How To Find And Serve Your Best Customers
In 1896 Italian economist Vilfredo Pareto observed that 20% of his pea pods accounted for 80% of his peas. He also discovered that 80% of land in Italy was owned by 20% of the population.
You can observe these phenomena in all nooks and crannies of life.
Originally called the Pareto principle and now colloquially known as the 80/20 principle or the power-law distribution. Because this law is present throughout all areas of life, it’s a hidden gold mine for entrepreneurs. We can apply it everywhere in our businesses to discover new value.
In early 2020, when Covid hit, my gym lost 30% of its members in the space of a few months. Little did I know then that Pareto’s principle was going to be our saving grace.
We made many changes to the business that helped us survive but ultimately led us down the wrong path. The proof was in the pudding; we were losing members, fast.
We decided we needed to reconnect with our customers, find out where we went wrong and how to move forward.
The only way we were going to do that was by talking to our customers. But what customers?
At the time, we had 330 members. If we spoke with 330 people, the feedback would be incoherent at best and wholly counterproductive at worst. We’d have 100’s of different opinions and answers.
I didn’t know where to start.
Around this time, I was listening to a Tim Ferris podcast. He was interviewing an author named Richard Koch. They were talking about the ‘80/20’ principle. As it turns out, Richard was the one who wrote the book on the principle and introduced it to a mainstream audience. Better yet, his book focuses explicitly on how to apply the principle to business.
Long story short, I brought the book, read it and learned exactly how to answer my question. As the book explains, following Pareto’s principle, the top 20% of your customers generate 80% of your profits.
That was my aha moment. Instead of talking to everyone, we could focus on our top 20%—the members who contribute most of our profits and kept us in business.
They could tell us where we were wrong and how we could move forward.
There are several reasons why your top 20% are way more profitable than the rest.
Your top 20% will likely be your raving fans. The ones that tell their mates about you, the ones that leave you 5-star reviews on Google and share your social media posts. They’re the ones that are acting as the mouthpiece for your business and driving word of mouth.
Reid Hoffman, an incredibly successful entrepreneur and angel investor, believes that word of mouth sales are the singular most important metric or cause of any business success.
They’re the ones that require very little maintenance. They aren’t clashing with you over every last penny. They don’t kick up a fuss when your product or service isn’t performing correctly. They treat you more like a friend than a stranger. These people generally require fewer resources to look after because, in their eyes, you’re offering them more value than what they’re paying for.
• After looking through our numbers, I found the top 20% of our gym members were 5x more valuable than average.
So after being inspired by Richard and with the help of several other resources, which I’ll mention through-out this article, I created a process to find those top customers, ‘become friends’ with them and re-orientate our gym to serve them.
The long-term benefits this can provide to your business are massive. I would expect you to earn a minimum of 100x ROI from completing this exercise (assuming you use the fictional characters you’re about to discover to grow your business) within the next 12 – 24 months. Over the lifetime of your business, who knows what the end ROI will be.
The entire exercise took our gym manager and me about 25 hours to complete. So if I generously value my and our gym managers time at $50, we invested $1,250 into this process. Over the next 12 months, we use the information discovered from this exercise to find another 50 of these members and add $100k + revenue to our business.
FINDING YOUR TOP 20%
1. Learn how to calculate LTV
2. Find the highest value LTV customer group.
3. Dial down with additional criteria
4. Create a scoring system to find your best customers
5. Summarise into common groups
WHATS CUSTOMER LIFETIME VALUE
First, you’ll need to understand what LTV (customer lifetime value) is.
LTV is an estimate of a customer’s value over the life-time of them buying from you.
LTV = lifetime revenue – lifetime costs
Your most profitable customers will likely buy from you regularly and for long periods. In short, customer lifetime value is the present value of all future profits you’ll earn from that customer.
For example, cafes have many regular customers.
Let’s say one customer orders 3x short black’s daily. In comparison, another customer orders a trim soy latte with a friand each day. The long black customer spends $10 daily, and the trim soy latte customer spends $11 daily.
Over a year, the revenue the cafe generates from each customer is similar. However, serving the long black customer is worth $5 per day, while serving the trim soy latte customers is worth $2 per day. If they remain customers of the cafe for the same period, the long black customer is 250% (higher LTV) more valuable.
As you can see, the length of time a person is a customer also affects this calculation.
Suppose the cafe operates for the next 20 years. A person who frequents the cafe for the entire 20 years will have a much higher LTV than someone who leaves town after 12 months.
USE LTV TO FIND TOP CUSTOMER GROUP
I use LTV as a starting point to find my most profitable customer group; then, I can dial in with other qualifying criteria.
I’ll use my gym as an example to guide us through this discussion.
At my gym, we had a limited amount of data to work with. We had a membership database and personal relationships with some members.
We don’t have a CRM that shows us our gym members’ purchase history. We can’t track what marketing channel acquired that member. I can’t even run a report to tell me how long individual members have been with the gym or how much revenue we have generated from them.
Using an LTV calculation, at best, I can distinguish between a few different membership types – groups of ~ 120 people. To find our top 20% of 330 members, I need to find our top ~60 members.
There are other issues caused by relying purely on LTV to find your top customers.
LTV doesn’t distinguish between members who take 20 hours of support time each year compared to those who take 2. It doesn’t account for members who bad mouth the gym based on one bad experience between those that actively promote the gym. It doesn’t distinguish between those planning to leave the gym in the next three months vs those that could be with us for the next five years.
Our LTV calculation did show us our top customer group. People who held a group training membership. These people had an LTV of ~$1,000 versus a standard member who’s LTV was closer to $200.
Given those issues, I used LTV to find my top ‘customer group’ then used other criteria to find the top customers in that group.
You can group your customers by
• Product or service
• Product or service group
• Sales Channel
• Marketing Channel
Calculate LTV for different customer groups
Calculate costs per customer group – as shown below
Calculate revenue per customer group – as shown below
Calculate LTV = Revenue – Costs, per customer group – as shown below
Pick your highest LTV group.
From the screenshot above, you can see the highest LTV group is group training members.
• Remember, these numbers aren’t exact; they’re estimations. The point is to find the highest LTV group. If you’re consistent with your assumptions, the calculation will work.
Once I found the top group of members using the LTV calculation, I used additional criteria to find the ‘best’ customers in that group.
I read a great book about these ‘best’ customers called ‘Hooked’ by Nir Eyal. The book’s premise is to reveal how successful companies create products people can’t put down – and shows how you can do it too’ So I reverse-engineered the hooked framework to understand which customers are likely to be my ‘best’ customers.
I used these indicators of being hooked to create a scorecard to rank members.
• Member Referrals – How many people the member has referred to us
• Membership Length – How long they’ve been a member of the gym
• Member Engagement – How often they engage with us, either offline or online
• Member Frequency – How often they come to the gym
I created a new sheet in google sheets with member names listed down one column on the left and my scoring criteria along the top to the right.
Then I attached a point system to each criterion. Here’s how I did this with ‘member referrals’ as an example.
I assigned a score based on how influential each member has been for the gym (see below). One point being the lowest score and five points being the highest.
1. The member has not referred anyone.
2. The member hasn’t referred anyone, but we think they would
3. The member has referred someone, but the person didn’t join the gym.
4. The member has referred someone, and the person joined the gym.
5. The member has referred multiple people who joined the gym.
Then I added a weight to each criterion.
I believe referrals are the strongest indicator of a ‘best’ member. So I gave a 3x weighting for referrals. The reason being; if someone referred multiple members that joined our gym, then theoretically given our LTV for group training members of $1,500, a member referring multiple members could generate us an additional $1,500 – $10,000 in value, which makes them a high-value member.
You’ll know from your own experience that you only recommend or refer people to products and services you are a fan of and had a positive experience with. Because the product or service aligned well with your expectations and provided you value. So you’ll likely keep going back to that business, and your LTV will be a lot higher than the average customer.
So if someone has referred multiple members to the gym who signed up, then we would give them a score of 5 points from the example above. Combined with the weighting I have given that criteria, this person would receive 15 points in total.
This is by no means a perfect system. I used a mixture of logic and intuition to choose each criterion’s weighting based on what I believed to be the strongest to our ‘best’ members’ weakest indicators.
Here’s the weighting I gave each criterion:
- Criteria and weighting used
Member Referrals = 3x
Membership Length = 2x
Member Engagement = 1.5x
Member Visit Frequency = 1x
SCORING YOUR CUSTOMERS
Now, this part is a little tedious. Once I created the scorecard for finding our best members, I sat down with my gym manager and 2IC and scored each member.
Even if we had a membership base of 1,000, I would still sit down with my team and go through this same process person by person.
If we didn’t score each member, we’d be stuck with customer groups of ~100 people that we could not differentiate between.
When we used the scorecard and ranked each person, we were able to find the top 20% of the customer group, which allowed us to discover our ‘best’ customers and create our member avatars.
RANKING YOUR CUSTOMERS
After scoring all the members, I sorted from highest to lowest score.
Using Excel or Google sheets, you can use the ‘Sort Range’ function.
The result looked like this.
• This screenshot shows the top 20% of gym members, not group training members.
FINDING COMMON GROUPS
Now I looked for common groups of people among the ‘best’ members based on their score.
Because we had ~80 group training members, my cutoff point was 16 members.
I’ve completed this exercise a couple of times now and found that there usually are 2 – 3 common groups of customers sitting amongst your ‘best’.
If you know your customers well, finding common groups will be easy.
For example, when I reviewed the top 16 names in the list above, apart from sex, nothing, in particular, stood out to me. However, when I presented this list to our gym manager, he quickly identified three different groups.
Area of commonalities to look for are;
• Common Interests
• Common Goals
• Common Challenges
• Shared Values
• Shared Priorities
Here’s an example of a top-scoring group that Phil, our gym manager, identified.
We called this group the ‘Professional Mums’
“I think for a lot of this group, it’s more about connecting with each other before, during and after the session.
This group has become part of their social connection to each other and are always talking to other mums about it and bringing others along to try our tribe programs.
Another interesting thing about these ladies is that they are all local people (or have been here for over 20 years, have young families and are locked into living here with their children for at least the next ten years while their children make their way through High school.
Most of this group are also financially sound and are in one-income families.
So they only need to work part-time or don’t have to work. This is the group either has kids that are training with Shane or are asking about TribeKIDS as an option for us to bring on.” – Phil Shaw.
In summary, if you work through the steps in this exercise, you should end up with 2 – 3 identifiable groups of customers who I would describe as your best customers.
BECOMING FRIENDS WITH YOUR CUSTOMERS
Simply knowing these people’s names won’t be enough to help you transform your business and unlock meaningful growth.
We wanted to become ‘friends’ with these people. We wanted to intimately know why these people spent their hard-earned dollars with us and, most importantly, how we could serve them better.
We decided the best way to do this was to create a fictional character representing them to keep them present in our minds and at the heart of every decision we make.
I don’t understand why this works, but it does. When you start creating your next marketing campaign and have a picture and description of the person you want to target sitting in front of you, it’s a lot easier.
When you’re deciding about the next improvement to make to your product or service, and you have a ‘real person’ to map that decision against, it becomes a lot clearer.
So far, you will have two or three groups of ‘best’ customers from the previous exercise.
Now I’m going to walk you through how I turned these best customers into fictional characters.
But before I do so, if you’re not convinced, here’s a few examples of how this could help your business.
When you know who your best customers are. You can rapidly improve your marketing ROI.
Instead of a spray and pray approach, i.e. mass marketing, you can be very targeted.
You’ll know the best channels, best demographics, the right language to use and so on.
You can craft highly relatable marketing messages. Instead of writing a headline that reads ‘January Gym Promotion’, you can use ‘Gym Special for Dunedin Mums’. These little changes can make a massive difference to your marketing’s ROI.
When I meet someone for the first time, I find the first 5 – 15 minutes of conversation (small talk) tough to get through. Imagine if we received a brief of a person before we met them. You knew what interested them; you knew where they were from; you knew what they valued—no more small talk.
When prospective leads walk into the gym, Phil already has a good understanding of who they are and what they’re looking for. They feel like we already know them, which helps them trust us.
Our sales conversion rate has doubled since we’ve created and learned these avatars (35 – 70%).
By creating these fictional characters, we now have a much better understanding of their needs and wants. We know what areas of the business we need to improve to give them more value.
Every time we make improvements to the gym, our offerings provide our members with more value, word of mouth grows. Word of mouth = free sales and is the cheapest way to get more sales. Not only that, but word of mouth generally attracts people similar to those ‘fictional characters’, building momentum and creating a compounding effect on business growth.
Know your people, know what they want, give it to them, and your business will grow.
CREATING YOUR FICTIONAL CHARACTERS
I made this for small & growing businesses with limited budget and resources. It’s easy to follow, time-efficient and produces a good result.
It goes like this.
1. Create an interview
2. Pick the interviewee’s
3. Schedule the Interviews
4. Perform the interviews
5. Review the feedback
Generalise the feedback to create a fictional character
CREATING AN INTERVIEW
The essence of any good interview is well-crafted questions. Questions that will deliver the answers you’re looking for.
I’ve created a draft document of all the questions I used here. You can use these to guide your own or copy and paste.
A problem you might run into is understanding the context behind each question in the document.
There’s no point asking these questions if you’re not sure what answers you’re looking for. I’ll explain these below.
The first section of the fictional character is demographics. I haven’t explicitly listed those questions in the interview document, but that doesn’t mean they’re not relevant.
Demographics are the statistical characteristics of human populations. They help you define a segment of the population.
I used the demographics recommended by the digital marketer in the diagram above.
I created the next part of the interview based on the value proposition canvas. The value proposition canvas was made by strategizer to help people like me, and you develop products and services that solve people’s problems.
There are two parts to the canvas – the customer profile and the value proposition.
To create our fictional character, we focused on the customer profile side.
The customer profile helps us understand what jobs our customer is trying to complete, what they hope to gain by doing that job and what pains they encounter trying to do that job.
Job = What the person is trying to achieve. E.g. ‘Get in shape for Summer’
Gains = Benefits of achieving that job. E.g. = Increased confidence
Pains = Struggle to try to complete that job. E.g. = I Can’t find someone to care for my children while I work out.
These aren’t outcome-based like the member’s jobs; they look at the feeling and emotions our members experience while going to our gym.
I wanted to get a better understanding of their experience.
I picked out parts of customer development and customer onboarding interviews that I learnt from other founders and business owners to craft my own.
There are four categories or characteristics of our members that I wanted to know about here.
Values – What are their values, and if possible, precisely what values aligned with our gym. E.g. – ‘I value the family-friendly environment you provide at the gym.’
Objections – What objections did the person have to overcome before becoming a customer. E.g. ‘I was intimidated by the male-dominant gym environment.’
Likes – What did the person like about our service. E.g. ‘I like how social the group training is’.
Dislikes – What did the person dislike about our service. E.g. ‘I don’t like when we have to wait on other people for the session to start.’
Values are essential and tricky because they are part of a person’s buying criteria that don’t necessarily relate to your product or service in terms of functionality or financial value.
For example, I’m a shareholder in a hair salon that focuses on sustainability. While our stylists are great and care about what they do, other competing salons also have talented and caring stylists. I.e. our competitors create a look and feel for someone for a similar price point. But if that person values sustainability, they’ll come to us first.
Objections are the roadblocks people have to get through before buying from you. For example, at our gym, many people are self-conscious about the first time they come to a gym. They want to get fit or lose weight, and in many cases, a gym would be the best place for them to do that. But the environment is an intimidating space to walk into.
Every business will need to overcome specific objections for people to buy from them. Knowing what these are and helping your ‘best’ customers overcome them will give you a big leg up on your competition.
For the last part of the interview, we wanted to understand how our gym fits into our customer’s lives. This section of the interview was inspired by the book ‘Hooked’.
There are two parts to this.
2. Daily Behaviors
We wanted to learn about our customers’ daily routine to understand when and why our gym becomes part of their lives.
For example, we discovered we were part of our ‘professional mums’ morning ‘get the kids to school’ routine. Knowing this, we are making adjustments to our group training timetable to make training more convenient.
Learning daily behaviours helped us understand how our members go about their day.
When you know how they act, you can find new ways to introduce your business to more of your best customers.
For example, one of the criteria we used is ‘how do they entertain themselves. If you know your customers like to go to a specific social event or a cafe. You could partner with that business and advertise to their customers.
If you know how your customers make buying decisions, you’ll know the best avenues to use when marketing to them. Most of our members talk to friends and family before making a purchasing decision. So word of mouth marketing is going to be useful for us.
This might sound like a lot, but you’ll be surprised by how much you can learn about someone in a short period of time. The longest any of our interviews took to complete was 50 minutes.
Here’s what your avatar could look like when it’s finished. Take a look at this now, so you understand what you’re aiming for.
PICK YOUR INTERVIEWEE’S
Now you’ve got your interview questions ready and understand the insights you’re looking for. It’s time to pick your interviewee’s.
Go back to your top customer’s list and pick five names from each group you identified. If you’ve got your ‘groupings’ correct, after 2 – 3 interviews, you’ll see many commonalities between the people you’re interviewing.
SCHEDULING YOUR INTERVIEWS
Reach out to your customers and ask them if they’d be willing to sit down with you for 45mins and answer a few questions about themselves.
Explain to them why you are conducting the interviews and how the feedback will be used. I also recommend making sure they know all responses will remain anonymous.
We offered everyone we interviewed an incentive—either a free lunch, free training at the gym or a membership credit.
Most people enjoy talking about themselves and like the opportunity to be heard, so I doubt you’ll face many objections here.
We found it best to schedule the interviews in the same week to keep the answers from the interviews fresh in our heads to recognise common responses.
PERFORMING THE INTERVIEW AND RECORDING FEEDBACK
Now’s the fun part, conducting your interviews.
Do these somewhere you won’t be interrupted—ideally, a mutual place away from family, customers and staff.
We found taking notes on pen and paper provided a more natural feel to the conversation. Putting a laptop in front of you creates a barrier between you and the person you’re interviewing and will affect how open the person is with you.
Record the conversation if you can. Roughly 50% agreed to this for us.
We recorded quotes for answers to questions whenever we could for added context. They add emotion to your character and help you understand the language your ‘best’ customers use.
For example, a typical response we received was that our members looked forward to catching up with their mates when attending group training; it was as much a social occasion as it was a training session. But instead of just writing ‘social’ or something like that, we recorded direct quotes like ‘I can’t wait to get in a good catchup at the end of a session.’
CRAFTING YOUR FICTIONAL CHARACTER
While the interviews, notes, and the context of those answers are fresh in your mind, it is time to condense all the responses into a singular ‘fictional character’.
This process is more intuition than science. How’s what we found that works.
Make the responses fit the questions/criteria. People are going to give you some pretty random answers to each question. But don’t discredit them straight away. You might find that the answers you’ve received for one question are highly relevant for a different question.
For example, when we asked people about their ‘gains’ and or ‘pains’ quite often, people dove into likes and dislikes, which are quite different but very useful.
Look for common responses, i.e. if 3 out of 5 people gave you an identical response and the other two gave you different but similar answers. Use the common one.
Here are some examples
• 3 out of the 5 five people we interviewed from one group had an arts degree. While one didn’t have a degree and one had a commerce degree. So in the demographics section under education, our fictional character has a bachelor of arts.
• Interestingly only 1 out of the five said that vanity was a key reason for training. However, all respondents noted a version of ‘wanting to fit old clothes’ or ‘feel confident’. So I didn’t include the vanity response; I summarised it like this; ‘wants to feel good about herself and likes when old clothes start fitting again.’
Find their context. What do I mean by this? Don’t expect people to articulate themselves accurately.
For example, when we asked our members what they hope to ‘gain’ from completing their job, a few said ‘getting a good sweat up’, which isn’t really what we were looking for. However, we noticed a common theme from other answers was a feeling of satisfaction like I’ve achieved something.’
So the gain was ‘a feeling of achievement’ rather than a good sweat up’.
• Some people are much better at understanding and articulating themselves than others.
The opposite of finding common responses is removing outliers. I removed all ‘one-off’ responses. No two people are the same, but we were trying to find an average of all the people we interviewed for our fictional character.
You can’t and shouldn’t include all responses.
Less is better in this case. This is counter-intuitive, but the more details you include, the vaguer your character will become.
BUILDING YOUR FICTIONAL CHARACTER (AVATAR)
Now all you have to do is create a document. I used google docs.
Summarise all the information for each criterion and enter it into the document.
Give your person a name. Give them a face.
And hopefully, you end up with something like this.
Once I’d finished crafting the character, I sent them back to our gym manager for feedback and asked him to pass these onto a few others.
If you’ve done your job half-right, those you ask to review the character should ‘recognise’ the person. In our case, our gym manager’s wife was able to guess the exact people we interviewed as she knew a few of them personally.
The total time myself and Phil spent creating our first avatar (we also had two other groups to develop them for) was ~25 hours and we didn’t have a process to follow like I’ve outlined for you above.
Figuring how to find our best customers, figuring out what we needed to include in an avatar and crafting the right interview questions took up the bulk of that time.
If you work through this document step by step and use the free resources provided, you could complete this exercise in 7 – 10 hours with half the headaches. Which is less than half the time it took me to write this article.
Shoutout to these people and resources for the inspiration
1. The Value Proposition Canvas – made by strategizer
2. The Customer Development Interview – The Lean Startup Method
3. The book ‘Hooked’ – how customers develop habitual use of your product
4. The 80/20 Principle by Richard Koch