"Know your customer" is dogma in all industries, but what does it mean?
The most important thing to know about your customer is their profitability. In every business, some customers are more profitable than others, many significantly so. Some are less profitable than they can be or should be. To reach the goal of attracting more of the most profitable customers and reducing the number who are less than optimal, it is necessary to start with a profile of every customer whose purchases are in your database.
The customer profile system uses cluster analysis techniques to group customers by profitability. In-depth analysis reveals the customer clusters that should receive targeted marketing efforts. Merchants can then see how the individual customers in each cluster shop and what their impact is on profitability. Continual monitoring ensures early knowledge of any shopping behavior changes, positive or negative. This is particularly important in environments where SKU's have a short life cycle.
Customer profiling by clustering leads to testable marketing campaigns that are data driven and measurable. It invariably leads the organization to change marketing spend to higher ROI projects.
Retailers who practice every day low pricing hesitate to add cost required to profile customers. This is short sighted. Customer profiling is a strategic initiative. Targeted marketing is necessary for competitive reasons. Studies show that it can increase coupon redemption 20 fold. It is the future of retailing.