Customer Rating: How valuable are your customers to your business?

1. What is the customer value and what can you use it for?
2. What customer rating criteria are there?
3. What customer rating methods are there?
4. What are the advantages of customer rating for you?
5. Which softwares are suitable for rating your customers?

Do you want to invest only in the right customers in the future? Then it's time to rate your customers. We introduce you to the most popular customer rating methods and show you what advantages customer scoring & co. have in store for you. With our customer rating examples and a list of relevant evaluation criteria, you can start right away.

What is the customer value and what can you use it for?

Customer value indicates how valuable a customer is for your business. In other words: The customer value describes what part a certain customer contributes to getting you closer to your defined corporate goals. You can determine the customer value using various customer rating methods. Using set customer rating criteria, you determine how high the respective customer value is and then assign the customers to a customer category.

This categorization allows you to target your resources. Instead of blindly trusting your gut feeling, you only invest in customers with a high customer value. You can also initiate and terminate sales and marketing measures according to the customer value.

What customer rating criteria are there?

Customer rating criteria can be divided into two groups: monetary and non-monetary criteria.

The monetary customer rating criteria include:

• Revenue
• Shopping Cart Value
• Profit
• Purchase frequency

The non-monetary customer rating criteria include:

• Purchased products
• Willingness to buy
• Sales effort
• Reliability (e.g. in payment)
• Duration of the customer relationship
• Potential for follow-up business

What customer rating methods are there?

There are one-dimensional and multi-dimensional customer rating methods. One-dimensional methods are customer ratings where the customer value is measured using just one criterion. The value can be determined by sales or customer-life analyses. If several criteria are analyzed, this is referred to as multi-dimensional customer rating methods. These include customer scorings and portfolio analyzes.

1. Rate customers with the ABC analysis

With the ABC analysis you divide customers into three categories. This customer rating method is based on the Pareto principle - also known as the 80-20 rule. Simply put, it states that 20 percent of the input (effort) often leads to 80 percent of the output (profit):

• A customers: Customers who make up about 80 percent of sales
• B customers: Customers who make up about 15 percent of sales
• C customers: Customers who make up about 5 percent of sales

In practice, the ABC analysis is not only applied one-dimensionally. Some companies determine another value in addition to sales, such as the potential of the customers. Category B includes customers who bring in good sales but have little potential for growth. B+ customers include all B customers who bring in little sales but have great potential to further expand their joint business.

Procedure of the ABC analysis:

1. Define categories: Define exact category types (one- or multi-dimensional).
2. List customers: Create a list that includes all your customers.
3. Set evaluation criteria: This can be the revenue, for example.
4. Rate customers: Divide your customers e.g. into A customers, B customers and C customers.

2. Rate customers with the RFM analysis

With the RFM analysis, you set a weighting in addition to the criteria. You evaluate when customers last bought from you, how often they buy from you, and what sums they spend.

• R = Recency (currency) 
• F = Frequency (frequency) 
• M = Monetary (revenue)

Here too, three categories result:

• Particularly profitable customers
• Loyal customers
• Fickle customers

Procedure of the RFM analysis:

1. Determine R: Determine the number of days since the last purchase. This is your currency score(Recency).
2. Determine F: Determine the number of purchases. This is the frequency (Frequency).
3. Determine M: Determine the money value. This is the turnover (Monetary).
4. Set Scores: Set value ranges (e.g. scores from 0 to 5) for the three criteria.
5. Rate customers: Rate your customers according to R, F and M.

3. Rate customers according to the Customer Lifetime Value

The Customer Lifetime Value (CLV) refers to the profit that your company has generated through this customer during the entire business relationship. The CLV can be calculated using the following formula:

Customer Lifetime Value = Customer Value x Average Customer Lifetime

Procedure of the Customer Lifetime Value calculation:

1. ⌀ Determine purchase value and ⌀ purchase frequency rate: Total customer value = average purchase value x average frequency
2. Divide the total number of purchases in a period by the number of customers: average purchase frequency rate = total number of purchases in a period / number of customers in the same period
3. ⌀ Divide the number of active customer years by the total number of customers: average customer lifespan = average number of active customer years / number of customers
4. Multiply both numbers: Customer Lifetime Value = Customer Value x Average Customer Lifetime

4. Rate customers based on the customer life cycle

In the customer evaluation based on the customer life cycle, you take into account the phases that customers go through. These include the following five phases:

• Acquisition phase: the initiation of the business relationship
• Welcome phase: the acclimatization
• Penetration phase: building the customer relationship
• Maturity phase: optimizing customer service
• Reactivation plans: reactivating off and online customer loyalty

Procedure of customer evaluation according to the customer life cycle:

• Define measurable KPIs: Set concrete definitions and criteria for the phases.
• List customers: Create a list that includes all your customers.
• Rate customers: Divide your customers into the five phases.

5. Rate customers with the portfolio analysis

In the customer evaluation based on the portfolio analysis, you create a matrix with four or nine fields that gives you an overview of the product potential. The most well-known portfolio analysis for evaluating customers is probably the BCG matrix. The matrix consists of four fields and two axes.

What the four fields say about the customer value:

• Development customer ("the question marks"): valuable customers who have not yet reached their full potential
• Premium or high-value customers ("the stars"): loyal and loyal customers who buy regularly over a long period of time and use cross-selling offers
• Skimming customers ("the cash cows"): loyal and loyal customers with great potential and relatively low sales
• Waived customers ("the poordogs"): Customers who cause more costs than they bring in sales

Procedure of the portfolio analysis:

1. Create matrix: Name the two axes with relevant factors, such as the y-axis with customer attractiveness (monetary customer value) and the x-axis with customer potential (non-monetary customer value).
2. Rate customers: Divide your customers into question marks, stars, cash cows, and poordogs

6. Rate customers based on the customer success calculation

Through the customer success calculation (Customer Contribution Accounting) you determine the contribution margin of customers. This means you look at what amount is left over when you deduct all clearly assignable costs from revenue. The full cost accounting determines the customer-related profits. The contribution margin accounting is even more accurate as all overheads are included.

Procedure of the customer success calculation:

1. Determine customer-related revenue: Consider discounts, bonuses and discounts.
2. Determine customer-related costs: This includes packaging and shipping costs, commissions and order costs, among others.
3. Calculate contribution margins: Determine the contribution margins of all customers.

What are the advantages of customer rating for you?

If you want to use your resources wisely, in the long run you won't be able to avoid rating your customers. Only in this way can you align your sales and marketing activities with profitable customers, improve their support, and end uneconomic business relationships.

• Learn how your customers tick: Focus on valuable customers and get to know them better. This will allow you to develop measures that exactly meet their needs. 
• Exploit the full potential: If you know which customers your advertising budget is not worth at all, you can use your financial resources and free resources to discover new potentials.
• Optimize your sales and marketing actions: You now know who YOUR best customer is? Then you can align your new customer acquisition strategy, your new customer acquisition methods and the customer journey and customer experience accordingly.

Which softwares are suitable for rating your customers?

In principle, it is possible to apply the mentioned customer rating methods in Excel. But as your customer base grows, things get complicated. Especially when using multi-dimensional customer rating methods, creating, updating, and expanding Excel lists is dangerous. You can easily lose track. In addition, unnoticed typos can quickly cause huge chaos. It is therefore definitely worth investing in a CRM with customer rating functions. The software automatically exports the required data from your CRM master databases and customer journey tracking tools.

On OMR Reviews, you can find a wide selection of CRMs with verified user reviews. These ten CRMs are particularly popular:

Salesforce Sales Cloud

Hubspot Sales Hub

CentralStationCRM

Pipedrive

weclapp

Microsoft Dynamics 365 Sales

ClickUp

BSI Customer Suite

ActiveCampaign

goTom