The Lake Wobegon effect: Or how to avoid the customers you wish you didn’t have
Garrison Keillor’s radio show, A Prarie Home Companion, originates from the mythical Minnesota town of Lake Wobegone, where “the women are strong, the men are good looking, and all the children are above average.”
Like the parents of Lake Wobegon, a lot of marketing managers seem to live in a place that’s a little disconnected from reality. In that place, every customer is profitable. In the real world, they’re not, and there’s an important issue in all this for marketers.
Marketing, particularly direct and online, is typically focused on two activities–acquiring new customers, and retaining existing ones. In both cases, the metrics are typically pretty cut-and-dried. But as Einstein is said to have said, “Make everything as simple as possible, but not simpler.”
The classic metrics many marketers rely on may, in fact, be too simplistic: How many customers did we acquire? What did they spend? How much revenue did they bring in? Often, that is as far as the analysis goes. A new customer is a new customer is a new customer. Revenue is revenue. It’s all good.
Not quite. In fact, there are many customers you would be better off without. Let’s repeat that: there are customers you have now that you don’t want, and there are new customers you don’t want to go near.
Why? Because they are costing, rather than making, you money. This happens in every business, selling every sort of product, in every market.
Black-belt marketing, then, is not simply going out and bringing in customers. It also requires understanding both what kind of customers you want and, perhaps more importantly, what kind you don’t. Or, if you will, identifying the kids in Lake Wobegone who are a little … slow.
Here’s an example. One company, contending with an erosion of its profits, determined that an astonishing 15% of customers were actually costing them money. Although these people exhibited all the traditional signs of being good-paying, high-value customers, and they spent a lot of money, it turned out that down the road they had a tendency to get behind, sooner or later, on their bills. This led to a long series of extremely expensive collection actions the company was obliged to take, including customer visits, repeated communications, and so on. The cost of these steps guaranteed that these customers, even if they paid up, would remain unprofitable, on average, for at least 18 months.
This sounds like a finance issue, right? What does this have to do with marketing? Well, thanks to CRM and customer database technology, the answer turns out to be everything.
Like a lot of businesses, this company had never done an in-depth profitability analysis of its customer base. In particular, it had never analyzed what kind of long-term behavior different customer segments tended to exhibit, and how that affected their long-term value. Had it done so, it would have discovered a segment of problem children within its customer base that was costing it a fortune, no matter how much they spent. In fact, the more service the company gave these customers, the more money it lost.
As a rule of thumb, roughly 15% of your customers are responsible for 65% of your customer-service costs. And it’s increasingly possible to predict who they’re going to be.
Consider retailing. Retail is all about a few basic metrics—same-store sales growth, revenues and so on. The customers who are part of loyalty programs and who receive the most love and care tend to be the ones who spend the most—period.
It turns out, however, that someone who buys a lot of clothing may also purchase only during sales or may return a lot of what she buys or may require a huge amount of customer-service help (electronics and computer manufacturers tend to suffer from this, too) and is therefore not only not profitable, but deeply unprofitable. Some of your biggest spenders may be costing you more than they are worth.
And without some kind of lifetime value analysis, as a marketer you may be spending enormous amounts of money to acquire these customers in the first place. Or, to put it another way, you may be spending hundreds of dollars to acquire customers who are costing you money. That is not really a formula for business success. And by doing some analysis, you can do a great deal to stop this situation before it starts.
The solution? Conceptually, it’s a three-step process:
- Do the homework to understand which of your customers are profitable and how profitable they are. Remember, revenue doesn’t equal profitability. The results of this research may astonish you.
- Do the database work to understand who these customers really are—append demographic data to your customer database and develop a rich profile.
- Finally, in both your acquisition and retention work, avoid marketing to people who match this profile. Clone your money-making customers and avoid those with profiles similar to the money-losers. Allocate your scarce marketing dollars to the customers who are making you money, not these guys.
That’s the long answer. The short one is this: accept the fact that there are some customers you really don’t want.
There’s an ancient business joke about a guy who buys a product for $1 and is selling it for $.95. A friend asks him how he can possibly stay in business when he’s selling his product for a loss, and the guy says, “Oh, that’s easy. I’m making it up on volume.”
At the end of the day, volume isn’t the point. Profit is the point. More and more, it’s the job of marketers to understand where that profit comes from—and more importantly, where losses come from—and to use that data to guide their marketing and allocate their spending.
Even in Lake Wobegone, where all the children are above average, some are more above-average than others.
First published on the site Marketing Professionals in May 2004.