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We all agree that customer retention is a good idea but it can all look a bit daunting and expensive.

If you could easily classify your prospects and then designate marketing budgets accordingly that would make sense, wouldn't it?

Where you start and how much time will I have to invest are common questions, so here is a formula that is used by numerous sales firms around the world based on 3 simple criteria. 

How recently, how often and how much?

Recency 
Assign a value based on the last 24 months order date, e.g. 1 month ago = 25 points, 24 months ago = 1 point.

Frequency
Assign 1 point for each sale in the last 24 months

Monetary 
Assign a point system for the value of the sales in the last 24 months say 3 for high 2 for medium and 1 for low (based on your average sales volume).

Also note here that this is “dynamic” in that your list ages every month which accurately reflects the real life value of your prospect list.

Math Time (simple - I promise!):

Now lets look at some examples to see how this pans out with some data:

Excellent customer profile.
Last purchase 2 months ago = 23 points. 
8 purchases in the last 2 years = 8 points. 
Sales Volume = High = 3 points.

Customer value: 23 x 8 x 3 = 552

Low value customer profile.
Last purchase 18 months ago = 6 points 
2 purchases in the last 24 months = 2 points
Sales Volume low = 1 point

Customer value: 6 x 2 x 1 = 12

How to use customers values to boost sales:

Work out all of your customer values and then separate them into groups.  You could group them by percentage such as the top 20%, 21%-80% and 81%-100% which would give you three groups where the 20% are the most valuable clients.  Or, you could assign some arbitrary figure like anything above 300 points is the top group and 299 down to 100 is an average customer.

However you separate your list give them some names to refer to them by such as Gold, Silver and Bronze.

Once you've got your groups you can then allocate your marketing budget accordingly.  Since the "Gold" group are your best customer it would make sense to spend a good percentage of your marketing budget on them, so let's say you assign 50% to this group.  Maybe then "Silver" would get 30% and "Bronze" just gets the remaining 20%.

Apart from generating more sales a sub goal is to move everyone up the ladder into a better category.  Perhaps three divisions won't be enough in the future if you get this right, maybe you'll need a "Diamond" or "Platinum" category as well.

You can of course adjust your profile system to better suit your industry but the above would be a good start.  

Good luck! 

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