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Recency: Not for Everyone? 
Drilling Down Newsletter # 26: October 2002


Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
*************************
Customer Valuation, Retention, 
Loyalty, Defection

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Prior Newsletters:
http://www.drilling-down.com/newsletters.htm
-------------------------------

In This Issue:

# Topics Overview

# Best of the Best Customer Marketing Links

# Tracking the Customer LifeCycle: Recency

# Questions: RFM in a Subscription Business
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Topics Overview
=============

Hi again folks, Jim Novo here.

This month we've got the usual "best of" Customer Marketing article links, the third installment of the series on Recency, and a fellow Driller (a finance guy!) looking to increase profitability using simple customer models in a subscription-based business.

Now let's get right to it and 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 this.  You can get these "must read" links e-mailed to you every 2 weeks before they expire by subscribing to the newsletter.

5 Loyalty Techniques to Improve CRM
Expires October 30, 2002 DM News
People seem to forget that "CRM" has been around for decades,  in the form of loyalty programs and smart database marketing.  Here are 5 solid tips from the experience base.

Forget the Buzzwords, 
It's All About Communication
Expires November 3, 2002 DM News
If you really want to get down to brass tacks, CRM is all about communication, and you don't need a lot of fancy software to do that,
just some smart marketers and a plan.


Tracking the Customer LifeCycle: Real World Examples
=====================
If you are new to our group and want to review the previous LifeCycle metric - Latency - that discussion is here, along with the Real World examples
Hair Salon and B2B Software.  The previous piece on Recency is here.

Recency: Not for Everyone?

"Now hold on just a minute, Jim," you say.  "Recency is a very cool concept, but I can think of some specific instances where it can't possibly work.  A person who just filed a tax return 30 days ago is not more likely to file one than a person who filed one 60 days ago, and the same thing is true for people who bought a new car.  Explain yourself!"

Recency is a very powerful metric, but there are times when it simply is not appropriate to use without some adjustments.

There are two issues to consider when using Recency - external forces and time frame.  If there are powerful external forces shaping behavior - like the April 15th tax deadline - these forces may overcome the Recency effect and you should use a Latency trip wire instead.  An accountant trying to manage customer relationships would probably look more to Latency and set this trip wire: I will call best customers who don't schedule an appointment by March 15, for example.  The tax deadline is simply too powerful a force and overcomes normal Recency behavior; Latency then comes into play.

One also needs to consider Recency in light of the LifeCycle of normal customer behavior.  It is unrealistic to think of Recency for new car buyers in terms of 30 and 60-day periods, when the normal purchase cycle may be 4 years long.  It's not rational to use the Recency metric under these circumstances, knowing the LifeCycle.  However, Recency can be used in combination with Latency to create extra-powerful simple customer models in both these cases.

For example, up until the April 15th deadline, the accountant is really operating in the world of Latency.  If customers don't call by a certain day, they are unlikely to be using the accountant for their tax return.  Once the April 15 deadline passes though, the accountant is in the Land of Recency - the longer it has been since the deadline, the less likely it is the customer will be using the accountant next year. The accountant needs to get on the phone with these high value customers and find out what happened right away if the customer is to be recaptured.

The new car dealer is in a similar situation.  Let's say the average customer trades in every four years.  Up to four years after the new car purchase, the dealer is in the Latency world - there is a trip wire at 4 years, and any customer who has not purchased again at the 4-year point is in danger of being lost.  After the 4-year point passes, the more time passing, the less likely it is the customer will come back - the Recency effect.  As time goes by after the trip wire triggers, it becomes more and more urgent the customer be contacted and made an offer. And don't forget this: the more time that passes, the higher the offer will have to be to get the customer to come back - the Discount Ladder effect.

Also, please remember Recency (and Latency) are about relationships, not products.  If I sell home appliances and I profile my customers, someone who bought a stove 30 days ago is not more likely to buy another stove than someone who bought a stove 90 days ago.

But 30-day old stove buyer is more likely to buy a dishwasher from me than the 90-day old stove buyer.  That's what the customer LifeCycle is about, the relationship of the customer and the business, not about individual products purchased.  And Recency is a relative measurement, a comparison, a ranking of customers.  Neither one of these customers may buy a dishwasher from me; but one is more likely to and so deserves more of my attention if I am allocating precious resources and looking at ROI.

Got it?  Good.  Now that you have some background in the theory, next time we will get into some hard core "How To" on setting up Recency-based analysis and what you actually do with the information to increase the profitability of your business, on- or off-line. Yes, it is time to Return to some Real World Examples, this time with Recency.

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Questions from Fellow Drillers
=====================
Jim's note: If you still don't know what RFM is and how it can be used to drive increased profitability in almost any business, read this.

Q: My boss (VP of phone sales) is really looking to try out some new ideas and RFM is one he has latched onto.  He actually has explored this concept for a few years but never acted upon it.  Anyway, he just purchased your book and after finding that he did not have time to read it he gave it to me.  My job was to read and understand at a high level and to lead a discussion with the marketing group to get them excited about the concept.  I am a finance guy by trade so this concept was very interesting.

A: That's funny, the people who really "get it" the most are finance people and IT people, because it is kind of "black and white", very numbers driven.  Stuff either works or it doesn't - did you make money or not?  ROI is the name of the game.

Q: Obviously I either did not do a good enough job explaining RFM, Latency, tripwires, etc. or they just are unwilling to have someone from their team tackle the concept.  The question they always wanted answered was "We don't know why the customer behaved as they did.  Thus a sales call needs to be made not a marketing campaign."

A: "Why" is not really the issue; defection is happening.  Depending on the biz, a sales call might be exactly what is needed.  These models are always about allocation, putting scarce resources to the highest and best use.  Per customer, sales calls are expensive; direct mail is not.  If you have a formal "wall" between sales and marketing, usually the "whose responsibility is it" issue is decided by "degree of pain" e.g. how valuable is the customer to the business overall?

For example, if you have a small number of very high value customers who look to be defecting according to RFM then a sales call is triggered.  If you have lots of medium to low value customers who look to be defecting, then a direct mail/ telephone campaign is what you need, which is probably marketing.  Match the value of the effort to the value of the customer; this is how you get gigantic ROI's (or since you are a finance guy, more accurately something like ROME's - Return On Marketing Expense).

Q: We are a subscription service in which customers pre-pay for the service they expect to use.  Our sales (and I guess marketing to some extent) are responsible for driving customers to use their service throughout the year.  Usually if a customer uses more than they committed to then they raise the commitment the following year.  So I guess my question is this: Can RFM be used for a pre-paid subscription service?

A: Sure, perhaps not in the "classic" sense.  For many service biz, particularly subscription ones (telco, insurance, etc.) you profile activity other than billing.  Sounds to me like what you want to profile is usage - the more Recently and Frequently a customer has used the service, the more likely they are to continue using it.  So you could rank customers by likelihood to "continue using the service".  High value customers with low likelihood (low or dramatically falling RF-M score) to continue to use the service get a sales call, mid to low value customers with low likelihood to continue get a direct mail piece from marketing.  Dramatic changes in score require the most urgent attention, in terms of allocating resources to the effort.

Q: As an FYI, we have customers who pay as they go and customers that sign a yearly commitment.  Would it be best to segment the two groups when developing the RFM model and tripwires?  As we have different size customers some spending more than $10K/year and some $1K, should we segment based upon dollar values as well? 

A: Yes, both these segmentation approaches would help you.  More on this below.  Payment method is a huge behavioral clue, there will be significant differences in behavior.  With a service, you hopefully know why people stop using it.  Find defected best customers (high value cancels) and look at why they stopped using it (or interview them if you don't know, offer a free month or whatever to get them to talk to you) , and create sales / marketing - pitches / materials to address the issues they have.  When you see a client engaging in a defection pattern on usage (drop in RF-M score), engage the appropriate response (sales or marketing) based on customer value.

And sure, the more you segment your customer base, the better it works.  You should start at the bottom, however.  Don't "out-think" the segmentation; let the data speak to you.  Try something at a very basic level and look for raised hands; this will tell you what works and put you on the right track.

For example, let's say (and I imagine it would be true) that SIC codes play a role in the quality / value of a customer.  So you do a campaign (sales, marketing, or both) to all customers who used to access the database Recently and Frequently, but have dropped off (RF-M score is lower).

What you see when the data comes back is certain SIC codes had a very high response and "activation" and start using your database again, and others do not.  The data has now spoken; it has told you where it is worth spending time / money on this particular idea.  

Perhaps you look at bit deeper, and find that an SIC code that looks to be a "bad idea" overall actually generates activation for you as long as the offer is made by direct mail in the South.  So you keep this particular segment of the "direct mail" campaign and reject the rest.

You can look for other segments by value, by region, by services subscribed to, by average transaction value, by location of their customer, whatever.  As you subdivide segments, you will find new pockets of profitability.  You could spend a LifeTime chasing down all the segments - I have never, ever finished this task on any particular engagement.  Clients call me years after they have stopped using my services to tell me they have discovered unique new segments that are extremely profitable and I appreciate that, because it adds to the knowledge base.

Jim

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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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