Making Money with the Customer LifeCycle:
Trip
Wire Marketing
First published 7/15/01
Jim's Intro: There is so much confusion surrounding how behavioral
customer metrics are monitored and used I thought it was high time to
write the story. Folks, none of this stuff is really hard and
anyone can use these techniques with simple query tools - CRM not
required. This article is Part One in a series of articles on
Behavioral Marketing techniques.
Part 2: Customer Latency
Part 3: Latency Profiles
Part 4: High ROI Latency Promotion
Part 5:
Extending the LifeCycle
No question about it, the constant drumbeat of the CRM machine over
the past several years has confused the heck out of people. I've been
doing this stuff for almost 20 years now, and I can tell you it is not
as difficult as it is often portrayed. Sure, you can make it
very, very complicated if you want to. But if you don't start
with the basics, you're going to end up wasting a ton of money.
Let's start simple, shall we?
I'm going to back up a second and explain in a more general sense how
metrics like Latency are used, and in particular, address some of the
misconceptions people have regarding customer value-based and
relationship marketing techniques. Much of CRM is based on these
fundamental ideas. Remember, CRM is an approach to managing a
business, not a technology. You do not need to live on the
bleeding edge of technology to take advantage of a customer-based
management approach.
Generally, CRM or Relationship Marketing attempts to define
customer behavior and then looks for variances in behavior. When
you hear people talk about "predictive modeling" or looking
for "patterns" using data mining, they are essentially
taking a behavioral approach using the latest tools. Once you
know how "normal" customers behave, you can do two things
with respect to your business:
* Formally document normal customer behavior and internalize
it systemically, leveraging what you know to improve business
functionality and the profitability of customers
* Set up early warning systems, triggering events, or "trip
wires" to alert you to customer behavior outside the norm. This
variance in behavior generally signals an opportunity to take action
with the customer and increase their value - online or offline.
What is most important to measure in CRM is change.
People spend way too much time worrying about "absolute"
numbers, like LifeTime Value. What they
should really be looking at is "relative" numbers - change
over time. It's not nearly as important to know the absolute
value of a customer as it is to know whether this value is rising
or falling - called the customer LifeCycle.
Knowing and understanding the customer LifeCycle is the most powerful marketing tool
you can have.
Customers in the aggregate tend to follow similar behavioral
patterns, and when any single customer deviates from the norm, this
can be a sign of trouble (or opportunity) ahead. For example, if
the average new cellular customer calls customer service 60 days after
they start, and an individual customer calls customer service 5 days
after they start, this customer is exhibiting behavior far outside the
norm. Is there a potential problem, or opportunity? Is the
customer having difficulty understanding how to use advanced services
on the phone, or is the customer happily inquiring about adding on
more services? In either case, there is an opportunity to
increase the value of the customer, if you have the ability to
recognize the opportunity and react to it in a timely way.
Understand, there is no "average customer", and a
business will have many different customer groups, each exhibiting
their own kind of "normal" behavior. The tools
available to identify and differentiate customer segments using
behavioral metrics are discussed at length on almost every page of
this web site. For example, the type of media or offer used to
attract the customer can have a dramatic effect on long term behavior,
and customers who come into the business on the same media and offer
will tend to behave in similar ways over time.
In the cell phone case above, the measurement of
Latency
(number of
days until customer service call) serves as the "trip wire",
a raising of the hand by the customer, to say to the marketer
"I'm different. Pay attention to me." It is then
up to the marketing behaviorist to determine the next course of
action. Metrics like Latency provide the framework for setting
up the capability to recognize the opportunity for increasing customer
value.
This raising of the hand by customers, and the reaction by
marketers, is the feedback loop at the center of Relationship or
LifeCycle based marketing. It's a repeating Action - Reaction -
Feedback cycle. The customer raises the hand, the marketer
Reacts. The customer provides Feedback through Action - perhaps
they cancel service, or perhaps they add service. The marketer
reacts to this Action, perhaps with a win-back campaign, or with a
thank you note. It's a constant (and mostly non-verbal)
conversation, an ongoing relationship with the customer which requires
interaction to sustain. It is not a relationship in the
"buddy-buddy" sense. Customers don't want to be
friends with a company, they want the company to be responsive to
their needs - even if they never come out and state them openly to
the company.
This relationship continues to cycle over and over as long as there
is value in the relationship for both the customer and the marketer.
If the customer takes an Action and there is no Reaction from the
marketer, value begins to disappear for the customer, and they may
defect. When value disappears for the marketer (the customer
stops taking Action / providing Feedback), marketers should stop
spending incremental money on the customer.
Notice I did not say "fire the customer" or any of the
related drivel thrown around in some of the CRM venues. All
customers deserve (and pay for) a certain level of support. The
real question is this: for each incremental, or additional dollar
spent on marketing to the customer, is there a Return On the
Investment? If I have the ability to choose between spending $1
on a customer returning $1.10, and $1 on another customer returning
$3, I would be nuts not to choose the customer returning $3. I
have not "fired" the customer returning only $1.10; I have
just chosen not to spend incremental money doing any special marketing
to them.
Do you see the difference?
In fact, much of the profitability typical of high ROI Customer
Marketing techniques comes from knowing who not to spend on.
Most of the decreased profitability in any marketing program is a
result of over-spending on unsuitable targets with lowered returns.
But because marketers tend to look at results in the aggregate, or
they are looking at demographically-based segments to measure a
behaviorally-based outcome, they miss details like certain segments
returned $5 for each $1 spent, and others lost $5 for every $1 spent.
The campaign as a whole may return only $1.10 for each dollar spent
because the marketer spent money on low ROI
customers.
When you are trying to encourage a customer to buy something, you
are looking for a behavior to occur. To measure the results of
such a marketing campaign using only demographic segmentation without
any behavior-based metrics (like Recency or Latency) is misleading at
best, and lazy otherwise - it's apples and oranges.
Why is this all important?
Customers who are in the process of changing their behavior -
either accelerating their relationship with you, or terminating their
relationship with you - are the highest potential return customers
from a marketing perspective. They represent the opportunity to
use leverage, to make the highest possible impact with your marketing
dollar.
You may make money marketing to customers
who are just
cruising along the LifeCycle, acting like an "average
customer". But when you can predict the likelihood of an average customer to
turn into a best customer, and you successfully encourage this
behavior, or you can reverse a customer defection before it happens,
there are tremendously profitable longer-term implications for the
bottom line. You discover these opportunities by understanding
behavior and setting up trip wires (like Latency metrics) to alert you
to deviations from normal behavior.
What about all the rest of the customers, those who are not either
accelerating or terminating the relationship? Leave 'em alone.
Whatever background marketing you do (advertising, branding, service
campaigns, etc.) is serving them just fine.
High ROI data-driven marketing techniques are best used (and create
the highest returns) when they are used to surgically strike at a
trend in behavior, not when customers are comfortably plodding along.
However, there's not as many comfortable plodders as you think;
in fact, from 40% to 60% of your customer base is either in the
process of accelerating or terminating their relationship with you
right now. The question is, how do you take advantage of the
situation?
Latency, and all the other metrics described on the Drilling Down
site, are simply tools for recognizing the opportunity to take an
Action in Reaction to the customer raising their hand. If you
don't have some kind of system to recognize customers in the process
of changing their behavior, you will miss out on most of the highest
ROI customer marketing opportunities you have.
And don't count on the customer to e-mail you when they're thinking
of changing their behavior - we both know that just is not going to
happen. A more likely scenario: they will just stop taking
Action and providing Feedback. By then, it's too late for
you to do anything profitable about it.
Set up your trip wires and predict the behavior, folks. It's
the only way to sense when an average customer is ready to become a
best customer. And reacting to a customer defection after the
fact is a truly sub-optimal way to "manage" a
relationship.
If the above makes sense to you, then you are on your way to
designing the highest ROI customer marketing campaigns of your
career. The Drilling
Down book teaches you all of the proven LifeCycle-based marketing
techniques step-by-step, gradually building up from simple ideas like
Latency to full-blown visual customer LifeCycle mapping techniques. If
you want to start returning profits of 2 - 5 times the money you spend
on a customer marketing campaign, you need this book!
What would you like to
do now?
Go to Part Two:
Customer Latency
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