Summary: The Customer-Base Audit: The First Step on the Journey to Customer Centricity by Bruce G. S. Hardie, Michael Ross, and Peter Fader

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If you lack clarity about the number of unique customers you have, the health of your customer base and who your highest value customers are, you’re not alone, say Peter Fader, Bruce G. S. Hardie and Michael Ross. Many businesses have a 2D view of their profits and revenues, and fail to properly consider the additional and vital dimension – customers. Learn the basics of conducting a customer-base audit, which will empower you to spot problems and opportunities before they arrive while gaining a more complex understanding of the customer behaviors behind the numbers.

Take-Aways

• Many firms lack clarity on who counts as a customer and customer statistics.
• Move past the 2D analysis of your revenue, and embrace a data cube approach.
• Analyze customer cohorts to better understand the value they bring your firm.
• Track “same-customer performance” over time to understand behavior changes.
• Conduct a cohort analysis to gain a more nuanced understanding of your customer base.
• Focus on attracting the highest value customers – not the most customers possible.
• Deepen your understanding of product performance by applying a customer-centric lens.
• Build customer centricity into your business plan, embracing a new operating mind-set.

Summary

Many firms lack clarity on who counts as a customer and customer statistics.

How much do you know about your customer base? Do you know which products appeal most to your highest value customers? Do you know how many first-time buyers plan to make a second purchase or how your customers differ in the value they bring your firm? If you’re like most senior executives, you probably can’t answer these questions offhand. Most organizations lack adequate reporting structures and systems, reflecting a failure to truly embrace a customer-centric mind-set. Fortunately, a “customer-base audit” can help you develop a vital understanding of your organization’s profit and revenue streams while guiding the creation of a healthy growth strategy.

“Imagine looking at your business under a microscope. That is what a customer-base audit is like: It provides deep insight into customer differences and dynamics that have always been there but were typically not visible.”

When beginning their customer-base audit, many executives cannot even agree upon what constitutes a customer. For example, is someone who uses a platform’s services, such as Google, a “customer” or simply a “user” if they’re not subscribing to premium paid services? When coming to a consensus about whom you view as a customer, consider details such as:

• Whether making a payment is required to be labeled a customer.
• Whether you consider the payer or the person they’re purchasing for (e.g., an employee) a customer.
• Do customers include people who haven’t contributed to your revenue stream in the past year but who you still have legal obligations to (e.g., users with warranties)?
• Are customers who buy your product from channel intermediaries still customers?

Move past the 2D analysis of your revenue, and embrace a data cube approach.

Your “top line,” which refers to your gross sales or revenue, is the sum of every transaction over a given period. Your goal is to identify “customer profit” with more sophistication, ultimately moving past simple analysis such as “spend minus direct product costs” toward considering semi-variable costs (e.g., operations costs such as returns and packing). To better conceptualize your business’s transactions, it helps to use a data cube, visualizing the three dimensions of the cube as the following: the customer making the transaction, the time in which the transaction occurred, and the product sold. Most businesses only reflect on the dimensions of the product and time, ignoring the customer dimension – it is as though one of the cube’s edges is facing away from them, outside their perception. Stop analyzing transactions in this 2D manner, and embrace a more 3D approach, pivoting the cube’s orientation to focus more on understanding the customer behavior driving your top line.

“The measurement of customer-level profit is the Holy Grail for any firm that aspires to be customer centric.”

Analyze the customer dimension by using the following lenses:

• First lens – Focus on the customer’s behavior over a specific time (e.g., a quarter) to better understand performance.
• Second lens – Reflect on the customer’s behavior over the dimension of time, but take a different view, sorting results by focusing on circumstantial events, such as natural disasters, that may have impacted your top line.
• Third lens – Focus on the performance of a customer cohort or those you acquired within the same period and how it evolves over time, tracking cohort-related buying patterns.
• Fourth lens – Compare cohorts to one another to understand the differences between the customers you’ve acquired at different times: How has the quality or quantity of customers you attract changed over time?
• Fifth lens – Integrate all your findings and consider customer transactions over time more complexly and holistically.

Analyze customer cohorts to better understand the value they bring your firm.

Look beyond averages when assessing customer behavior as “there is no average customer,” and analyze customers with the three D’s:

1. Distributions – Look at the distribution of total spend, the number of customer transactions and the average spend per transaction.
2. Decomposition – Conduct a multiplicative decomposition to better understand underlying revenue patterns. For example, you could decompose your quarterly cohort revenue into the number of active cohort members and the average spend of each active member. Next, you’d decompose your active members figure into cohort size and the percentage of the cohort that’s active before decomposing your average spend per active member into the average order frequency (AOF) and average order value (AOV).
3. Decile analysis – Conduct a decile analysis to better understand differences in the value different customers bring your firm. Consider organizing your data by sorting your customer cohorts from most to least profitable.

Track “same customer performance” over time to understand behavior changes.

To better understand overall changes in your company’s performance from one year to the next, it’s helpful to view the customer as your “fundamental unit of analysis.” Dig deep when analyzing customer behavior, looking for the minor changes behind the bigger changes. For example, if the mean average spend increased per customer in a year, ask yourself how many of the customers accounting for sales in your current year are the same as those in past years.

“We can get a sense of ‘same-customer performance’ by looking at the revenue and profit associated with those customers who made at least one purchase in both years.”

Just as retail outlets count “same-store-sales,” to better understand how individual stores affect the company’s overall performance, you can also track “same-customer performance,” looking at the profit and revenue associated with individual customers who’ve made one or more purchases two years running. Gain even deeper insights by conducting a modified decile analysis, “creating bins of customers,” to separate the most from the least profitable to better understand your highest value customers. When measuring your firm’s performance changes between two years, be sure to account for events outside your control, such as a public health crisis or recession, that could impact your results, as a lack of growth may not be due to a failure on your firm’s part. If you notice customers “disappear” or spend less money from one year to the next, reflect on plausible explanations and the tactics you’re engaging to inspire purchases.

Conduct a cohort analysis to gain a more nuanced understanding of your customer base.

When trying to understand how your customer’s behavior within a cohort evolves over time, consider using an RFM analysis, which stands for the following:

• Recency – Identify when customers in a cohort last made a purchase, then group cohort members based on recency.
• Frequency – How many transactions have cohort members made over your chosen period? Sort customers again based on frequency.
• Monetary value – Reflect on the cohort’s spend or the profit you’ve made on average per transaction over time, creating groups based on value.

“One of the most immediate and important observations that arises in a customer-base audit is that all customers are not created equal.”

Cohort analysis is beneficial, as it can help you better understand how customers’ buying behavior changes as they “age” and the number of repeat customers you have.When conducting a cohort analysis, executives should consider the following:

• The technologies the firm will leverage to “tag and track” new customers.
• How your firm plans to assess the effectiveness of campaigns and promotions (e.g., Do you pay attention to long-term and short-term effects?).
• The reporting mechanisms you have to keep track of customer behavior changes.
• Other acquisition characteristics you could use to sort cohorts aside from time (e.g., those who purchase a specific product).
• How long do you wait before you stop tracking and attempting to win back customers who’ve disappeared?

Focus on attracting the highest value customers – not the most customers possible.

You should be conducting “cohort-to-cohort analyses” just as regularly and routinely as you conduct “period-to-period analyses” (e.g., such as comparing sales of products within the same store). Ideally, you aim for “cross-cohort stability,” in which you don’t see dramatic differences between cohorts. However, analyzing the differences between cohorts can help you spot early warning signs of customer base degradation. For example, if each new cohort makes fewer second purchases and takes longer to do so, you should reflect on what’s causing this (e.g., new competition) and take action.

“Every growth-oriented firm is constantly seeking new customers, but the customer-centric firm will focus at least as much on the quality of the next batch of customers as they will on the quantity of them.”

Using all five lenses, you should be auditing your customer base to determine its overall health and gain a deeper understanding of underlying customer behaviors impacting it. If you notice inter-cohort differences you don’t understand, then start researching, perhaps having conversations with people at your firm who might shed some insight into the changes. For example, have they launched new promotional or pricing policies or altered your product mix? For a thriving customer base, it’s important to focus on more than simply attracting new customers – you should also focus on growing your existing customers’ value to keep your base healthy.

Deepen your understanding of product performance by applying a customer-centric lens.

Now that you’ve gained a more nuanced understanding of your customers’ influence on your revenue, you can analyze the product dimension with more complexity – understanding your customers will deepen your knowledge of product performance. For example, you can better identify high-value customers by integrating metrics such as the number of product units customers have purchased (#units) and the average number of product categories they’ve purchased from (#categories purchased) into your decomposition analysis to identify which customers spend the most and buy from the most categories.

“Products should be seen as a vital conduit of customer profitability, but ultimately it is the customer driving revenue, not the product.”

You can also look at the category-level performance (not just firm-level) to understand which categories appeal most to buyers. To decompose category profit, consider using the following equation: “category profit = the number of active firm customers (in the given period of time) × the percentage of customers active in the category (which we will also call category penetration) × average category order frequency (ACOF) × average category order value (ACOV) × average category margin.” By integrating the customer dimension into your product performance analysis, you can better understand what’s really profitable at your firm. After all, the product categories with the highest price tags may not be your most profitable if customers buy more from less expensive categories.

Build customer centricity into your business plan, embracing a new operating mind-set.

Structure your customer-centric strategy around these three elements:

• Customer-centric planning – Don’t simply build your business plans around traditional elements such as geography, product line or channels; make customers central to your planning. Do so by figuring out how much profit and revenue you already get from your existing customers and how many new ones you’ll need to find to achieve your desired growth, carefully monitoring customer performance.
• Customer acquisition – Focus on aligning customer acquisitions to challenges and opportunities arriving based on the time of year (e.g., perhaps your business performs better in the Fall); aligning your products to customer acquisition, understanding the role different categories play in a customer’s life cycle; aligning acquisition spend, such as marketing spend, with customer value; and looking “beyond that first purchase” to focus on acquiring customers.
• Customer development and retention – Create incremental profitability and drive engagement by investing in different aspects of your proposition, including service and pricing, with your customer’s values in mind; investing in your highest value customers most; nudging customers to take your desired actions; and managing your loss-making customers (e.g., stop marketing to customers who return products more often).

“Many companies talk about being customer centric but keep making the same decisions with the same logic, in the same silos and with the same incentives. How can they be surprised when nothing changes?”

To recap, to truly embrace customer-centricity, you must view your customer as the fundamental unit of analysis, put acquisition, retention and customer development at the center of your growth accounting framework, put long-term customer profitability at the center of your decision-making and learn to recognize your highest-value customers. Your customer-base audit is only the beginning of your transition toward customer-centricity. Start cultivating a culture of curiosity around customer data as you inspire people at your firm to enthusiastically adopt your new customer-centric operating mind-set.

About the Authors

Peter Fader co-founded Theta, a firm working to revolutionize finance through customer-based valuation, and the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania. He is the co-author of The Customer Centricity Playbook (2018). Bruce G. S. Hardie is a marketing professor at the London Business School. He develops tools to analyze marketing and customer data. Michael Ross is the senior vice president of retail data science at EDITED, and a non-executive director at Sainsbury’s Bank, N Brown Group and Domestic & General. He has co-founded businesses such as Dynamic Action and eCommera, and served as a consultant at McKinsey & Company.

Review

The book “The Customer-Base Audit” by Bruce G. S. Hardie, Michael Ross, and Peter Fader offers an insightful guide for businesses to assess their customer base and embark on a journey towards customer centricity. The authors present a structured approach to identifying, understanding, and leveraging customer segments, which can help organizations boost their revenue and sustain long-term growth.

Key Takeaways

• The Importance of Customer Centricity: The book emphasizes the significance of shifting from a product-centric to a customer-centric approach, where businesses focus on meeting the needs and wants of their customers. The authors argue that this shift is crucial for achieving sustainable growth and staying ahead of the competition.
• The Customer-Base Audit: The authors introduce the concept of the Customer-Base Audit (CBA), a systematic process to evaluate a company’s customer base and identify opportunities for growth. The CBA involves analyzing customer data to segment customers, understand their behavior, and determine their lifetime value.
• Identifying Customer Segments: The book provides a framework for identifying and categorizing customer segments based on their behavior, preferences, and profitability. The authors describe four primary segments: Loyalists, Misusers, Strangers, and Ne’er-Do-Wellers. They also explain how to analyze customer data to identify these segments and their characteristics.
• Understanding Customer Behavior: The authors discuss the importance of understanding customer behavior, including purchasing patterns, usage rate, and loyalty. They provide examples of how businesses can use data analytics tools to track customer behavior and develop strategies to retain valuable customers.
• Leveraging Customer Segments: The book offers practical advice on how businesses can leverage their customer segments to increase revenue and customer loyalty. The authors suggest strategies such as personalization, customized marketing messages, and tailored product offerings to meet the needs of different customer segments.
• Case Studies: The book includes several case studies of companies that have successfully implemented the CBA framework, such as American Express, Intuit, and Dell. These examples demonstrate how the CBA approach can be applied across various industries and provide insights into the challenges and opportunities that companies may face during the process.
• Implementation Challenges: The authors acknowledge the potential challenges that businesses may face when implementing the CBA framework, such as data quality issues, organizational silos, and cultural barriers. They offer practical advice and strategies to overcome these challenges and ensure a successful implementation.

Strengths

• Actionable Framework: The book provides a comprehensive and actionable framework for businesses to assess their customer base and develop strategies to improve customer engagement and loyalty.
• Data-Driven Approach: The authors emphasize the importance of using data analytics to understand customer behavior and preferences. They provide practical guidance on how to analyze customer data to identify patterns, trends, and opportunities.
• Case Studies: The inclusion of real-life case studies adds credibility to the CBA framework and demonstrates its applicability across different industries.
• Relevant for Both B2B and B2C: The book’s approach is relevant for both business-to-business (B2B) and business-to-consumer (B2C) companies, making it a valuable resource for a wide range of businesses.

Weaknesses

• Complexity: The book’s framework may appear complex, especially for smaller businesses or those with limited resources. Implementing the CBA approach may require significant investments in data analytics tools and personnel.
• Lack of Emphasis on Emerging Technologies: The book does not extensively discuss the role of emerging technologies, such as artificial intelligence, machine learning, and the Internet of Things (IoT), in customer engagement and loyalty.
• Limited Focus on Ethical Considerations: The authors do not dedicate sufficient attention to the ethical considerations of collecting and using customer data, which is a critical aspect of customer-centric businesses.

“The Customer-Base Audit: The First Step on the Journey to Customer Centricity” is an informative and practical guide for business leaders looking to improve their customer-centric strategies. The book provides a comprehensive framework for conducting a customer-base audit and includes numerous case studies and practical examples from experienced practitioners. While the book may have some limitations, such as a limited focus and technical language, it is an invaluable resource for anyone looking to understand their customers better and create personalized experiences.