Drilling Down

Turning Customer Data into Profits

 with a Spreadsheet

Site and Book topic:

Maximizing marketing ROI with customer behavior analysis

Customer Retention

Customer Retention marketing is a tactically-driven approach based on customer behavior.  It's the core activity going on behind the scenes in Relationship Marketing, Loyalty Marketing, Database Marketing, Permission Marketing, 1-to-1 Marketing, and so forth.  Here’s the basic philosophy of a retention-oriented marketer:

We are talking about actual behavior here, not implied behavior.  Being a 35-year-old woman is not a behavior; it’s a demographic characteristic.  Take these two groups of potential buyers who surf the ‘Net:

• People who are a perfect demographic match for your site, but have never made a purchase online anywhere

• People who are outside the core demographics for your site, but have purchased repeatedly online at many different web sites

If you sent a 20% off promotion to each group, asking them to visit and make a first purchase, response would be higher from the buyers (second bullet above) than the demographically targeted group (first bullet above).  This effect has been demonstrated for years with many types of Direct Marketing.  It works because actual behavior is better at predicting future behavior than demographic characteristics are.  You can tell whether a customer is about to defect or not by watching their behavior; once you can predict defection, you have a shot at retaining the customer by taking action.

These promotions range from discounts and sweepstakes to loyalty programs and higher concept approaches such as thank-you notes and birthday cards.  Promotions encourage behavior.  If you want your customers to do something, you have to do something for them, and if it’s something that makes them feel good (like they are winning the consumer game) then they’re more likely to do it.

Retaining customers means keeping them active with you.  If you don't, they will slip away and eventually no longer be customers.  Promotions encourage this interaction of customers with your company, even if you are just sending out a newsletter or birthday card.

The truth is, almost all customers will leave you eventually.  The trick is to keep them active as long as possible, and to make money doing it.

Marketing is a conversation, as the ClueTrain Manifesto and Permission Marketing have pointed out.  Marketing with customer data is a highly evolved and valuable conversation, but it has to be back and forth between the marketer and the customer, and you have to LISTEN to what the customer is saying to you.

For example, let's say you look at some average customer behavior.  You look at every customer who has made at least 2 purchases, and you calculate the number of days between the first and second purchases.  This number is called "latency" - the number of days between two customer events.   Perhaps you find it to be 30 days.

Now, look at your One-Time buyers.  If a customer has not made a second purchase by 30 days after the first purchase, the customer is not acting like an "average" multi-purchase customer.  The customer data is telling you something is wrong, and you should react to it with a promotion.  This is an example of the data speaking for the customer; you have to listen.  

This site and the Drilling Down book are all about how to discover, manage, and listen to customer data.  The data is speaking for the customer, telling you by its very existence (or non-existence) there has been an action (or non-action) waiting for a reaction.

4.  Retention Marketing requires allocating marketing resources.  You have to realize some marketing activities and customers will generate higher profits than others.  You can keep your budget flat or shrink it while increasing sales and profits if you continuously allocate more of the budget to highly profitable activities and away from lower profit activities.  This doesn't mean you should  "get rid" of some customers or treat them poorly.  

It means when you have a choice, as you frequently do in marketing, instead of spending the same amount of money on every customer, you spend more on some and less on others.  It takes money to make money.  Unless you get a huge increase in your budget, where will the money come from?

For example, let's say you have 1,000 customers, and you have an annual budget of $1,000.  You spend $1 on each customer each year, and for that $1, you get back $1.10 in profits.  That's an ROI of 10%; you got back $1,100 for spending $1,000.

Now, what if you knew spending $2 each year on a certain 50% of customers would bring back $8 in profits.  That's a 400% ROI.  Where do you get the extra $1?  You take it away from the other 50% of customers.  You spend the same $1,000 total and you make back 500 (half the customers) x $8 = $4,000.

If you always migrate and reallocate marketing dollars towards higher ROI efforts, profits will grow even as the marketing budget stays flat. 

You have to develop a way to allocate resources to the most profitable promotions, deliver them to the right customer at the right time, and not waste time and money on unprofitable promotions and customers.  This is accomplished by using the data customers create through their interactions with you to build simple models or rules to follow.  These models are your listening system, like the "30 day latency" model above.  They allow the data to speak to you about the customer.

This site and the Drilling Down book are about teaching you how to build and use these models yourself in 30 minutes with an Excel spreadsheet.  If you want to increase sales while reducing the costs of marketing to customers, you have to get this book.

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