Nurture Customers

What are the Different Types of Customers?

Customers play a significant role in any business. To understand customer behavior and to better allocate resources to different customers to generate the highest profit, it is necessary to be able to identify and segment different types of customers. By better understanding the different types of customers, businesses can be better equipped to develop successful strategies.

 

 

Five Main Types of Customers

In the retail industry, customers can be segmented into five main types:

1. Loyal customers: Customers that make up a minority of the customer base but generate a large portion of sales.
2. Impulse customers: Customers that do not have a specific product in mind and purchase goods when it seems good at the time.
3. Discount customers: Customers that shop frequently but base buying decisions primarily on markdowns.
4. Need-based customers: Customers with the intention of buying a specific product.
5. Wandering customers: Customers that are not sure of what they want to buy.

#1 – Loyal Customers

Loyal customers are the most important segment to appease and should be top-of-mind for any company. This type of customers generally represent no more than 20% of a company’s customer base but contribute the majority of sales revenue. Loyal customers, as the name implies, are loyal and value a product heavily.

In addition, loyal customers are likely to recommend the company’s products to other people. Therefore, it is important to solicit their input and feedback and involve them in a company’s decision-making process. Heavy emphasis should be placed on loyal customers if a company wants to grow.

#2 – Impulse Customers

Impulse customers are the best customers to upsell to and are the second most attractive segment (after loyal customers) to focus on. Impulse customers do not have a specific shopping list in mind and purchase products spontaneously. In addition, impulse customers are typically receptive to recommendations on products.

Impulse customers are second to loyal customers in the generation of sales revenue. Keeping these customers in the loop on new product offerings goes a long way in improving a company’s profitability.

#3 – Discount Customers

Discount customers play an important role in turning over a company’s inventory. Therefore, discount customers are a key contributor to a company’s cash flow. This type of customer seldom purchases products at full price and shops around for the best markdowns.

Discount customers are resilient to upselling, are usually the least loyal segment of customers, and generally move on when better markdowns are available elsewhere.

#4 – Need-Based Customers

Need-based customers are driven by a specific need. In other words, they enter the store quickly, purchase what they need, and leave. These customers buy for a specific need or occasion and are hard to upsell. It is important to note that need-based customers can be easily drawn to other businesses.

Therefore, it is important to initiate positive personal interaction with this customer segment in order to retain them. Converting need-based customers to loyal customers is attainable with proper positive personal interactions.

#5 – Wandering Customers

Wandering customers draw the largest amount of traffic to the company while making up the smallest percentage of sales revenue. They have no specific need or desire in mind and are attracted by the location of the business more than anything else. These customers enjoy the social interaction of the shopping experience.

Therefore, spending too much time trying to appease this segment can draw away from the more profitable segments. Although this segment generates the least amount of sales revenue, providing insightful information about products to these customers can stimulate interest and ultimately result in a purchase.

What are Buyer Types?

Buyer types are a set of categories that describe the spending habits of consumers.

Consumer behavior reveals how to appeal to people with different habits and preferences. The spending habits of a company’s consumer base significantly affect its overall business. Understanding the different behaviors of buyer types is crucial no matter the product or service. With regard to marketing, there is no “one size fits all” approach.

 

 

Types of Buyers and their Characteristics

Buyer types fall into three main categories – spendthrifts, average spenders, and frugalists.

 

1. Spendthrifts

Spendthrifts are a group of consumers who spend without hesitation. The spendthrifts feel little or no pain in making a purchase. They love purchasing what catches their eye immediately. Spendthrifts are more likely to resort to impulse buying. They need minimal convincing to make a purchase. They form the smallest percentage of the overall population.

A lot of people misjudge spendthrifts and brand them as materialistic and extravagant. However, it would be more appropriate to describe them in terms of when and where they feel the pinch in the entire purchasing process. They rarely feel any purchasing pain until after the purchase is complete. Below is a list of the characteristics of spendthrifts:

• They lack self-control in spending.

Spendthrifts are not able to exert any level of control when exposed to spending situations. The only control they can access when exposed to spending situations is a lack of money, low credit score, maxed credit cards, or other strict economic factors.

• They are more likely to incur debts.

Spendthrifts tend to overspend and overindulge. Since they experience minimal pain in parting with their money compared to the general population, they are much more likely to borrow in excess to satisfy their spending habits.

• They are not savers.

Spendthrifts anticipate purchasing and don’t feel the need to save. In the same way that they don’t experience the pain of purchase, they also don’t feel the pinch of not saving consistently, until they encounter a situation where they need to have some savings (such as losing a job).

 

2. Average Spenders

Average spenders spend on what they believe is appropriate. They weigh their options and decide on what they think is a good investment. Average spenders know how their budget looks, and thus they act accordingly. The following describes the average spenders:

• Average spenders weigh their options and think about a buying decision for a while. They consider their decision criteria, make comparisons, search for discount codes, and finally make the decision.
• Average spenders seldom overspend or get involved in dramatic episodes of impulse buying. They may occasionally exhibit the behavioral characteristics of a spendthrift or a frugal.
• Average spenders are influenced by facts, but they are not fully controlled by those facts. They are partly influenced by messaging but will take their time before making a purchasing decision. They need to be persuaded that they are making the right choice, which happens when exposed to both data and emotional messages.

 

3. Frugalists

The frugalist is the terminology that is used to describe people with a tendency of holding onto and saving their money as long as they can, as opposed to spending it. Frugalists prefer to save rather than to spend money. They love to keep their money safe in a savings account rather than spend it.

Frugalists respond less favorably to marketing advertisements and commercials. They are controlled by the amount that they believe the products should cost and not what is being advertised. They demonstrate a low attitude towards spending and believe the amount they spend should be consistent with their budgets. They don’t indulge in luxurious expenditures. Frugalists are budgeters and planners.

The characteristics of frugalists are as follows:

• They feel the pain of purchase.

Since frugalists do not anticipate a purchase, they are likely to avoid it altogether. Spendthrifts feel the pain after the purchase, which is too late, but for frugalists, the pain is prior, which can prevent the purchase.

• They are overly self-controlled.

Frugalists exercise self-control when it comes to financial and spending matters. They tend to stick to their financial plans, and may even aim to spend under their budgets.

• They are savers.

Frugalists experience more security since they hold onto their money. They are likely to forgo a purchase just to save their money. While average spenders commonly set aside a portion of each paycheck for the purposes of saving, frugalists tend to set aside significantly larger percentages.

 

 

How to Appeal to the Three Buyer Types

 

1. Selling to a Spendthrift

Spendthrifts spend more with minimal convincing and save less. They are, therefore, your dream customers. The money they spend is not controlled by factors such as budgets or financial plans. They feel little buyers’ remorse and are rather driven by emotions. Selling to a spendthrift requires you to:

• Make your adverts with elements that trigger emotions and feelings, with a lot of visuals. To illustrate, using crowd-pleasers such as cute babies and puppies can be ideal for products and services aimed at spendthrifts.
• Leverage color psychology to increase appeal and conversions.

 

2.  Selling to an Average Spender

The average spender, just as the name suggests, falls in the middle, between frugalists and spendthrifts. Average spenders spend on an item that they think makes a good investment, while trying to save. They still indulge but within reason. They take their time to reason whether the items are worth the indicated or quoted prices. Average spenders are driven by both analytics and emotions and so, to appeal to them, one must:

• Strike a balance between appealing to emotion and providing quantitative analytics.
• Include a warranty, a money-back guarantee, or free shipping to appeal to their spendthrift characteristics and encourage them to buy with no fear.

 

3. Selling to a Frugalist

Appealing to a frugalist takes time and does not happen spontaneously. To sell to a frugalist, you need to take into account the fact that, if it is not within what they initially budgeted for, they are likely to reject it. To appeal to a frugal, you need to:

• Use negative emotional signals and words in your sales copy and adverts. For example, avoid saying “you deserve this” and instead say, “Secure your future by investing in this.”
• Make use of data, numbers, charts, and graphs to convince them, instead of just employing emotional appeals. Frugalists need to see, through quantitative measures, that they are getting the best value for their money.
• Be honest, precise, and straightforward with your pricing and product description.

 

Bottom Line

There are three different buyer types – spendthrifts, average spenders, and frugalists. Their purchase journeys and criteria can significantly differ, requiring businesses to be aware of their needs in order to appeal to each type. Understanding which techniques appeal to each buyer type can be very helpful when designing campaigns for a specific consumer segment.

What is Customer Profitability Analysis?

Customer Profitability Analysis is a tool from managerial accounting that shifts the focus from product line profitability to individual customer profitability. Activity Based Costing looks at the various cost drivers to accurately isolate costs and determine a product’s profitability.

In contrast, Customer Profitability Analysis is a method of looking at the various activities and expenses incurred in servicing a particular customer. In other words, it focuses on analyzing profit per customer rather than profit per product.

 

 

Calculating Customer Profitability

Calculating customer profitability begins by identifying the various costs incurred specifically in relation to servicing a specific customer or segment of customers.

For example, a solar panel company serves two types of customers: Individuals and Small Medium Enterprises (SMEs). For the attainment, servicing, and retention of its customers, the company is required to provide consulting and service visits, as well as process sale orders. Individuals require only one site visit before placing an order.

SMEs require more frequent visits, as they are based in multiple locations and are provided with after-sale service as part of the bulk purchase. The customers’ behavior and profitability are given by the following table:

 

 

Application of Customer Profitability Analysis

From the given example, the customer profitability of the Individual segment exceeds the SME segment. This insight then supports the company in its strategic decisions. It can shift its focus towards attracting and retaining more customers from the more profitable Individual segment. Alternatively, it can look for cost reduction approaches for its SME segment.

Potentially, it can work to redesign its purchasing process in order to reduce the frequency of visits or orders. Otherwise, it can look to charge its customers for additional service visits to shift the weight of the cost from the company to the customer.

 

Benefits of Customer Profitability Analysis

These insights might not be attainable from traditional reporting methods. In a company’s income statement, there is no granularity provided in the calculation of its Selling, General, and Administrative Expense line.

One of the most common marketing metrics of sales per segment may also be misleading. If the company reported 120 customers in the Individual segment and 80 customers in the SME segment, managers might believe that SMEs contribute to two-thirds of their annual sales.

 

 

By following the Pareto 80-20 Rule, they conclude that they should focus on this smaller group of customers that contribute to a larger share of annual revenue. However, as we know from the added analytical granularity offered by the above Customer Profitability Analysis, they would then be allocating more resources to a less profitable customer segment.

 

 

By examining Customer Profitability rather than just sales, the company will gain a more accurate insight into which customer segment is the stronger driver of its overall profitability.

 

Criticism of Customer Profitability Analysis

The biggest criticism regarding Customer Profitability Analysis is the selection of a limited time frame and segmentation criteria. However, with the emergence of Big Data, customer profitability can be calculated using new methods that determine a customer’s lifetime value rather than just the sales within a restricted time frame.

Additionally, with respect to segmentation, predictive analytics will be able to estimate the value of individual customers by identifying drivers in behavioral patterns rather than just the value of the average customer in its respective segment