Saturday, April 5, 2014

The Most Important Factor In Wine Club Success



The psychology and dynamics of consumer choice is complex. Economists can make it even more complex but one of the theories that I've always liked is the concept of marginal utility, and if you can hang with me a bit, I want to use it as a backdrop in discussing the single most important metric to track and drive wine club success.

What is Utility and How Can You Use it?

Economic utility doesn't mean usefulness. In economic parlance, utility is a measure of the amount of pleasure a consumer gets from a good or service. It's measured in units of 'utils' - and I'm not kidding even if that sounds strange. Just don't ask how economists measure pleasure because you don't want to know. Marginal utility is a measure of the amount of enjoyment a person gets by purchasing the next incremental unit of the exact same good. We don't get the same enjoyment out of the 10th cup of coffee compared to the first. In fact, I'm guessing if you consumed the 10th cup in a day, at some point you would experience negative marginal utility. That's the way to think of the concept: You don't get the same joy getting the second cup of coffee compared to the first. It can also be described by using the Water-Diamond Paradox.

The market places a value on diamonds that's a lot more than the value of water, even though water is more important to survival. In reality diamonds have greater total utility compared with water, but only when the need for water is satisfied and there is no threat of running out in the near future. A person dying of thirst in the desert will gladly turn over a pocket-full of diamonds in exchange for a ride to the oasis. The utility of that first sip of water is much larger than diamonds, but you wouldn't turn over your diamonds if you had access to all the water you could consume. 

With marginal utility understood, what do you think the marginal utility is to your club member of getting the exact same shipment six months after the first shipment? Is their utility the same as they received from their first shipment?

Opting Out - Staying In

Why do you think people opt out of your club? 
  1. Something happened to their capacity to purchase goods, and they have discovered greater utility in paying their water bill compared to buying your wine.
  2. They have a new medical condition they've discovered and have revalued the utility of consuming your wine against the penalty of dying an early death. They have found greater utility in living.
  3. They found a substitute and found greater utility with the new wine versus yours. Something happened. Either someone has a better club concept at that point, your customer service is lacking, your wine isn't special or rare, or the thrill is gone - they've grown bored and have found greater utility in a new wine or wine club.
Why does your wine club member stay in your club? Because you've found some way to keep their utility (pleasure) as high on subsequent shipments as the first shipment. You've kept a spark in your relationship somehow. There is still a thrill they get when they receive a delivery and they are excited to share the news with others that they are in love with your wine! So what are you doing to keep your club member's utility high so they don't stray to an interloper?

The Most Important Metric

Wine Club members should be measured in their lifetime value. It's not how many tasting room sign ups that matter. Its not the conversion rate of visitors to club members in the tasting room that matters. Its not the first sale that matters. Those are good things to measure but what matters the most is the second sale and all subsequent sales in their club life. That makes the most important metric to track the length of time customers remain in the wine club. That metric is a true reflection of all the activities and initiatives you take on to improve the consumer's utility (pleasure) and increase their Lifetime Value.

Lifetime Value is the product of how long they stay in your club (months), and how much they decide to buy each year($). If you can increase either of those metrics, the lifetime value of your customer goes up and as a winery owner, your personal utility will soar right along with your winery's wine club sales! But between convincing club members to buy more, getting them to pay more for the same goods, or getting them to stay in the club longer - which do you think is easier to pull off?

Measuring Time in a Wine Club 

Here is a chart from the just completed Silicon Valley Bank/Wine Business Monthly Tasting Room Survey, sorted by region and showing the number of months consumers remain in clubs on average. The arithmetic average of all the responses in the survey came out to 25.9 months, which is a decline of 2 months from the 2013 survey but no matter, keeping a wine club member only two years seems embarrassingly short to me. How many shipments did the consumer get on average before they opted out of your club?

That's where I start asking questions such as: Are you keeping up a relationship with wine club members and if so what are you doing already, and what should you be doing. Are you overly focused on adding new members and have limited follow-up connecting with existing club members? If the big goal is to keep wine club members longer, are you aligning compensation of tasting room staff to mirror that goal? Are you paying for initial club sign ups with staff but ignoring club departures in their comp structure? Are you doing the basics and maintaining a data base of who your club member is, their preferences, what you shipped them already, information on contacts and purchases, etc.? Is there something you can do to surprise them with a unexpected shipment? What about evolving your club to honor and reward loyalty?

Without going through a long list of ideas here, ask yourself: What activities am I taking on with the wine club to maintain (or even increase) the on-going marginal utility of my club members? Since you understand that theory now you should recognize, you can't keep shipping the same thing because it wont give them the same zing. You have to develop a program of adapting and changing instead of seeking routine in the club. Your wine club members want variety and if you don't give it to them, they will find it with another winery.

The utility in choice and variety is proven out in blue and white in the above slide. In this case we sorted out the average length of time club members stayed based upon a winery's willingness to offer their members some level of choice and control over their shipment. You can see wine clubs that give no choice in wine selections keep club members the shortest amount of time. Put yourselves in the consumer's shoes. Would you remain in a club that sent you only what the winery decided to send you? You would at least want to have return privileges and the ability to let someone know you didn't like something they shipped if that was the club you were in. Would you stay in that club if they shipped you something you didn't like the second time? Does someone in your wine club follow with club members a couple weeks post shipment to see if they received their shipment and what they thought? That's an opportunity to engage and something the tasting room staff can do between visits.

Measuring Spend in a Wine Club

The second expression in the lifetime value of a club member equation is the member's annual spending. What is it that you can do to get your club member to spend more? There are countless ways of doing that but it is more difficult. If you just raise prices - you also have to increase the value you give them at the same time or you are lowering their marginal utility and they leave your club. If you want a possible template to work through ideas here, try using all your P's of marketing and come up with some actionable steps, but consider those actions in the context of choice again.

Here are some examples: Do you know your target customer well enough to reverse-engineer some product attributes to suit them? If they live in a different state and have to hand carry wine back, would they prefer boxed vs bottled packaging for convenience? Do they want club only wines, or would they prefer a deal on a wine well represented in the market - and if the club wine is in the market, can they buy it cheaper in Costco versus your club? Are you able to produce a SKU in a price category that can grow with your younger consumer's tastes? Are you keeping members not just informed, but excited about developments with your promotions?

I'm not suggesting any of those are good ideas for your particular brand. Maybe they are all bad ideas but they arise from a line of questions that started with the P's of Marketing and might give you some direction. You might want to find some fresh ideas because in reviewing the chart above on purchase behavior and giving choice, its pretty clear when wineries give their club members some choice in their purchases, their annual spend increases and it turns out they also stay in the club longer.

Lifetime Value of Club Members

After looking at the questions that surround consumer choice and the application of marginal utility in wine clubs, we get to the real interesting slide which is the lifetime value of a club member again taken from the SVB-Wine Business Monthly Tasting Room Survey. Lifetime Value is the number of years in the club times their average annual spend. This is where you as a winery owner or club manager get your own utility increased. 

While I could have included a slide based on product choices offered for club shipment, you can figure Lifetime Value based on choice by multiplying the information in the middle charts together. I thought the slide above was far more interesting because it shows the Lifetime Value of club members when viewed regionally. I think that's more interesting because not all regions are created the same or provide the same utility for a consumer. But understanding the utility of the people in your club; the reasons why they like your winery and region's wines and comparing to the chart above is a good exercise.

Club Members for Napa winery owners have more lifetime value than any other region, but that has to do with bottle price. Think about how that would look if Napa figured out how to keep club members for 48 months? Or going back the average months in a club by region, what would Washington look like if they could get their prices up a little? Could they surpass Napa in Lifetime Value?

Offering Up-Front Discounts

There is one other thing I wanted to mention that didn't fit neatly into this post and that's the practice of offering club members a 30% discount (or whatever discount you use) the day they sign up in your tasting room for your club. On the one hand you are getting them into your club which is positive if you're collecting all their personal information, but I wonder if that is really the right thing to incent? 


So what is the lifetime value received by lowering the price on the first sale? You are starting with a discounted sale and it's also the most expensive sale because the fully allocated cost of making that sale is more than any subsequent sale. How many of those club members take that discount because they liked the wine that day, had a buzz on, or maybe even bought out of guilt at your tasting room - but never took a second shipment? 

Do you track how many club members never received a second shipment? I'd also be interested in knowing success rates in a second sale based upon which tasting room employee closed the club membership. If there are material differences, there is something to be learned and exchanged with others in the staff, and maybe that employee needs a different comp structure.

The first sale is not the most important one. The most important sale is the second sale because they have tried your wine and liked it, you have made a positive connection, and you have momentum to maintain that relationship for years to come - that is depending on how you improve your customer's marginal utility throughout their club life.
What do you think? Should you be giving your tasting room customers more choice? Should you offer a discount on the same-day purchase in the tasting room for joining a wine club? Should tasting room comp include a residual comp component for follow on purchases made by customers? What can be done to maintain your club members marginal utility, and keep them longer? Is there any part of this post that really resonated with you?

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21 comments:

  1. Great post. One thing that very few wineries do is to acknowledge and reward the loyalty of the those long-term members who are on the books well beyond the 25 month average. Why not have some really special rewards for this category, with the "unexpected", with a goal of increasing marginal utility and keeping them and motivating them as brand advocates,

    This goes beyond just sending an extra bottle of wine. It could be special events at the winery, free invitation to winemaker dinners, special gifts, whatever. Recognition for loyalty is generally less costly than new customer acquisition.

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  2. Hi Ron. Thanks for offering your insights. I know loyalty programs have been talked about for some time in winery circles, but I don't really know how much they've caught on. That's probably an interesting question to ask in next year's tasting room survey.

    Totally agree conceptually though. It seems to me it's worthwhile to hold back 'getting to know the family' until someone has been in the club for a period or ordered a certain amount of wine - or maybe even both. People do want to belong and knowing everyone at an event is a fan of your wine seems to me to be a good idea to increase utility and evangelism ..... I wonder if there is an economic term for an evangelist?

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    1. The term that comes to mind is, "Sales Rep". :-)

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    2. Lee - I'll have to check with john Maynard Keynes to confirm the linkage to economics, but that's not a bad one.

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  3. One wine club to which we belong offers an incentive that we particularly value as members. David Girard Vineyard in the Sierra Foothills (El Dorado County) is a producer of primarily Rhone varietal wines. For their Premium Club members (6 shipments of 3 bottles per year commitment) they offer 40% discounts on all new releases during the week of the release. This has proven to be a powerful incentive for us and we purchase 3 to 4 cases per year beyond our wine club commitment as a result.

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    1. David - Thanks for the thoughts. Appreciate you logging in and posting.

      That's an interesting program. 40% is a big discount. I like the smaller multiple shipments versus one large one. Guessing a consumer wouldn't think about the big bill as much that way, and the winery is maintaining contact with you a little more often which is a positive.

      Just looking at their site, it seems a bit evolved in that they offer more than discounts for club members such as access before release to the public, use of a reserved picnic area (nice touch), and invites to club events. Each fo those are important tools for them.

      I'm guessing they are sending you what they want in the club (not the best practice), in exchange for a big discount on other purchases which gets you then exactly what you do want.

      The success of the club and their ability to extend the life of their club members is still probably dependent on the company's abililty to engage with you, understand what you like, and meet your desires.

      If you believe the theory of marginal utility, it says that a discount will keep a customer in the club for only so long - unless you are the rare consumer who likes every vintage and never gets tempted by other's offers.

      Unless the winery finds other ways to increase your pleasure with each subsequent purchase, you as a consumer will increasingly place less utility in those purchases until the value of the discount meets the decreasing value of your utility. Said plainly, you will get bored. At some point price doesn't matter because you won't pay for what you are bored with.

      There has to be more considered in the equation to maintain customers for a longer term. That's not a comment on this winery because I don't know all that they do - only that they do have other non-price elements to help extend your satisfaction in the club. But using that one point about the discount not holding value forever is helpful for others to better understand the need for CRM and relating to each customer, asking questions, and evolving and adapting the club.

      Success here is going to be defined by making successful changes for each customer, the longer they are in the club.

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  4. Rob - insightful as always...several comments:
    1) Most Important Sale = First Sale. If you don't make that first sale, you're SOL. Too much competition, too many choices. Gotta make the initial connection and sale to be in the game.
    2) Second Sale isn't as important as customer contact. The notion here - to really nurture the relationship is to make personal contact with the customer. A follow-up phone call, a check of the rest of their travels, a reminder of the fun they had at your TR...these make memorable impressions vs. the crowd and enable future follow-up calls for specials and sales.
    3) Discount - essential in today's retail world. Most wines are 15-20% lower at your local Safeway than TR retail, so not providing a discount basically tells the consumer to go local. Every TR shares the pricing game with their clients (that wineries must charge max MSRP to avoid pissing off retailers). At 30% off, still plenty of profits to go around, especially with high future sales conversion.
    4) High-Allocation Bias - while your data/graphs are useful, they are skewed by the tightly-allocated wineries. I can't tell you how many friends I have on vaunted lists (P-Michael/Harlan/K-Brown/Marcassin/etc) who won't ever drop off because they'll never get back on...but then sell most of their allocation due to extreme cost or cellar overload. While relatively small in #, methinks these wineries skew the database, as the consumer actions are a different population than most wine clubs.

    In summary, consumers are actually looking for a relationship - with the winemaker, the GM, or even the outstanding TR associate. That relationship can trump so-so vintages, an off bottle, or even raised prices. Without it, they'll flock to the next cheap date...

    Z

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    1. I think your points are spot on here. The relationship and experience is the key and it has to go much deeper than just engaging and trying to sell more. I recently was "cold called" by one of the clubs that we have been a member of for several years and was so turned off by the tone of the conversation and the inaccuracy of their information about me and my preferences that it took the relationship backwards in a big way.

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    2. Anon 11:02 Thanks for engaging and offering your thoughts.
      1) Agree. You can't make the second (and future sales) without the first. The point here is about what a winery values and that should be what they measure. If they spend a lot of time talking about first sales such as weekend tasting room revenue or club signups in isolation, they are placing their emphasis on the least valuable sale because of the allocated overhead that goes into getting that first sale is substantial. It's an important sale but there isn't the same margin as the second sale. Measurements have to be in place to talk about the second sale, and some thought should be given to rewards for staff that emphasize that element.
      2) Agree again 100%. But - you don't get the second sale without customer contact. Its really the by-product of engaging a client once they have joined the club. I think that is exactly what you said at the end there.
      3) I don't really have a conclusion on a discount for a first sale. Intuitively I know that its an additional cost on an already expensive sale, but if the follow up and engagement is in place (as you point out in #2), then getting them signed up probably is worth the discount. The one point I would quibble with is "profits to go around." Wineries make about 7% pre-tax. Few make a ton of money in the business. There are plenty of gross profits to go around in a discounted sale but when allocated, not that much.
      4) There isn't that much bias in keeping the fully allocated wineries in, as the sample size is over 850 wineries and allocated wineries are a small percentage of the total respondents. We did break allocated wineries out in two of the slides above, but if we left them in - it wouldn't change the conclusions.

      Totally agree with your conclusions - and for that matter virtually all of your comments. Thanks again for offering them to the community!

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  5. Nice post Rob. I think most Wine Clubs can benefit from customization options, shipping discounts, and increased marketing/offers to spur additional sales. However, I think the bottom line here is that the Wine Club model is in fact broken. It's based on a time in the wine industry that no longer exists. If there was data available that showed the buying habits of Former Club Members, I think you would quickly see what I mean. We trade a 25yr customer lifecycle for 3 years of intense/high volume relationship. Ever had a relationship that was hot and heavy, but when it was over you never wanted to see them again? Bet it didn't last too long! Once a customer makes the decision to leave your Club, they rarely buy from you again. As an industry we need to be looking for ways to sell to all potential customers constantly, not just those in a "club". We'll never crack the retention game, it's the nature of customers to move on from high-commitment options. We have clung to an outdated model that is now designed to fail.

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    1. 707 - thanks for logging in and participating.

      Fortunately I think wineries are evolving along with direct to consumer sales platforms. No question the old model doesn't work today and truthfully (...as if a banker can be truthful), I think most wineries recognize that and virtually all of the wineries I speak with are making progressive steps in evolving their model. There is still a lot of experimentation with the right approach and I believe we will find there is no one best approach, but several best practice models that can be used as markersThere are some highly successful wine clubs out there in many forms.

      NakedWine.com is an interesting model for many reasons, but first and foremost - they are a retailer and start with that before thinking about wine quality. They back into costs and the prices they want to charge and create a story around the offering. I'm not saying that is what everyone should evolve toward, but it is an insteresting spin and a leap forward in wine retailing direct. There are some lessons to be learned there for any wine club.

      I'm wondering if others have thoughts about role models that the business can follow?

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  6. Nice post and great convo below the line here. Just wanted to chime in on a few things:

    1.) Wineries must be careful when it comes to the whole freebie (or "tossing in an extra bottle" thing) - the ABC doesn't look favorably on this.

    2) Cracking the retention game starts with getting accurate information about your customers. DTC sales platforms/technology still has a loooooooong way to go. Getting accurate (even minor level) metric data is both manual and time-consuming in most cases.

    IMO, wineries have to recognize their most loyal customers, *even if they are not in the wine club*, in some form or fashion. It's really hard to think of role models in that area, but I can think of many examples of companies/industries that are doing it all wrong (which is kind of sad).

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    1. Dave - thanks for posting!
      1) Absolutely true. There are limits and practices the ATF brackets and free wine is one of them. That said, there are several ways to make that work. I'd also suggest that a surprise doesn't have to be wine. It can be a sleeve of golfballs (presuming you had a CRM system and knew what your clients interests were), a photo essay or picture suitable for framing of the winery site (absent commercial names) ..... be creative.

      2) Agreed but we are making progress. Some wineries are far more along in this than others, tapping into Big Data to augment their existing systems, but those are the industry leaders and in the minority.

      Rewarding and recognizing (even a thank you) loyal customers is a really important thing to do in maintaining and building a customer's marginal utility.

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  7. Great post, as usual. Having built customer retentions models in other domains, I'm guessing the retention curves are nonlinear as a function of months in the club and retention declines exponentially moving through the average. Any chance of seeing a plot of retention rates (y-axis) versus months in the club (x-axis)?

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    1. Hey thanks for logging in Michael. Intuitively I'd suspect you are right the curve is non-linear relative as far as days in the club go ... some drop out on day 1 (steep curve) and some never drop (flat curve). I don't think I understand the difference between retention rates and days in the club, except one is a percentage and the other is time. I'd have to take respondent by respondent, come up with their percentage and months in club and plot that as a scatter-graph. But the two axis are so similar in meaning, that intuitively - for that chart it would be linear, so I'm not sure what you are looking for or how what information you want to get from it?

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    2. Hi Rob, I’m looking at it from the perspective of survival analysis. Knowing the characteristics of the survival curves can help identify critical points in the customer lifecycle when extra attention might keep customers engaged. The curves could also be measured using variables other than club membership such as purchasing data, for example.

      Here is a page describing the concept in the context of gym memberships. I have no affiliation with the company— I found them today when searching for a useful illustration of survival analysis applied to customer retention…
      http://www.theretentionpeople.com/insight/research/march-2009/

      If you combine this approach with your lifetime value analysis and some marketing scenarios, you can model the revenue contribution from the wine club over time under different growth assumptions— and tie to your earlier post on winery value. More sophisticated approaches can also calibrate to economic changes and estimate their impact to the business.

      Happy to discuss in more detail offline if you like. I enjoy your posts.

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    3. Michael - Thanks again for a really interesting direction. I get where you are headed with this now.

      The data we have are aggregated winery customers. If we had individual customers information, we could run a survival analysis. The only question is what should the independent variable be? Face to face interactions? Phone calls? Email?

      As a total guess, I suspect the more the contact moves from inanimate to animate, impersonal to personal, the better the curve would look. Its a fun thing to try. Maybe Liz Thach over at Sonoma State University can send some of her students after the project? I'll ping her.

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  8. IMO, Wine Clubs as revenue centers compete with tasting room operations. They are integrated within the winery business, yet separate. Club Management should be a full time job for any winery with a club exceeding 300 members. The ideal candidate (send 'em my way if you find 'em) would exhibit a mix of art, science and genuine interest in people. Wineries should have staff dedicated or focused that have hospitality experience, tech savvy and equip them with with CRM or other simple behavior tracking systems. Even then, it should be an all hands on deck mentality from ownership, winemaking staff and marketing to compete for a slice of this recurring and forecast-able revenue pie.

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    1. Carl - Your comments are spot on. Hope you can join us for the live Tasting Room broadcast on May 15th.

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  9. Excerpts from The Wall Street Journal “Marketplace” Section
    (November 26, 2008, Page B6):

    “Marketers Reach Out to Loyal Customers”

    [Link: http://online.wsj.com/article/SB122766322705958805.html ]

    By Emily Steel
    Staff Reporter

    It’s an adage of the business: Persuading a satisfied customer to return is cheaper than attracting a new one. Now, in the struggle to do more with less, that concept is becoming even more important.

    Acquiring a new customer costs about five to seven times as much as maintaining a profitable relationship with an existing customer, says Marc Fleishhacker, managing director at WPP’s Ogilvy Consulting . . .

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  10. Excerpt from C F O Magazine
    (January 2009, Page 50ff):

    “Playing Favorites;
    It’s Tempting to Feel Grateful for Every Customer You Have.
    You Should Fight That Feeling.”

    [Link: http://www.cfo.com/article.cfm/12835154/c_12838677]

    By Josh Hyatt
    Contributing Editor

    . . .

    [Larry] Selden, professor emeritus at Columbia University and co-author of Angel Customers and Demon Customers, contends that the bottom 20 percent of customers can drain profits by at least 80 percent, while the top 20 percent can generate 150 percent of a company’s profit. . . .

    . . .

    At most companies, about 30 percent of customers aren’t profitable -- and two-thirds of those aren’t ever going to be, according to Jonathan Byrnes, a consultant and a senior lecturer at Massachusetts Institute of Technology. . . .


    Excerpt from The Wall Street Journal “Business Insights” Special Report
    (June 22, 2009, Page R4):

    “Why a Loyal Customer Isn’t Always a Profitable One”

    [Link: http://online.wsj.com/article/SB10001424052970203353904574149041326829628.html]

    By Tim Keiningham, Lerzan Aksoy, Alexander Buoye and Luke Williams

    A lot of companies look at customer loyalty the wrong way.

    Without question, loyalty is important. Loyal customers hang on for years, devote a larger share of their wallet to the company, and recommend the company to their friends. Customer loyalty, in short, helps drive profits.

    But what too many companies fail to understand is this: Loyalty does not always equal profits. In fact, many companies don’t know how to recognize -- and thus encourage -- the kind of customer loyalty that’s really worth having.

    . . .

    The target audience for any company should be customers who are not only loyal in both attitude and action, but also profitable. But research consistently finds that profitable customers tend to make up only around 20% of a company’s customers. Break-even customers represent around 60%, and unprofitable customers around 20%.

    . . .

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