April 17, 2022

Eventually, Margin Matters at a Customer Level

I segmented customers based on historical gross margin percentage, then segmented customers again by life-to-date orders. Finally, I measured future gross margin percentage for each combination of segmented customers. The results are outlined in the graph below.

After a first purchase, low margin customers generate lower margin than higher margin customers, but the difference isn't huge ... 53% for low margin customers, 58% for high margin customers.

After a second purchase? 52% vs. 59%.

After a third purchase? 52% vs. 59%.

6th - 10th purchase? 49% vs. 60%.

11th - 25th purchase? 47% vs. 61%.

26+ purchase? 40% vs. 60%.

I know, you have those "loyal" customers you love and some of them generate two-thirds the profit of other comparable customers. You'd rather have some non-loyal high-margin customers, wouldn't you?

Also notice in the graph that there isn't much of a difference between high-margin customers and average-margin customers, in terms of future margin percentage. They key differentiator is low-margin history ... and low-margin history (for this brand) is a function of low-margin categories coupled with discounting and then applied to loyalty promotions.

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