Zoe Ward
Optimisation Strategist
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  • Customer Psychology

3rd Jul 2017

5 min

In the world of ecommerce, there is a reason why a brand’s best customers are referred to as VIPs. Customers who invest a lot of time and money in your brand are very important people indeed and are crucial to the overall success of your business.

The Pareto Principle was initially coined based on the finding of Italian economist Vilfredo Pareto. Pareto wrote, following on from his research that 80% of the land in Italy was owned by 20% of the population. Further similarities were noted and have since been applied to many different areas.

So how does this figure in ecommerce and how can you use it in your business? When applied to ecommerce this translates to, 80% of your profit comes from only 20% of your customers.
This principle may not be strictly 80/20 for every brand, however, the general theory remains the same – your top customers will stick around if they are treated well.

 

The 80/20 rule

 

Understanding the characteristics and preferences of your best customers is important for two main reasons: 1) to continue to provide this group with what they’re looking for and keep them as customers, and 2) to target your marketing efforts toward prospects that resemble your best customers.

How do you go about identifying your best customers?

You may be thinking, “My best customers are those who spend the most money” and you would be correct…BUT! (there’s always a but) you need to ask yourself; are they huge purchases once a year? Or small purchases but frequently? This is where the type of brand you have comes in. For example, furniture stores may see large purchases while clothing stores are likely to see more frequent spenders. What they spend may be the same, just over different periods of time.

However, before you can start to understand your best customers you need to find them first. There are a number of ways you can identify them including RFM (recency, frequency, monetary value) analysis to using advanced behavioural clustering.

This blog will focus on the RFM approach:

The theory behind RFM is straightforward

• Customers who have purchased from you recently are more likely to buy from you again than customers who haven’t visited for a while
• Customers who frequently spend with you are more likely to buy again than customers who buy infrequently
• Customers who spend more are more likely to buy again than customers who spend less.

To calculate a customer’s RFM score, you will need;

1) Most recent purchase date 2) number of transactions within the period (often a year), and 3) total or average sales attributed to the customer. Then they will need to be coded and ranked (more information on this here)

Once you have identified these VIP customers, we need to address how to target them and ensure their shopping experience as pleasurable as possible.

 

ASOS loyalty scheme

Loyalty schemes:

Rolling out the red carpet for your VIP customers will ensure they feel valued and appreciated. These customers have developed a personal relationship with your brand, they have invested time and (most importantly) their hard earned money. So how can we make them feel special?

VIP programs increase customer satisfaction and encourage customers to purchase by rewarding them. In fact, 81% of customers are more likely to keep spending on brands that offer loyalty programs. So, VIP programs can boost sales, build customer engagement and retention. It’s a win-win situation!

Rewards vary depending on the type of industry and brand but are likely to be in the form of money off in store and promotions. Others provide ‘money can’t buy’ experiences such as exclusive events, prizes and personal shoppers.

 

ASOS A-List

 

Loyalty schemes reward progress and customers can become hooked on earning points that can progress to the next level. This has a similar outcome to gamified content and people love working towards a goal. They are essentially being rewarded for spending their own money.

Finally, Your VIP customers could be shown a different experience when returning to the site to give the impression of exclusivity and importance. A wonderful example of this is the treatment you see when you are a Linkedin Premium customer. The usual blue “in” logo is now gold which may elevate feelings of superiority and serves to remind you of your premium status. This increases the perceived value and belonging to an exclusive club.

 

LinkedIn Premium

 

In order for your ecommerce brand to thrive, you must understand the importance of the 80/20 rule. Your VIP customers are probably your most lucrative sources of revenue, so it’s important you dedicate more time to them, pay more attention to their habits, behaviour, needs and have strategies in place to keep them engaged with your brand.
By rewarding loyal customers and letting them know you appreciate their business, you strengthen your relationship with them and boost sales amongst an already eager group of shoppers.