Recency: When is a Customer Not a
Drilling Down Newsletter # 34: June 2003
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention,
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In This Issue:
# Topics Overview
# Best of the Best Customer Marketing Links
# Question: Are Non-Members Customers?
# Question: Retention and Defection Scoring
Hi again folks, Jim Novo here.
This month we've got the usual "best of" Customer
Marketing article links section. And we have 2 deep questions
from fellow Drillers.
For several months now, new subscribers to the
newsletter have been receiving the first nine chapters of the
Drilling Down book free by e-mail. This has caused a flood of
questions on how to use this info in specific day-to-day business
operations. That's OK with me, because I believe by going
through examples of using these techniques in a whole variety of
business situations, everyone will benefit.
For some reason, people often do not see the "home run"
applications for customer analysis in their own business. But
provide examples of how it works in a different business, and the
"Ah-Ha! moment" all of a sudden is at hand. I have seen this happen offline for years. Want to bet we can
make it happen online too?
OK then, let's do some Drillin'!
Best Customer Retention Articles
This section flags "must read" articles moving into the paid archives
of trade magazines before the next newsletter is delivered.
If you don't read these articles by the date listed, you will have to pay
the magazine to read them from the online archives.
Note to web
site visitors: These links may have expired by the time you read
can get these "must read" links e-mailed to
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Pay Attention to 12-Month-File, Forum Speakers Urge
Expires June 30, 2003 DM News
Sure, that's the "blunt force" way to do it. People who have
purchased last 12 months are much more likely to purchase than those who have
not purchased last 12 months because they are more Recent.
But, people who purchased last 6 months are even more likely and past 3 months
even more likely than those people. So the "power" of past 12
months really comes from the past 3 months. How can you test and measure
this? Divide customers into <3 month, 3-6 month, and 6-12 month buckets
and promote to them; use the same approach as the 30-60-90
Can Prove Costly For Catalogs
Expires June 30, 2003 DM News
What we're really talking about here folks is the coming of true multi-channel
marketing; and it really only works if you track the customer
LifeCycle across all your channels. Is it difficult?
Absolutely. Is it impossible? No. Is it profitable?
Wildly so, if you understand the LifeCycle and follow the two fundamental rules of
High ROI Customer
Marketing and you have a system to
track the LifeCycle and act on it.
Questions from Fellow Drillers
Non-Members are Still Customers?
Q: I just ordered the book too, so I am eager to learn
more about SIMPLE ways to implement RFM-based strategies.
A: Well, thank you for ordering! I hope it
fulfills your expectations.
Q: In the continuity club (Jim's Note: flower of the
month, book of the month, beer of the month) club business though, a
little of the RFM process looks tricky
because everyone has a certain Frequency built-in, because of the
"repeat" nature of clubs. Also, we're starting to see
a phenomenon where customers that drop out of our club continue
to order from us.
A: This is quite normal, depending on how the club is
set up and whether or not you make it "easy" for people to
continue. In some clubs, you are either in or not (books, CD's,
credit cards). Most catalog-type clubs (pay a fee in exchange
for ongoing discounts / added services) see continuation beyond club
membership. It's a volume-based thing and a "rational"
decision by the consumer - if you need to buy a lot of stuff, joining
the club makes sense, because the discount pays for the membership.
In your case, it might be more attached to education, for example -
you join the club to educate yourself about the products, then quit
when you can "do it on your own". Or, you get lots
of product to experience the variety, and settle into a specific
usage pattern. This is the customer
LifeCycle at work. If you can recognize these patterns, you
can use them to predict what customers are likely to do next. If
you can predict behavior, you can create very high ROI customer
Q: This challenges our traditional thinking that
club-lapse is the end of the LTV contribution.
It leaves me wondering what really is the end of the LTV for any given
customer. The end-all goal for me is to learn everything
possible about customer lapse and how to influence it. I've been
given explicit responsibility just recently to take charge of customer
lapse and influence it to our advantage. I'm analyzing the scope
of the problem and putting together a plan of attack.
A: Well, somebody has their thinking hat on at that
company! In your environment (if I understand it correctly from
a brief review of the web site), I don't think the "club"
really defines long-term behavior, it could be seen simply as a
customer acquisition tool, which is also true of the catalog-type
clubs I referred to above. You have to be careful with this kind
of club, because you can end up creating negative value customers if
they buy a lot of low margin goods with a membership discount and then
just simply abandon you.
The bottom line is this: you probably should not define LTV by club
membership length. It may be convenient to look at membership as
the definition of a "customer", but being a
"member" is probably just the first stage of the customer
LifeCycle. There is then a transition period where some stay
members, some reject membership but remain customers, others
quit entirely. You need to find out what variables - media
source of customer, creative / offer used, first product purchased,
etc. cause customers to end up in these buckets and optimize for
If you want to be proactive on this LifeCycle transition, you need
to predict which members will transition and remain customers,
which ones need promotional "help" doing this, and which
ones you should not bother spend on. How? You can check
out how we did this at Home Shopping Network in
the book, it's quite simple and works like a charm. Track
the customer LifeCycle using simple metrics like Recency
or Latency and act only when
you have to, and when you do act, act at the point of maximum
Q: What sort of work have you done on customer lapse
studies, retention marketing, or in club environments like mine?
A: I've done 100's of customer retention programs over
the past 20 years. Every one is different based on the industry,
the business model, and the constraints of the specific business.
You will find many examples in the book, and more recent case studies
are on the web site here and here.
Unfortunately, companies are not very willing to let me talk openly
about solving their customer retention problems; they consider this
info a "trade secret" because of the financial implications
/ competitive issues involved.
If you are interested in my services, the most cost-effective
solution I can suggest is to read the book first; it provides a ton of
"how to" information and could keep you busy for quite some
time. If you want to accelerate the learning process, I'd be
glad to talk with you about this. I have to tell you something
first though - all my current clients read the book first, did some of
the work outlined in the book, and then engaged me to help them push
it forward. Ask any questions as you review the book - you're a
Retention and Defection Scoring
Q: Just read your book and I say full marks for such a
practical and sensible approach!!! Start small and grow is the way to
A: Well, thanks for the kind words!
Q: I am a part owner of a travel agency (not been the
best area to be in lately).
Q: My first focus for Drilling
Down is on our leisure customers. But my head is
spinning a bit with all the ideas I have from your book. I can
electronically access our: customer names etc., an ID number, when
they purchased, how much the product cost, the supplier, the category
(i.e. air only, cruise, tour etc.) and the final destination. If
you would be so kind as to give me a little steer in the right
direction in setting up the metrics and scores.
A: Hmmm... I of course don't know your business
but would think that particularly in leisure, there is a natural
cyclicality caused by vacation timing, anniversary events, and such.
So in terms of timing, you use a classic Latency approach, e.g. if a
customer took a trip last July they are somewhat likely to take
one this July. If they took one last July AND the July before,
they are very likely to take one this July. If they have
taken a trip the last 5 July's in a row, they are extremely likely
to take one this July.
So you can rank customers by likelihood
to travel each month, and if you want, could assign them a
"score" to represent this likelihood, in the case above,
extremely likely = 5, very likely = 4, etc. People who have not
booked with you for a year might be a 2, not for 2 years a 1.
Then you add a frequency / monetary component and you have a
two-digit ranking quite similar to an RF
score, but customized for your business. My guess is due to
the variance in prices on travel (e.g. plane flight versus ocean
cruise) using monetary or total sales rather than frequency is the
ticket, so to speak. Even better would be margin dollars or
profit, since as I understand it a person could take 10 flights and
not deliver the profit you might make on 1 cruise; the profit margins
vary enormously, so "sales" or "number of
bookings" is probably not tracking the real issue, which is to
identify most profitable customers. Rank customers by value then
divide customers into 5 equal "Quintiles" on this score as
discussed in the book.
Once you have your rankings, first digit = likelihood to purchase,
second digit = value of the customer (the RF score), you proceed with
marketing as suggested in the book, using the scores to identify
customers likely to buy and customers likely to defect.
For example, under the likely to buy approach, you may have an idea
of how many days a person books travel in advance of the trip (or you
can get this from your records, date of sale versus trip date).
Let's say it averages 8 weeks. It is currently June, so 8 weeks
from now is August. Find all customers who traveled last August,
and look at their rankings. If you were going to call them but
can only make a few calls a day, start with the ones with the highest
ranking - the ones who are most likely to buy and are also best
customers, and work down the list.
This average number of weeks between booking and trip probably
differs by type (cruise versus plane), so you might want to
approach it like that, e.g. in June you call people you
traveled by plane last July (plane = average 4 weeks booking to trip), and people who traveled by cruise
last August (cruise = average 8 weeks booking to trip).
Follow? Identify the behavior and then follow it, try to get it
to repeat. This is the "when", the "timing".
The "who" to market is defined by your rankings; given
limited resources, start with the ones most likely to result in a
On the defection side, look at people with high rankings who failed
to book when they were supposed to. Back to using June as the
current date, this would be customers with high rankings who booked
last May. They are now Latent, past the "trip
wire", they failed to book when they were most likely to.
So you call them and find out if the trip was taken with somebody
else, or perhaps delayed (highly likely) and would they like help with
organizing it for later on in the year?
The above approaches (both sales and defection work) combined
create a very systematic and directed way to just gradually push the
whole thing forward every week, by specifically identifying customers
who are likely to buy and likely to defect. You end up
concentrating your work where it is likely to be most effective, and
as long as you are taking advantage of every opportunity to predict a
sale or recapture defecting customers, all customers will eventually
make it to your radar screen as an opportunity for profits.
Hope that helps!
If you are a consultant, agency, or software developer with clients needing action-oriented customer
intelligence or High ROI Customer Marketing program designs,
That's it for this month's edition of the Drilling Down Newsletter. If you like the newsletter, please forward it to a friend - why don't you do this now while you are thinking of it? Subscription instructions are at the top and bottom of the newsletter for their convenience when subscribing.
Any comments on the newsletter (it's too long, too short, topic suggestions, etc.) please send them
right along to me, along with any other questions on customer Valuation,
Retention, Loyalty, and Defection right here.
'Til next time, keep Drilling Down!
- Jim Novo
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