Do You Really Understand Your Best (and Worst) Customers?

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Move from talking about “what makes us money” to “who makes us money.”

As Covid-19 declined, a European multichannel retailer observed a decline in its online revenues, which caused alarm. But then they looked at the data a different way, focusing on transactions by individual customers.

As you analyze your firm’s revenues and profits, or as you make plans for the future, what’s your unit of analysis? A customer-base audit is a systematic review of the buying behavior of a firm’s customers using data captured by its transaction systems. The objective is to provide an understanding of how customers differ in their buying behavior and how their buying behavior evolves over time.

The starting point is a list of transactions for each customer . This will reside somewhere in your company’s operational IT system. How do we approach the task of gaining insight from such a customer-level summary? As we reflect on the various questions that are asked when leaders seriously engage with the idea of understanding the performance and health of their business using the customer as the atomic unit of revenue and profitability, five broad themes appear, which we call the five lenses of a customer-base audit.

The analyses that answer these questions are central to getting the firm to think about the cohort as a key unit of analysis when seeking to understand revenue and profit dynamics. A common conclusion is that the revenue for each cohort decays over time and recognizing the nature of this decay is critical for understanding long-term growth.Having looked at one cohort, it is natural to look at another cohort and start questioning how and why the cohorts differ.

 

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