Creating successful marketing campaigns for your customers
June 24, 2021
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Retail marketing is a huge challenge. Campaigns can be difficult to measure and even more difficult to design. Because of these difficulties, it is critical to avoid wasting energy by sending ineffective marketing campaigns to customers who won't pay attention, or worse, opt out of future messaging. Instead of blindly mass-marketing, build smarter, more targeted, and ultimately more effective campaigns to engage your customers and grow your sales. By tracking your customers' purchasing patterns, you can group them into segments that allow you to understand what they purchase, how often, and their overall value to your business. These different customer segments will respond differently to different types of campaigns.
In this report we will:
Demonstrate how not all customers are equally valuable to your business.
Learn how to determine the value of your customers and group them into clearly defined segments using Headset's RFM model.
Give examples of different marketing campaigns that will be most effective with different customer segments.
Customers are vital to your business, but not all customers are equally as important. For example, in California over the previous 30 days, 36% of sales were generated by only the top 10% of customers. We also found that 56.1% of customers went to a cannabis store only once over the previous six months. On the other hand, 60% of all retail sales came from customers who made at least six trips over six months, but this group only made up about 15.1% of all customers. In order to attract these very different customers to stores, retailers need to create marketing campaigns that are targeted to these individuals. The remainder of the report explores various marketing campaigns and how they can be used to attract different customer groups.
Data for this report is sourced from Headset connected cannabis retailers in California who collect anonymized customer data.
Not all customers are equal
Customers are of course vital to your business. Without them, your business wouldn't exist! However before we discuss marketing campaigns, it is critical to realize that not all of your customers are equally valuable to your business. We'll begin with two simple statistics:
Over the previous 30 days at the median California cannabis retailer, 36% of sales were generated by the top 10% of customers.
Also, 80% of sales are from its top 46% of customers.
Immediately we can see that there are more and less important customers in your business. While not an exact match, this is very reminiscent of the famous Pareto Principle (aka 'the 80:20 rule'), which describes the tendency for the majority of output (sales) to come from a minority of inputs (customers).
This means that you could lose more than half of your customers (as long as it was the right half), and only suffer a 20% loss in revenue. This demonstrates that it is critical to understand the differences between your customers so that you can think about them differently, and most importantly, interact with them differently.
How important are returning customers?
To further explore the value of different customers, let's analyze value in relation to the number of trips that customers made to an individual California cannabis dispensary over the previous 180 days. On the left we can see that more than half (56.1%) of customers that California retailers tracked over the previous six months only came into a given store one time. Because of that low frequency, these customers only generated 16.2% of all sales.
On the right side of the graph, we can see that nearly 60% of all sales were from customers who made at least six trips (averaging at least one purchase per month), even though that group only made up 15.1% of all customers. Should you interact with the customers on the left in the same way that you interact with the customers on the right? Probably not.
How do we determine the most important customers?
So how do we figure out which customers are the most valuable customers for our business? In Retailer Premium, we use a multi-faceted model to group customers into different segments based on scores in three different metrics: Recency, Frequency, and Monetary Value, or RFM.
Recency is a measure of how long it has been since a customer last made a purchase at your store. For example, Willie N made a purchase six days ago.
Frequency is a measure of how often that customer purchases. For example, Willie N purchases every 15 days on average, over the previous 365 days.
Monetary Value is a measure of how much the customer has spent in total over a given time period. For example, Willie N has spent $565 over the previous 365 days.
By blending these three measures and giving a score for each customer, we are able to create a matrix and group similar customers into named segments. These segments can then inform targeted marketing campaigns that are tailored to their behaviors.
Let's take a closer look at these segments next.
RFM segments explained
On this matrix, the horizontal axis shows Recency (R). As we move from left to right, the segments include customers who have purchased more recently. The vertical axis is an aggregation of Frequency (F) and Monetary Value (M). As we move from the bottom to the top, the overall value of the customer increases.
Champions and Loyal Customers are the customers that generate the most revenue for your store. They come in frequently, spend a lot, and have purchased recently.
Potential Loyalists have been in recently, but either don't spend enough or don't come in quite frequently enough to be in the Champions or Loyal segments. These are great customers to target and move into those highest value segments.
Promising customers have tried your store and have returned at least one time very recently. Now is the time to capture this customer and turn them into a more regular visitor.
New Customers have visited for their first time within the last 90 days and have not yet returned.
Needs Attention customers, as the segment name suggests, would benefit from some marketing effort. They used to spend a good amount in your store, used to come in fairly regularly, but haven't made a purchase in a while.
About to Sleep customers are customers that are perhaps less worth the effort to engage. They didn't spend much or come in regularly, and they haven't returned super recently.
Hibernating customers are those which spend smaller amounts at your store and have not visited your store recently. These customers are not as critical to your store's revenue as other groups.
At Risk and Can't Lose customers are two segments that definitely need your efforts to re-recruit. These are customers that used to spend a lot and purchase often, but haven't purchased in a long time.
RFM in action
This graph shows the percent of total revenue and customers generated by each RFM segment in California over the previous 365 days. We can see that customers in the Loyal and Champions groups only accounted for 15% of California cannabis customers over the past year, but contributed 62% of all sales! This reiterates the importance of these customers to any cannabis retailer. Visitors (customers who have been in only once and have not returned in more than 90 days), and New Customers, on the other hand, were 55.2% of all customers, but only contributed 12.9% of all sales.
At Risk and Can't Lose customers, even though they haven't been to the store in a long time and account for a small group of total customers, still generated more sales (15.6%) than the Visitor and New Customers segments. Now let's look at some real world campaigns and the marketing principles behind them.
A Memorial Day campaign for basket expansion
In this occasion-based Memorial Day campaign, there are several strategies at play. By encouraging customers to come in around a holiday with a juicy discount on selected products, the retailer should see some significant basket expansion. With Retailer Premium, this business could tailor the campaign to highlight discounted products from the individual customer's most-purchased category. This type of campaign would be great for any segment that you'd like to move upwards on the RFM matrix (Potential Loyalists, Promising, Needs Attention, etc.).
Simple high value discounts such as this can also be great tools to re-recruit those important customers in the Can't Lose or At Risk segments. By providing an exclusive, high value discount, with a near-term expiration date, the call to action is clear: come back soon for a great deal!
A loyalty program campaign
This campaign is all about the retailer's loyalty program. By providing a loyalty-member-only discount on a very popular category (Flower in this case), the retailer is accomplishing two goals:
By sending this campaign out to loyalty program participants, they are rewarding their best and most dedicated customers (Champions and Loyal customers).
By advertising this promotion to walk-in customers, they are incentivizing new loyalty program sign ups, which is a great way to convert Potential Loyalists and New Customers upwards.
This campaign also adds a 'Corporate Social Responsibility' (CSR) message by donating a portion of the sale's profits to a public health charity. This further incentives customers to join in, knowing that they can feel great about their purchase.
A 'back in stock' campaign
This simple 'back in stock' notification campaign is informing customers about a popular product that's back on shelves after an absence. However, this strategy could also be used to increase excitement about a slower moving product as well. By using Retailer Premium, this store could target customers who love this particular category, or even this specific product.
This type of campaign is probably most relevant to customer segments with high 'Recency' scores, as they may have tried to purchase this product while it was out of stock.
A campaign for mom
Here we have another occasion-based, basket expansion campaign, but this one has a very smart twist. By incentivizing a $200 basket with an extra gift 'for mom', this call to action pulls two different psychological levers: the customer's desire to purchase for themselves AND the desire to purchase for others. By removing the need to choose between these two desires, this campaign heavily incentivizes a big spend. Additionally, the fine print notes that this offer is only 'while supplies last', which adds a sense of urgency to the campaign.
However, it is important to note that this campaign would be wasted on any customers that have an average basket of more than $200, which might not make it the best one for your Champions. Save it for those customers who don't usually spend that much per trip.
In order to measure the success of a basket expansion campaign, use Headset Retailer to track the growth in basket size before, during, and after the promotion.
In this campaign, we see some category-specific targeting. This campaign should definitely be sent to customers who are already Vapor Pen fans in hopes of incentivizing bigger baskets.
However for this specific campaign, it might also be effective to send it to customers who have never purchased a vape product, since providing a free battery could be a great 'starter pack.' This strategy is especially smart since the battery itself has very visible branding, and while it appears to be the standard 510 format, customers may think that they should buy cartridges of the same brand in the future to use with the battery.
Here's another campaign that would be most effective if was only sent to specific subset of customers:
Customers whose favorite category is Concentrates.
Customers whose average basket is less than $100.
Sending it to other customers would either not be relevant to their interests, or advertise a promotion that simply gives away margin for no reason.
Announcing new products
This simple announcement of new products arriving in shop is a great way to engage and reward your best customers such as those in the Champions and Loyal Customers segments. This could also be a great way to re-engage some of those At Risk and Can't Lose customers as well if they were waiting for the retailer to carry a certain product or brand.
An additional way to create extra engagement without giving away any margin would be to provide an 'early release' call to action. The retailer could offer this product to Loyal Customers only for the first weekend it is in stock, and only those customers that know can purchase it by asking specifically for it.
In this report, we demonstrated how the Pareto Principle is being expressed in the cannabis retail space, as the majority of sales comes comes from a minority of customers. Because of this, it is important to segment your customers for targeted and more meaningful marketing campaigns. To find out how Headset's Retailer tools can help you grow and maintain key customer segments, sign up for a demo.
Over the previous 30 days at the median California cannabis retailer, 36% of sales were generated by the top 10% of customers.
Over a period of six months, 56.1% of customers went to a cannabis store once, while 15.1% of customers went to a cannabis store six times. Customers in this latter group made up 60% of total sales.
Loyal and Champion customers only accounted for 15% of California cannabis customers over the past year, but contributed 62% of all sales. Visitors and New Customers, on the other hand, were 55.2% of all customers, but only contributed 12.9% of all sales.
Customer segmentation can be used to create targeted marketing campaigns in order to attract different customer groups to your store.