Ensuring Customer Profitability in a downturn

Marketing organisations are by default primed for customer acquisition. The downturn will require focus to be reset on classic CRM strategies: Up- and cross-selling, along with retention and profitability management. If you still are not fully geared for this, this is an opportunity to propel your marketing organisation towards fully-fledged data- and customer-centricity.

As governments have started to ease lockdown measures from early May 2020, customer confidence in the Nordics shows early signs of recovery in domestic travel, automotive and real-estate. Avaus has assembled three basic CRM recipes for responding to the downturn by boosting customer profitability. They should be helpful for marketers fighting for revenue and margins during the recovery. 

It costs several times more to acquire new customers than to retain old ones. When customer demand goes down, the acquisition cost multiplies. During the early stages of recovery, success rates for all sales and marketing activities will be significantly lower than before the downturn. When demand eventually approaches pre-crisis levels, the success rate for new sales to existing customers should get back to 60-70% compared to 5-20% for non-customers. 

COVID-19 impact on businesses varies from the demand peaks of groceries and necessities to the full lockdown of location-based sports and entertainment and travel industries. In the latter, customer relations are in a hiatus, meaning that they are on hold until further regulatory notice. Depending on the degree of lockdown-induced business interruption, marketing should focus on either:

1. optimisation and safeguarding the profitability of ongoing customer relationships in less affected industries or:
2. recovering relationships in industries that have experienced total shutdowns. 

Customers will return but it is not self-evident that the relationships will resume from the point of disruption. 

Customer strategy updates are necessary as customer priorities, focus and behaviour patterns are likely to have changed. Rule-based, non-dynamic segmentation models may also no longer be fully valid. A good starting point for the update of your customer profitability strategy is to ask these questions:

– Can I measure the impact of the downturn on CLV? Do I apply CLV (Customer Lifetime Value) as a leading profitability metric for the customer base, my campaigns and discounting? 

– Is my strategy for key customer segments based on value? 

– Is the segmentation still valid, as a decline in demand or customer hiatus has likely had a major impact on customer preferences and price sensitivity?

– Do I understand the changes in customer purchase patterns during recovery?  

– Have I updated my customer propensity scoring models to buy, based on different recovery scenarios? Do I understand the effects of discounting? Have I adjusted my up/cross-sell campaigns?

– Have I analysed changes in customer journeys? Has there been a significant shift towards digital touch points? Do I need to re-assess engagement models, customer pain-points and re-design experiences altogether?

If several of your answers were negative, you need a brush-up of your customer analytics tools. You will need them for managing the profitability of your customers in the near future.

Three recipes for managing customer value in downturns

1. Optimise the value of your most valuable customers during the rebound

The crisis has impacted the priorities of your most valued customers. Up- and cross-selling activities should be updated to reflect this. The focus on ROI in marketing and sales now forces organisations to add analytical sophistication. In industries with demand disruptions, even returning best customer behaviour might appear irregular. New patterns will emerge as the recovery progresses. Propensity scoring, next best offer and other predictive tools should be calibrated based on the new data as it becomes available. Best customer likelihood to buy at a premium price might also have changed.

For the businesses where most customers, including the best, have temporarily all but disappeared, this is the time to assess what actions will best drive their behaviour during the rebound. Returning customers should be greeted and prioritised based on their potential future value. Pricing, discounting and promotions should be re-assessed based on data-driven insights of customer needs and behaviour during the recovery. Purchase patterns might have changed permanently. 

If you need help with customer value optimisation please contact us!

2. Manage your unprofitable customers

During growth periods, companies tend to accumulate unprofitable customers. All companies have strategies for customer acquisition but few companies have efficient strategies for managing the profitability of individual customers, including measures as drastic as relationship termination. Profitability rather than the absolute size of the customer base should be a principal KPI during the recovery. 

Boozt reportedly did shed their unprofitable customers to improve 2019 earnings, with a significant impact on margins. Introducing pricing schemes for shipping and deliveries are good alternatives to service denials. 

There is also significant profitability potential within unprofitable customer segments. There are various methodologies to differentiate your products, services and pricing to cover the full cost of service for these customers. Persistently unprofitable customers should be shed with minimal cost or brand damage. Alternatives are managing service channels and response times based on profitability, discount eligibility based on customer profitability, as well as cross-up selling strategies. 

If you want to hear more about Avaus’ cases and solutions, we are happy to help:

3. Reduce the risk of customer churn

Downturns provide a premium for customer retention investments. In some subscription businesses, churn may temporarily decrease during downturns, as customers cease to make active decisions. Conversely, many discrete purchase-based businesses are now experiencing hiatuses. Besides abruptly interrupted revenue  streams, this creates the unprecedented challenge of increased churn risk in all customer segments. The challenge is aggravated by the loss of information in the case of customer hiatuses. Win-back actions should be based on pre-crisis customer value. 

Reducing the churn of ongoing relationships can be done with vaccination activities. You predict the impending loss of a customer, as well as the likely reason, and try to prevent this from happening. Methods range from proactive discounting, service, value-add or simply cross- and up-selling to commit for a longer period of time. Preventing churn “in-flight” is popular with subscription business models, where you persuade your high-value customer to stay with relevant offers.

Win-back programs address customers who have already churned – familiar to anyone who ever received an email saying “we miss you, come back”. With increased predictive power (i.e. more data sources), the granularity of your customer insight and the precision of your churn management activities increases, and so does the saved revenue. 

Final remark – will the COVID-19 crisis force customer-centricity into siloed marketing organisations?

As customer profitability should become a leading metric in any company’s performance in the months and years after the COVID-19 crises, marketers might finally need to address the reasons why customer-centricity has not yet become a reality. Some of the most quoted challenges include siloed organisations, product focus, sales reporting and budgeting structures (product vs customer) as well as low data quality and data literacy. At Avaus, we are happy to help you remedy any one or all of these issues.

Written by  Anna Trygg, Ola Ottoson, Emma Storbacka, Saija Ekman