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In This Issue:

# Topics Overview

# Best Customer Retention Articles

# Second Purchase Marketing

Topics Overview

Hi again folks, Jim Novo here.

How does an online retailer with little purchase history (and a lot of 1x buyers) do profitable database marketing?  That's a question a lot of you may have as we exit the holidays, and the answer is a very simple 2nd purchase program that will actually *save you money*.

In addition to answering this burning question, we'll got a couple of great customer marketing article links.  The first is about how to get IT folks and marketing folks to play nice with each other, something all data-based Drillers need to understand.  The second is about the pros and cons of using the comparison shopping engines for online retail marketing.

Let's do the Drillin'!

Best Customer Retention Articles
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Best of Friends
November 11, 2005  CMO Magazine
Here's a shocker - there are companies where marketing and IT try to work together.  Really.  Amazing, isn't it?  Seriously, more companies should be implementing these "translator" positions that help IT and marketing to understand each other.  We used them at HSN when I was there in the early 90's (called IT outreach managers), and the money / time you save from doing projects right the first time far outstrips the staff costs.

Courting Clicks
November 21, 2005  Internet Retailer
I've never really embraced the comparison shopping engines, as either a user or a web marketer.  An environment designed to attract price shoppers is a retailer's worst nightmare, IMHO - unless you compete specifically on price, a nightmare all by itself.  Plus, they all show stock pay-per-click ads anyway, so what's the benefit?  

I guess it's working for some people though...

Questions from Fellow Drillers
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Second Purchase Marketing

Q:  I loved your book, thanks.  Armed with it, I feel like I can achieve much more than most small retailers in terms of CRM.

A:  Thanks for the kind words!

Q:  I have a question though.  I sell relatively high-priced furniture and design items, and as this is our first year of business, our inventory is pretty small.  As a result, my Frequency totals range from 1 to 4.  That's it, after a year of business.  About 75% of our customers have bought once and it "ramps up" to 4 from there.  I use "ramp" in the broadest sense of the word.

A:  Yep.  That's the hardgoods business, especially on the web.  Don't beat yourself up, it's early in the game for lines like these, and don't blame it too much on inventory either.  In the long run, it's better to sell the *right* stuff than everything you can find, trust me.

Q:  So when I compute RF quintiles, the totals don't cleanly fit within quintiles.  In other words, for RF scores of X1 ­ X4, customers have purchased once.  X5 customers have purchased 2, 3, 4, or 5 times.  If I raise the hurdle and only look at customers who have purchased more than once, I still can't fit them cleanly in five quintiles.

A:  That's one problem with RFM, it's a bit robotic and works best with larger (usually meaning older) databases...

Q:  I read your article on durable goods purchases and avoiding the one-time-buyer problem.  I guess I'm looking for advice on how to make the "F" number significant until we've been in business long enough to get a
broader range of frequency numbers.

A:  Well, Latency, Recency, RFM, and my own LifeCycle Grids are really just tools that help people recognize "patterns" in customer data and take advantage of these patterns to increase profits.  Personally, I would go with more of a Latency or LifeCycle Grid approach on this until the database becomes large enough and you have had a chance to see the LifeCycle play out a little longer.  For example, next year, hopefully 1/3 of those 1x'ers become 2x'ers.  This is typical in higher-end hardgoods, especially "aspirational" stuff.  Many people have to save up for these purchases.

At this stage of the game I think I would concentrate on those 25% who are
multibuyers and try to find commonality.  One of the easiest is 2nd purchase Latency.  Take the multi-buyers, and ask, "On average, how many days / weeks are there between first purchase and second purchase?"

Generically, let's say the average multi makes a 2nd purchase within 5 weeks of the first purchase.  So every 40 days or so, scan for 1x'ers whose last purchase was over 40 days ago and send them a 10% (or whatever, test it) discount.  If you don't convert them at that point, there is a good chance they won't convert for a very long time, if ever.  This is a very simple idea, easy to manage, and once you get a multi, they are about 5 -10x more likely to make a 3rd purchase than a 1x'er is to make a 2nd purchase.

Once you get some experience and fine tune your "days since first purchase" drop date and discount for the best tradeoff between response and profit, you start to segment.  Does "how many days between first purchase and second purchase" vary by category of first purchase?  First purchase price?  Line these multi's up in a spreadsheet or something and just keep asking yourself questions until you find more patterns, something that tells you about becoming a multi-buyer on your site.  Then design your campaigns around these multi-buyer patterns.

For example, you find 1st time Nelson Clock buyers who become multi-buyers tend to buy a storage accessory within 6 weeks of the clock purchase.  So you set up a scan that says "give me all 1x Nelson Clock buyers" and look at how long it has been since they bought the first time.  If it's 7 weeks or so and they still have not made a 2nd purchase, send a discount for any accessory, or, if the "Nelson Multis" tend to buy Media Storage, for that particular accessory.  Follow?

You could end up with a bunch of campaigns like this.  The great thing about approaching web marketing this way is these campaigns can easily be automated because they all use simple math (item number, # of purchases, days since purchase) to generate the lists.  If you're not a programmer and are using Excel or Access for the customer database you could probably find a programmer who could create these scanning routines for you dirt cheap.  Then you could just run them with the click of a button and create your campaigns.

The process above is how the LifeCycle Grids are created.  The 40 day and 6 week cutoffs mentioned above become "boundaries" in your Grid; you can track the retention of buyers overall and of "first time Nelson Clock buyers" and adjust campaigns as needed to maximize customer value / decrease discount expense.

By the way, these campaigns would be in addition to whatever generic newsletter thing you do, because they are customized to a particular segment.  When you are doing a plan like this, the generic newsletter becomes "air cover", sort of a background "friendly contact" or awareness approach.  The real promotional work gets done in these behaviorally segmented campaigns.  If you are doing these campaigns, you *do not* want to put discounts in the newsletter.

Do you know why?

I mean, why bother with all this, why not send the same discount to everybody in a generic newsletter?  Since you bought my book you probably know the answer already, but just to wrap this reply up in a complete package, think about this:

Let's say from the example above that you do find your multi's usually buy the 2nd purchase within 40 days of the first.  And let's say you do a *monthly* (every 30 days) newsletter with discounts in it.  What is happening to the business and customer base?  Two things:

1.  You are throwing margin away.  All the future multi's who would have bought anyway 10 days after the newsletter drop at full margin are responding to the newsletter discount.  Sure, great response, but *is it really*  if you were going to get the sales at full price anyway?  Prove it to yourself.  Next newsletter, look at the actual responders.  You will find the majority of them are multi's - the people most likely to buy again *anyway* without a discount.  There are literally millions of dollars being left on the table this way in web retail.  E-mail, at least in web retailing, is not "free"
by a long shot.

2.  You are teaching your future multi-buyers what is called "coupon proneness".  You are teaching them to always buy on deal.  If they get their 2nd purchase on deal, they tend not to make their 3rd until they get another deal and so forth.  Remember, these multi's are your future best customers, they are the 10% that will drive 90% of your profits.  Do you really want to teach them to buy everything on deal right up front?  Really?

If that's not enough work for you, don't forget you have the marketing patterns to look for, e.g. where did the multi's come from - which ads, what offers, search engines?  Certain search phrases will tend to create multi-buyers and others will not.  You should heavy up the spend on the phrases that create multi-buyers and back down on the phrases that tend to create 1x buyers to maximize the value of any search campaigns.  Also, feature products that create multi's in your newsletter and on the home page and back away from promoting any product that tends to create 1x buyers.

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!  Subscription instructions are top and bottom of this page.

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 here.

'Til next time, keep Drilling Down!

- Jim Novo

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