Drilling Down Newsletter # 13 -
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention,
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In this issue:
# First Anniversary
# Best of the Best
Customer Retention Articles
# Tracking the Customer LifeCycle:
Making Latency Pay
# Practice What You Preach: Online Advertising
Effectiveness? Tell Me About It... (Part 6)
# Questions from Fellow Drillers
Hi again folks, Jim Novo here. This month we're a little light
on customer retention article links as most media were focusing on
other issues. But I've written a practical "how to"
article on turning customer Latency measurement into bottom line
profits. Plus, we finally say goodbye to the Advertising
Effectiveness study (did you think it would ever end?), and a fellow
Driller has a great question on how software development folks can use
behavioral modeling in their work.
Let's do some Drillin'!
Hey, this is the 13th newsletter! What do you know, it's been a
year since I started this effort to teach people simple High ROI
Customer Marketing techniques they could use without a lot of fancy
equipment or software. And judging from all your comments
on the book you folks dig it and it's helped you make more money
on your customer marketing programs. Great!
Do me a favor? Call it an anniversary gift to me. Would
you please forward this newsletter to a couple of your peers who could
use this kind of information? This is an especially jam-packed-with-cool-stuff issue, so it would make a good introduction to
those unfamiliar with data-driven marketing concepts.
Thanks in advance for the gift!
Best of the Best Customer Retention Articles
This article on the DM News web site will move into their paid
subscription archive 30 days after the date of publication listed
below, so check it out soon! The URL is too long for the
newsletter, so the following link takes you to a page you can link
directly to the article from.
Note to web
site visitors: These links may
have expired by the time you read
can get these "must read" links e-mailed to
every 2 weeks before they expire by
subscribing to the newsletter.
Shapes Up As Success for Fitness Club
September 21, 2001 DM News
I get a lot of questions from people about using direct marketing to
acquire customers in geographical segments. This article is
a good example of the smart way to do it, whether your business is
online or offline. For low cost targeted acquisition, you can't
beat post cards.
Here's another great article (not on DM News) talking about a concept
familiar to my readers - CRM Lite. You can get 80% of the
benefits with only 10% of cost using
October 1, 2001 Direct Magazine
"At its core, customer relationship management is simply about
increasing profits and sales by better understanding who your
customers are, which ones are driving in the greatest profits, what
your high-value customers want, and how to satisfy them."
The article goes on to describe how to get started on some aspects of
CRM using existing resources. Sounds familiar.
Tracking the Customer LifeCycle:
Making Latency Pay
The first three parts of this series start
Recall this table, measuring the average number of days between a
series of customer events. These events could be any action taken by the customer - purchases, web site
visits, calls to a contact
center, or a mixture of these actions:
1st - 2nd event:
2nd - 3rd event:
3rd - 4th event:
4th - 5th event:
5th - 6th event:
6th - 7th event:
|| 120 days
7th - 8th event:
|| 150 days
Note the time between events gets shorter and shorter, then around the
fourth event, begins to lengthen. This is a classic customer LifeCycle,
and the last half of the pattern is typical of what you see when a
customer is about to defect and stop or substantially slow down doing
business with you. The time between events gets longer and
longer until no next event takes place at all.
Will all customer LifeCycles look like this? No; this is the
average behavior of a customer in your business as it stands
now. Some customers may cycle more rapidly, others more slowly
through these events.
Customer LifeCycles are a reality: there is going to be a LifeCycle
and you will not be able to stop it. You probably don't know
about LifeCycles. because you have not measured them; perhaps you don't
know how. Besides, you don't
even hear the pundits talking about them.
This is most amusing given all the jaw flapping and tongue wagging
about LifeTime Value; if you don't understand
the customer LifeCycle, how would you ever know when the
"LifeTime" was over to measure value? The plain fact
is people have it backwards; LifeTime Value is the last thing you want
to try to wrestle with when just starting out with customer
relationship and value management. You start with the LifeCycle,
and only after fully playing out that card, do you move on to the idea
of LifeTime Value. You do not have to mess around with
calculating absolute customer LifeTime Value to be successful using
data-driven marketing. If you don't believe this, you must have
missed the tutorial which explains this
concept in detail.
Customers are not just customers one day and then not the next day;
there is a process to customer defection, and the smart
data-driven marketer creates High ROI Customer Marketing programs by
taking advantage of understanding the complete customer defection
There are two ways you can increase the value of customers:
1. Extend the customer LifeCycle, leaving
more time for the
customer to increase in
value, by increasing the time the
customer takes to defect.
2. Increase the value of the customer within the existing
LifeCycle. The customer still defects pretty much on schedule,
but you have done everything you can to increase their value
before the defection happens.
The first approach usually requires some pretty sophisticated tools
and can be expensive; loyalty programs are a classic example of
extending the LifeCycle. Not for the faint of heart financially
and organizationally, loyalty programs also do not work well for every
type of business. But they do work and can be extremely
profitable if they are designed and executed correctly. If you
are interested in how this type of loyalty program is constructed,
here are some good
The second approach to increasing customer value above is easier to
execute, and for many companies, is the right way to go. It
involves what I would call a customer retention program as opposed to
a loyalty program, and this is how you go about setting it up.
The first place I would look to address the above customer
LifeCycle is the fourth event. Why? This event looks to be
the one that sets up the beginning of the defection, since it is this
fourth event which starts out the pattern of longer and longer times
between customer activity events.
For the average customer, this fourth event happens at 180 days
after the first event. We can assume some customers reach the
4th event before 180 days, and some reach it after 180 days. Any
customer who is 180 days old and has not yet made a 4th purchase, a
4th visit to the web site - whatever the event is you are tracking -
is acting outside the behavior of the average customer and is a prime
candidate for an earlier than normal defection. This is where
you focus your efforts. You set up this fourth event as the
"trip wire" - if the customer doesn't trip the wire by
engaging in the 4th event by day 180, you take action and affect this behavior.
If you can save just a small percentage of defecting customers, the
ROI can be very high, because these customers represent "found
profits" which would not have existed without your
efforts. And yes, you can measure and track these found profits
- I am going to show you how to do this below.
Why concentrate on these defecting
customers? The two fundamental rules of High ROI Customer
1. Don't spend until you have to
2. When you spend, spend at the point of
You don't have to spend on customers who make the fourth purchase
or visit within 180 days, because they are acting like
"average" customers. Why spend on them if everything
there is OK and they are behaving normally? You want to
concentrate your spending where it will have maximum impact - on the
customers who "roll over" the 180 day barrier without
engaging in "average" behavior. These customers are
the most likely candidates for a complete defection, and by focusing
your resources laser-like on these people, you can spend more per
customer and really have some impact on their behavior.
Put another way, let's say you have a customer retention budget of
$20,000 and you have 20,000 customers. You currently spend $1
per customer each year sending all your customers the same lame
retention stuff - statement stuffers that say you care and so
forth. But if you could tell which 5,000 customers were the most
likely to defect, and only spent on them at the point of maximum
impact - when the defection was taking place - you could spend $4 per
customer trying to stop or slow the defection with the same budget,
have a much higher success rate, and actually realize the "found
profits" I spoke of earlier. Make sense?
How To Execute a Latency Promotion
We'll use a retail example because the numbers are easiest to
understand and convey. But the same thought process is valid for
Utility / Telco, Insurance
/ Services, or Durable Goods / Long
Sales Cycle businesses.
1. Determine the timing of your promotion. You normally
want to take action as close to the "trip wire" event as is
reasonable and practical, taking into consideration the cost. If
you have a ton of customers, there may be enough customers rolling
over the "180-day with no 4th purchase" barrier to execute
your promotion every week; if not, then gather up enough customers to
execute efficiently. Some may be anywhere from 180 - 210 days
old with no 4th purchase. That's fine; but don't let them get
more than 30 days past the trip wire without taking some action.
2. Create the offer. In a retailing business, this
could be as simple as a discount of some kind. You could
sub-divide the 180 day old / no 4th purchase customers into
"best" and "other", creating a VIP service offer
to best customers and a discount offer to other customers.
3. Prepare the list. Select all your 180 day / no 4th
purchase customers, and then randomly
select 10% of them to not contact. This is called
your control group. People will tell you to only use 2% or 3% as
control, and statistically they could be right about
this. But the first
time out of the box, I like to go with a 10% control,
for two reasons:
a. It's a "no argument" control group size.
If your effort works and you can prove it, there won't be chattering
from the sidelines about the possibility of a "defective"
b. Why spend more than you have to the first time? By
taking a large control, you reduce the number of people you are
spending on to execute your promotion.
If you created the two groups "best" and
"other", you need to take a 10% random sample of each.
The other 90% of a group is called the test group; they are the
ones who will receive the promotion by direct mail, e-mail, other
The creation of proper control groups is absolutely essential to
measuring the "found profits" referred to above. If
this step has you puzzled, you can read more about creating control
groups and random samples here.
4. Now you have two lists of people, control and test.
Set up your tracking capability, which at minimum is the ability to
run a report every 30 days that reveals the sales of each group starting
from the beginning of the promotion, which is when you execute the
e-mail, snail mail, or other communication of your offer to the test
group. The metric you are interested in here is revenue per
customer, so you would take the total sales of each group from the
time the promotion is delivered and divide by the number of customers
in the group, for both control and test groups.
5. Deliver your promotion to the test group.
6. Monitor the revenue activity of test and control
groups. Run a sales report weekly or every 30 days, and look for
divergence in the revenue per customer. The customers in the
test group should be registering a higher sales per customer level
(you hope). Keep running the report until the increase in
revenue between test and control remains stable or begins to
fall. When this happens, the LifeCycle of the promotion is over
(promotions have LifeCycles too!). Let's say this takes 90 days,
so 90 days after the event, you have a revenue per customer number since the promotion started, for both
control and test
7. Calculate ROI. I'll use some plug numbers as an
example. The idea here is to compare the revenue behavior of the
test group with the control group, and determine how much additional
revenue occurred because of your promotion. Since the control
group experienced no promotion, any difference in revenue between test
and control can logically be attributed to the promotion. We
then take out costs, and see if we added value to the customer
LifeCycle - in more mercenary terms, did we make money or not?
|180 Day / No 4th Purchase Promotion
Revenue per Customer
Gross Margin @
Due to Promo ($33 - $30)
Here's the key to the above. The people in control generated $30
in Gross Margin per customer over 90 days; the people in test
generated $33 per customer. So $3 in additional Gross Margin per
customer was created because of your promotion, since the two
groups are the same in all other ways (if control was truly a random
This $3 nets down to $2.50 because the cost of doing the promotion
was $.50 per customer. Note: nowhere in here are we talking
about response rates. Response doesn't matter; what
matters is actual buying behavior. When you use control groups,
you pick up buying behavior you never could have measured by just
looking at response rates.
Now, the Per Customer Cost of Event is usually where you get into
some arguments. If the event included a discount, the per
customer cost of this discount must be included in the calculation of
the true promotional cost:
Customer Discount Calculation
Total Discount Dollars:
|Total Number of
Customers in Promotion
Gross Margin per
Customer from Above
minus Discount ($.50)
Also, in the strictest sense, there is probably additional overhead
attributable to the additional revenue: the cost to take the
additional call and
ship the box, the cost of additional salespeople needed to cover the
promotion, and so on. These costs would not exist if you had not
executed your promotion, so they should be included in the calculation
to the extent you can calculate these additional overhead costs.
Cost of sales
people for Promo:
Customers in Promo:
Cost of Salespeople
Gross Profit per
Customer from Above
Net per Customer
Profit w/Sales Cost
This $1.60 is profit after all expenses have been paid back.
You have added $1.60 in value to the LifeCycle (and LifeTime Value) of
each customer in the promotion.
To get to ROI, we need to look at what the promotion cost, and compare
this to the value we generated; this is the definition of ROI.
How much did we invest, and how much did we get back? We know
what we got back $1.60 per customer Net of all costs, so we need to
calculate total costs:
You spent $1.40 and you generated $1.60 after all costs. It's a
90-Day ROI because the additional revenue generated was measured over
A 114% return is not something the CFO is going to be against,
trust me. In fact, you could make the argument that since ROI in
financial circles is usually measured on an annual basis, and this is
a 90-day ROI, the real ROI here is 4x the 90-day ROI, or 456% on an
"annualized basis". Not bad for a first-timer.
These are the found profits you have generated from your
effort. By comparing the test group with the control group, you
have proven these profits would not exist without your 180 day trip
wire promotion. A smaller percentage of customers in the test
group defected when compared with the control group; at least some
portion of test made a purchase, and some kept right on buying for at
least 90 days. These are found profits that would not have
existed without your effort.
You have proven the 180 day / no 4th purchase trip wire promotion
added value to the customer LifeCycle, a total of $1.60 per customer x
5000 customers = $8000 to be specific, and you did this without
costing the company a single dime, since you paid back all your costs
with profit from the promotion, and still had $8000 left over to put
in the bank.
I can hear you now. C'mon Jim, looks good on paper, but 485%
annualized ROI? An $8000 profit on a promotion that with every
cost imaginable thrown in costs $7000? How is that remotely
Folks, it's not just possible, this kind of return is normal
in LifeCycle-based promotions. Remember 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
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. Efficient and
Here is why this type of promotion makes so much money. It's
anti-defection. You literally kept customers from leaving the
company, and the control group proves this. The people you did
not promote to in the control continued to slip away, while some
portion of folks in the test group were stopped and their behavior
reversed. This is where the huge returns come from - it's the
relative spending disparity between the groups that creates the
"found profits", which would have slipped away had you not
done the promotion. It's a "tipping point" kind of
idea - if you can be in the right place at the right time with the
right catalyst, it doesn't take much change to create a big impact.
This promotion was not designed to extend the customer LifeCycle,
but to add value to the LifeCycle. Still, are you curious?
Did you actually extend the LifeCycle, and how would you measure this
effect? We'll answer these questions next month.
I can teach you and your staff the basics of high ROI customer
marketing using your business model and customer data, and without
using a lot of fancy software. Not ready for the expense and
resource drain of CRM? Get CRM benefits using existing resources
by scheduling a roundtable or
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of the October 2001 Newsletter
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