terms of product and service offerings. These elevated experiences can be in the form of both monetary and non-monetary benefits, with later being more sustainable in the long term. The most common occurrence of this velvet rope experience can be seen in the airline industry for its business class flyers, who are pampered with priority treatment throughout their journey.
So why only these top customers? Aren’t all customers important? Let’s dig into some data for more insights. In this three-part blog series we shall explore in detail all the nuances of VRM including the good, bad and ugly!
The Fifth P – Profitability
Along with the four P’s of marketing (product, price, place and promotion), profits will become increasingly important for all businesses as they try to remain afloat with decreased consumer spending. Profits will act as the guiding beacon as the world slowly emerges from this unprecedented scenario.
For any brand, there are usually multiple segments of customers with a wide variation of lifetime values dictated by their spending patterns. Identifying and retaining customers at the top of this pyramid will prove beneficial. Businesses now need to focus their already depleted resources on this small set of users (top guns) with VRM. These loyalists tend to stay true to brands even during testing times, and are therefore more profitable.
Segmentation plays a pivotal role in VRM. Other good customers can also be prompted or nudged to follow in the footsteps of the loyalists. Finally, a lookalike audience of the good & loyal customer category can be built for future customer acquisition.
VRM intends to ease consumer pain points so that they can transact more freely with a brand, enabling it to earn more revenues. Customer Life Time Value (CLTV) is the key to determining which customers get the velvet rope treatment.
How Do You Give A Velvet Rope Experience For Your Best Customers?
Enable your best customers to do more with ease, access and exclusivity. While this may vary depending on the type of industry a business operates in, it is universally applicable. Easing the customer’s journey to purchase will go a long way in sustained revenues for any brand.
According to Sunil Gupta’s book on “Driving Digital Strategy”, the 200-20 rule applies to your best customer segment. The Harvard Business School professor writes, “According to the familiar 80-20 rule, 20 percent of the customers provide 80 percent of the revenue. However, research shows that if we focus on profitability instead of revenues, the rule would be 200-20, where 20 percent of the customers provide almost 200 percent of the profit! How is that possible? Because the remaining 80 percent of customers actually destroy profitability.”
What’s more? VRM also reduces Customer Acquisition Costs (CAC) because it focuses on the crème de la crème of customers. The growing love for local businesses and a rise in conscious consumption are new marketplace truths every brand needs to deal with. Additionally, with Google looking to do away with third-party cookies soon, VRM is the way forward for brands today.
In a VRM program, it is the brand that decides which customers are eligible for the differentiated experience. Many companies have a loyalty program, but very few do VRM.
The days of one-size-fits-all marketing are over as consumers are reacting and acquiring new tastes as a result of the global pandemic. VRM can help brands to outmaneuver uncertainty around emerging consumer buying behaviour. Customers will continue to cherish personalized experiences from the brands they love.
It is time for marketers to respond, reset & renew their offerings in the new consumer era by developing a sustainable growth flywheel which can double up as an infinity loop of profitability. This can only happen by letting your best customers enjoy the very best you can offer. And CLTV is the guiding beacon to the velvet rope treatment.
How To Effectively Calculate CLTV?
CLTV is a forward-looking, predictive measurement that is calculated by modelling and projecting the following:
- How long the customer relationship lasted (for churned customers) or is likely to last (for active and future customers)
- Number of transactions
- Value of the transactions
- Other non-financial activities that the customer may engage in.
Examples include visits to a brand’s website, willingness to try other products, posting ratings and reviews about the brand’s products, and/or referring other prospective customers.
VRM can help enterprises effectively double their profits with the twin engines of increasing revenue from their best customers and decrease acquisition costs. Ready to learn more? Stay tuned for our next blog. You can also reach out to us for more insights on VRM.