It’s time to stop including low-value customers in your customer lifetime value analysis. You can take it one step further and fire these customers. Stop marketing to them. Stop producing products that only low-value customers buy.
In this post, we will discuss how bad customers impact your business from a growth perspective and from the viewpoint of board members and investors.
Not the best
Bad customers can make their way into your customer base in a variety of ways. We define a “bad” customer as one that has low customer lifetime value. This means that over their lifetime as a customer, they will not spend very much money with your business. In fact, they may not even spend enough money to cover the cost to acquire them.
One way bad customers pop up is through discounts and promotional offers. Take a look at your current customers. Are there certain customers that only purchase when a very steep discount is offered? In these cases, the margins might be so low that these purchases aren’t worth it to your brand. To take control of this situation, you can start personalizing your discounting strategy.
Other customers might sign up for a free trial and then cancel their subscription before ever paying full price. You can almost guarantee these customers are spending less than the cost to acquire them. Consider adjusting the terms of your free trial offer. Perhaps to get two weeks of your subscription for free, the customer has to sign up for two weeks paid at the outset. At the very least, make sure each customer can only sign up for the free trial once.
Another way you may acquire bad customers is through certain products. Take a look at each product in your lineup. Are certain products only purchased by low-value customers? Do these products have a lot of one-and-done customers? If only “bad” customers are purchasing certain products, consider removing them from your lineup altogether. Alternatively, you could bundle these products with others or even adjust the packaging or format to encourage repeat purchases.
Fire the bad ones
While it seems counterintuitive to think negatively about customers that are spending money with your brand, it’s necessary for your business to survive and grow. Focusing on acquiring and retaining high-value customers makes perfect sense. But you should also be actively avoiding very low-value customers.
You can fire bad customers in several ways. One is through your promotion and discounting strategy. Instead of offering a blanket discount to all customers, like 40% off, personalize your discount strategy based on customer lifetime value. You can afford to reward your high-value customers with better discounts. Time your discounts around predicted churn dates to retain high-value customers by encouraging a repeat purchase. At the same time, stop offering discounts to bad customers as an easy way to fire them.
You can also fire bad customers through your product strategy. As mentioned above, stop making products altogether if they only attract low-value customers. Adjust the packaging, format, or even promotion of certain products to attract higher-value customers.
Finally, take a look at your customer acquisition channels. Are there certain channels that bring in high-value customers and others that bring in low-value customers? Shift your budget to the channels that bring in the best customers. If you’re only acquiring one-and-done customers on Facebook, for example, remove that channel and overhaul the strategy before posting new ads.
Meeting the board
At board meetings, you should also remove bad customers from your reporting and projections. At a high level, if you keep including low-value customers in your customer lifetime value analysis, you’ll drag the overall LTV:CAC ratio down. This makes your brand look less favorable.
Make the board aware of customers that you are excluding from reporting. For example, if you previously sold a product that only brought in low-value customers, consider removing that group from your reporting altogether. You can share that, because you removed the product from your lineup, those customers have no influence on the future growth of your brand.
One downside to this approach is that your overall customer base will look smaller. But a smaller, more profitable customer base is better than a larger group that includes low-quality customers.
Pitching to investors
Just like when talking to your board, you want to present your best customers to potential investors. If you fire or remove bad customers, you will be able to report a higher LTV:CAC ratio and show better growth projections.
LTV:CAC is one of the key metrics that buyers and investors look at when interested in a brand or business. Be careful about the customers you include when calculating this ratio. As mentioned above, you can exclude the following bad customers:
- Customers that purchased products you are no longer selling
- Customers who came in through steep discounts you no longer offer
- Customers from channels you have stopped using or where you adjusted your targeting strategy
Be upfront with investors about which customers you included and which you excluded in the LTV:CAC calculation. It makes sense to remove certain low-value customer groups because they don’t represent the future state of your business. You have shifted your strategy to acquire and retain the best customers—and fire the bad ones—so investors should see this change reflected when reviewing your metrics.
Quality of customers
Firing bad customers is a necessary step to maintain profitability and scale your business. When you make big changes in your acquisition, retention, and product strategies, your reporting should reflect those adjustments. You should present an LTV:CAC ratio that best represents the future state of your brand to investors and board members.
This practice is very common for financial reporting. For example, in a Quality of Earnings report, banks will adjust EBITDA to exclude any historical values that no longer reflect the future of the business. You can use this same strategy when presenting your Quality of Customers report to your board and potential investors. Remove historically bad customers that no longer reflect your customer base.
Learn more about Retina’s Quality of Customers Report or contact us for more details.