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This month we take a look at how to increase profits in a B2B subscription business by using  simple customer models.  Sounds straight up  enough, right?  But there's a twist - the "Marketing" person in charge is actually a Finance person!  Holy ROI, Batman!

For notable articles, we have a group of Ad Agency folks talking about how "regular" Marketing should be more like Search - focused on helping people get answers and solve problems.  There's a shocking idea.

The world's turning upside down and inside out in this month's newsletter!  Perhaps a little Drillin' will clarify things...

Best Marketing Productivity Articles
====================

Not ONline, INline

This is a collection of articles revealing an apparent change in the mindset of at least some senior Ad Agency people.  Namely,  Marketing should actually help people accomplish tasks, should "Pull" people in rather than "Push" at them all the time - kind of like Search Marketing does.  Can traditional Marketing do the same thing?

To access the full article review / links to the articles themselves, click here.

Questions from Fellow Drillers
=====================

Customer Modeling for Finance Folks

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 my approach is very numbers driven.  Stuff either works or it doesn't - did you make money or not?  Many marketing people seem to dislike the idea of accountability.....hmmm...

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.  My feeling is they felt this is a sales tool.  The question  they always wanted answered was "Why did the customer behave the way they did?  We find that out and make a sales call, not engage in 'marketing air cover' tactics."

A:  Not sure what you mean by this...in fact, depending on the value of the customer, a sales call might be exactly what is needed.  If you have a formal "wall" between sales and marketing, usually the issue can be decided by "degree of pain" e.g. how painful will it be to lose the customer?  Generally, a personal call is more effective than Marketing but more costly, so you use those guns sparingly.

If you have a small number of very high value customers who look to be defecting 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 campaign is probably 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).  The scoring approach to customer value is about allocating scarce resources to the highest and best use.

I think what Sales is saying is this: if you know a specific thing about a customer, we handle that "one to one" thing; Marketing does the "all customers" messaging.  And this is precisely the point of customer models - they allow Marketing to do the "one to one" thing, as opposed to the "air cover" thing you spoke of.

Q:  So it has fallen upon me to develop a project plan and come up with some ideas to implement.  If we can not get marketing support we will run with it ourselves.

A:  Good for you!  A good old fashioned skunk works operation, I love that!  And led by a Finance guy on top of that.  Bravo!

Q:  I am now reading the book for a second time and I have a slight problem with how to best implement with our business.  I can see how this concept could be used to radically change our sales channel, but I do not think I have that much pull.

A:  Well, let's take a look at it.  Typically, and particularly since you are in Finance, what you do is look to prove out a high value concept, then share financial success up the chain.  This builds momentum for the approach and gets people really interested in knowing more, which leads to taking concrete action.

So for example, find your very highest value potential defectors using either Recency or Latency.  Then split them into two equal groups - test and control - as described in the book.  Have sales call the people in the test group and find out what is causing the defection behavior, try to save the customer.

Then 90 or 180 days later, look at the number of test and control that stuck with the service.  Subtract the control number from the test number, this is the "net" retained due to your calls.  Multiply by value of the contracts, and you have sales due to your program.

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.  For us sales leads to higher revenues leads to higher sales, etc, one big circle.  So I guess my question is this: Can RF scores be used for a pre-paid subscription service?

A:  Sure, but perhaps not in the "classic" sense of transactional revenue.  For many service biz, particularly subscription ones, you profile activity other than billing, since the billing tends to be static.  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.  I assume you are authenticating subscribers to the service on your web site, so this shouldn't be a big deal.  Then your scores would rank customers by likelihood to "continue using the service" and their value. 

High value customers with falling or low likelihood (falling RF score) to continue using  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.

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 individually when developing the RF model and Latency tripwires?

A:  Yes.  Annual subscriptions and Pay As You Go are two fundamentally different behaviors and mindsets, so mixing them will confuse the scoring.  You have a Long cycle (annual) and a Short cycle (PAYG) decision being made; both the models and the actions would be different.  For example, PAYG will be a more sensitive model with action required more immediately.  Also, these are probably low value customers so you're talking about e-mail or direct mail.

And, your measurement cycle would be different.  Taking the test example above, you would check for "net results" on PAYG probably at 60 days; annuals you would wait for renewal date unless the offer affected it.

Q:  We also have different size customers some spending more than $10K / year and  some $1K, should we segment based upon dollar values as well since the more they committed to the higher their FM scores (you would expect)?

A:  You can make anything really complicated through segmentation if you want to!  When just starting out, my answer is Segment in terms of message yes, but Segment in terms of scoring and triggering action, no.

Keep in mind the Current Value / Potential Value model; don't confuse the two behavioral vectors and their meaning.  Current Value - what they have paid so far - is about how valuable the customer is to the company and determines what action is taken.  This is the "personal call" versus "send e-mail" part of the equation; it's the cost component.

The Potential Value (Recency, Latency) is about predicting the likelihood for future business, it's about "when" to act.  This is the risk of losing the business in the future.

So I would not segment by value in terms of predicting defection; but once defection is predicted, I would take action based on the value of the customer.

Current Value = What to do
Potential Value = When to do it

That's why this approach is so much more profitable then dropping Marketing on a "batch and blast" calendar schedule (you called it "marketing air cover").  Right message, to the right person, at the right time.  This approach works especially well online because Relevancy is so important and switching costs are low. 

Q:  What kind of Marketing should we do?  Is there any other segmentation we should try?

A:  Well, that's a little tough without knowing more about the business, but there's a good way for you to find out!

With a service, you hopefully know why people stop using it.  To prepare for these campaigns from a Marketing perspective, 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).  Create Sales / Marketing - pitches / materials / offers 
to address the issues they have.  

Then when you see a client engaging in a defection pattern on usage (drop in RF score, Latency Tripwire), engage the appropriate response (Sales or Marketing) based on the value of the customer.

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 the hands to be raised; this will tell you what works and put you on the right track for more complexity.

For example, let's say (and I imagine it would be true) that SIC codes play a role in your sales and retention.  Certain types of businesses are simply going to be more likely to realize value from the services.  So you do a campaign (sales, marketing, or both) to *all* customers in a particular defection state and let the SIC data speak.

Let's say for simplicity that you find if a PAYG  subscriber doesn't use the service for 10 days that's a warning flag for defection.  You prepare and drop the retention campaigns to any accounts that "trip" this trigger - right message, at the right time.

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, told you which SIC's it is worth spending time / money on.

Then you look at bit deeper, and find that within an SIC code that looks to be a "bad idea" overall, the results are pretty good 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 kill the rest of the marketing activity for that SIC.

You can look for other segments by value, by region, by services subscribed to, by type of data they look up, 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.  In fact, clients call me years after they have stopped using my services to tell me they have discovered unique new segments that are extremely profitable.

Good luck on the skunk works project, let me know if you have questions!

Jim

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If you are a consultant, agency, or software developer with clients needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click here
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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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