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Making Money with the Customer LifeCycle: Extending the LifeCycle

First published 12/07/01

Jim's Intro: So you did the trip wire promotion and you made a ton of money. Congrats! But are there longer term effects (what, a 114% ROI isn't enough?) to anti-defection campaigns like this on the Customer LifeCycle, and can you take credit for them? You bet. This article is Part Five in a series of articles on Behavioral Marketing techniques.

Part 1: Trip Wire Marketing

Part 2: Customer Latency

Part 3: Latency Profiles

Part 4: High ROI Latency Promotion

Last month, we looked at how to execute a Latency-based promotion and execute the two rules of High ROI Customer Marketing:

1. Don't spend until you have to

2. When you spend, spend at
the point of maximum impact

By focusing your resources squarely on the problem, each dollar you spend works much harder. By waiting for the trip wire you narrowed the population you were promoting to, weeding out people you would normally waste money on. And by acting when the wire was tripped, you spent at the point of maximum impact. This approach let to a 114% return on the promotion, as result of the "found profits" you generate when you surgically prevent customer defections with ultra-targeted promotions.

We were left with a question, though. This promotion was not designed to extend the customer LifeCycle, but to add value to the LifeCycle. Did we actually extend the LifeCycle, and how would you measure this effect?

Recall you made $8000 in 90 days after paying back an investment of $7000 with this promotion. You generated a bottom line profit of $1.60 per customer - without even looking at what happens to the customer after the 90 day promotional period is over.

But it is very likely you did something else with your promotion - you extended the LifeCycle of the customer - and this is how you track these "LifeCycle extension" effects.

All the customers in both the test (received promotion) and control (did not receive promotion) groups were 3x buyers who failed to make a 4th purchase by 180 days after their first purchase. This was the Latency "trip wire" selected to trigger the promotion.

So let's look at tracking these two groups for another 90 days, and look at continuing purchase activity using what I call the Hurdle Rate method.

A Hurdle Rate is simply the percentage of customers in a group who have "at least" a certain amount of activity. You define the behavior hurdle they have to reach, and measure the percentage of customers who have achieved this "threshold" (rate). If you track these percentages over time, you can use them to compare the actual and potential value of customer groups as a whole.

At the point of the promotion, 0% of both groups had made a 4th purchase. Recall we measured the profitability of the promotion over a 90-day period after we sent it to the test and control customer groups.

To track the Hurdle Rates for each group, we ask, "What percent had made at least 1 more purchase at 30 days, at 60 days, and at 90 days after the 90-day promotion was over, in both the test and control groups?"

We know some percentage of both groups made a purchase during the promotion, because there were revenues generated in both groups. We made a profit in the first 90 days because the revenues were much higher for the test than control group.

So at the beginning of this "post promotion" tracking, we see 1% of test and 3% of control have made 4 or more purchases. For the following 90 days, data might look like this:

% 4 or more purchases Control Test

End of 90-day Promotion             1%       3%
30 Days After Promotion End       1%        5%
60 Days After Promotion End       2%        8%
90 Days After Promotion End       2%       10%

Realize this: we have already made money on this promotion, a 114% ROI. We have already added value to the LifeCycle, increasing LifeTime Value - no matter how long a "LifeTime" is (does it really matter, as long as you are making profits?)

But as you can see from the chart above, we also extended the LifeCycle itself, because the percentage of customers exceeding the "4 or greater Hurdle" in the test group is far higher than the percentage of customers over the same Hurdle in control, and it appears to be growing over time.

There is a group of customers in the test group who just keep on keeping on - and this percentage (10% at 90 days after Promotion End) is much higher than both the initial group who responded to the promotion and made a 4th purchase (3%) and the test group. What's going on with that?

It's called the Halo Effect. It represents customer activity stimulated by the promotion which did not occur within the promotional period. Now we don't know exactly where it's coming from, and we can't show any measure of profit from it (we defined our promotion period as 90 days) , but it is clearly there, plain as the nose on your face.

Recall when describing the original promotion, I stated, "Response Rate doesn't matter in the measurement of profitability (it matters a lot in other cases). When you use control groups, you pick up buying behavior you never could have measured by just looking at response".

This "buying behavior you never could have measured" is the Halo Effect, working it's magic during the promotion. People you have no way to track will respond to the promotion. They want to make a purchase but forget the coupon, for example. So they go ahead and make the purchase anyway - because the promotion "woke them up" to a need for something you sell.

After the promotion is over, the same thing continues. It's the Halo Effect again, working after the promotion. For example, people think about participating in the promotion but wait too long. They've missed it. But they're now in a new state of awareness about your company because of the promotion, and so are more likely to make a purchase given any random positive stimulus. Perhaps some product appears on a TV show. Maybe a competitor promoted a product to them, the customer remembers you sell it also, and prefers your store.

It doesn't really matter. Fact is fact, and because of your promotion, you extended the customer LifeCycle. You created a situation where people became more likely to purchase from your company in the future, as demonstrated by the chart above.

Not bad for a beginner. In the first 90 days, your promotion created present value - real bottom line, measurable ROI - which adds Value to the customer LifeCycle (LifeTime Value). In the 2nd 90 days, your promotion created future value - accelerated repeat purchase rates - extending the LifeCycle.

CFO sings your praises! At last, somebody who can prove they are making more money than they are spending with marketing!

There is an important lesson here: you will never know how much money promotions really make without using control groups.

Well, I hope you've learned some actionable ideas on this trip through a Latency-based promotion. The plain fact is, this stuff works, it is simple to implement, and it makes money hand over fist. But Latency is only the beginning. It's the least effective, lowest ROI predictive behavioral metric you can use.

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!

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Making Money with the Customer LifeCycle: Extending the LifeCycle