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New RFM: Small Business B2B Models & ACT!, e-Mail Models
Drilling Down Newsletter # 42: 2/2004


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

Get the Drilling Down Book!
http://www.booklocker.com/jimnovo

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

In This Issue:

# Topics Overview

# Best Customer Retention Articles

# Question - New RFM: For Direct Mail Only?

# Question - New RFM: For E-Mail Campaigns?

# Question - New RFM: For SME B2B?

# New RFM Metrics: Take 10 on Retention
-------------------------------

Topics Overview
=============

Hi again folks, Jim Novo here.

Chock full issue.  We've got some fantastic customer retention article links, including one (Migration Matrix) that describes a very simplified version of a portion of my own Drilling Down method.  Then three fellow Drillers have questions answered including one on using customer modeling with a small database and contact manager like ACT!

But first, these two jobs are still open for you web analytics mavens out there:

Drs. Foster & Smith, Wisconsin

Karta, Los Angeles

If you have a job in web metrics / customer analysis you'd like to get to this newsletter audience of about 4,000 send me a link.  No charge to promote your analytics job.

Second, the free Website Conversion and Web Analytics Suite of Calculators is now available in business Spanish, courtesy of the bi-lingual folks at Future Now; click here.

OK, let's 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.

7 Mistakes to Avoid When Building Customer Loyalty
January 23, 2004  DM News
Another straightforward, simple list of bullet points one has to consider when designing a profitable Customer Loyalty program.  What do I mean by "profitable"?  Check this out.

Why Marketing Databases Often Fail
January 24, 2004  DM News
Arthur Hughes weighs in again with some rock solid, simple advice you need to read if you are thinking about a High ROI Customer Marketing  program.  For one thing, it is not nearly as expensive as everybody tells you to create the database that drives the whole thing.

The Migration Matrix
February 9, 2004  Catalog Success
A simplified version of my own Customer Scoring Grids, a way to create visual maps of customer retention and defection you can use as the "master plan" for managing your entire Customer Retention effort.  If you like The Migration Matrix, be sure to check mine out.

-------------------------------
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
-------------------------------

Questions from Fellow Drillers
=====================
If you don't know what RFM is or how it can be used to drive customer profitability in just about any business, click here.

New RFM:  For Direct Mail Only?

Q:  Is it true that RFM always uses the mail as the only method to get the response, or is there any other way that easier and faster to get the response beside from the Internet.

A:  Not sure I understand the question, but I think you are asking about the communication media, not the RFM model.  You can use any method of communication you want to - mail, internet, telephone, personal sales calls - it doesn't really matter *how* communication occurs.  The point of the RFM model is that it tells you **who** to communicate with and **when** to communicate to maximize your profits and reduce your costs.

So, let's say your only communication method is a personal sales call, and you only have one person who can make these visits.  Let's also say this person only has the ability to make 8 visits in a day.  You would want this person to concentrate their efforts where the likelihood of making sales or keeping a high value customer is the very highest, and the RFM scores would tell you this.  I hope this is clear to you and answers the question!  If not, please ask again.

Jim

-------------------------------

New RFM:  For E-mail Campaigns?

Q:  What do you suppose the per piece rate for e-mail is?  We are not sending out direct mail at all, just permission emails.  How can we use RFM if our costs are nil for a campaign?

A:  Well, I don't know what kind of business you are in, and that would help in answering this question.  But generally, two things:

1.  There are probably costs other than the cost of the e-mail involved

2.  RFM isn't just about reducing cost, it's about increasing profits based on knowing who to communicate to and when, and perhaps what to say.

Example of  # 1:  Opportunity costs are all around us, and can be very steep, for example:

* the cost of giving away product margin with a discount when you really didn't have to

*  the cost of over-communicating to someone and having them unsubscribe

*  the cost of sending the wrong messages at the wrong times and losing the customer

RFM allows you to measure and control these costs, maximizing profits.

Example of # 2:  RFM "standardizes" what you know about customers by ranking them against each other for present and future value.  This allows you to test programs and repeat successes over and over and over.  If customers with a certain score or range of scores respond well to a certain promotion, customers with this score or range of scores will respond well next month, the following month, and as far out as you can see.  The RFM scores tell you where the customer is in their LifeCycle with you and allow you to tailor the most effective contact.   Once you find something that works, you can repeat that success over and over just by looking at a customer's score, and constantly optimize for higher and higher levels of profit.

So RFM is about more than just reducing the cost of communications; as you pointed out, that is more of an offline play and an example of the "Old RFM".  The new New RFM  is about optimizing the marketing mix to customers who are in different stages of their relationship with you, in order to squeeze out the highest possible profits from each customer.

I know that last statement probably makes some factions of the CRM community cringe, but business is business. You can still treat customers with respect and earn their admiration while increasing profits. Those having a "moral problem" with increasing per customer profitability won't be around for very long, I 'd expect.

Good question!

Jim

-------------------
If you are in SEO and the client isn't converting the additional visitors you generate, you can help them make it happen - click here.
-------------------

New RFM:  For Small Business  B2B using ACT!?

Q:  You say your approach works for any size and any type of business.  We are an audio electronics manufacturer specializing in commercial installs of professional sound equipment.  Our equipment is marketed through reps (in North America) and distributors (outside North America).  Neither the reps or distributors stock our equipment.  Equipment purchases are on a project basis with audio and architectural consultants releasing RFPs specifying particular pieces of equipment.  Does your modeling work for such pure B2B business models?

A:  Sure, any business that has transactions with customers can be modeled.  The question really is more like can you **do anything** with the information once you have it?  If you can't "act" on the model, it won't do you much good to have one.

Q:   Our company is about $10 million in revenues.  Our current database is a glorified Rolodex in ACT.  I've seen cautionary notes concerning databases of less than 2,000 customers.  We have about 1881 dealers, 102 Distributors, 28 Reps and 712 end-users who (for a variety of reasons) can purchase from us direct.  We also have about 625 consultants who (hopefully) specify our equipment in projects that may require a year or two to become a reality.

A:  Nothing wrong with ACT!, I've seen some pretty nifty stuff done with it...

Q:  Which methodology should I use to uncover the behaviors of each of these small audiences and still have some degree of confidence in the results?

A:  Well, in distribution networks like this, I think the primary idea would be to make sure you understand the value of each customer relative to it's own group and be prepared to take action should it look like you should.

The 1881 dealers could be ranked against each other by Recency.  The rank predicts likelihood to buy again.  You could then re-score them each month and see who is rising and who is falling in rank.  Combined with the value of the  customer, you could decide on what action to take, if any.

So for example, let's say you have two customers, and they both fall dramatically in rank.  However, one has low value and the other has high value.  You have a salesperson call on the high value one, you send a direct mail piece to the low value one.  The cost of the retention effort is in pegged to the value of the customer; this conserves resources and ensures you get the highest ROI.

Or take the 102 distributors.  A distributor (I'd guess) has more cyclical or predictable order characteristics than a dealer, as in "Distributor A orders every 30 days, Distributor B orders every 60 days", etc.  This is a situation for the Latency metric.  You basically set up a "trip wire" for each that says "if we don't see a new order from A 35 days after his last one, call her, if we don't see a new order from B 70 days after his last one, call him".  

Once you know the average number of days between orders for a distributor, you can set something up in ACT! that at 35 or 70 days, pops up a message "check to see if distributor has ordered".  If you further know the value of each, you can say "call" for the low value ones and "sales visit" for the high value ones.  That way the sales force is working hardest where the money is most likely to be found.

Customer modeling work doesn't have to be complicated or use fancy software.  It's a bit more manual doing it this way, but with as few records as you have, you could do all the analysis in a spreadsheet and then use ACT! as the "campaign manager" or "CRM system".  All you have to do is program "reminders" in ACT!

If the above kind of system can be shown to work, then you have the justification you need to go ask for a higher level commitment to the program, in programming, people, etc.  Some of the best "CRM" systems out there have been built by the company specifically for the company based on results of "skunk works" programs like the one described above.

And don't sweat the size of the populations, in the above examples, it's not like we are trying to predict the outcomes of any campaigns across the populations or do advanced statistics.  We're looking at the patterns of individual behavior.  And we're simply saying "Hey, there is a pattern, and if the pattern changes, we should pay attention to it".

You don't need thousands and thousands of customers to do that.  In fact, you only need one.  What you do need is to be able to look at the pattern of behavior of the customer over time, and be able to recognize when it
changes.  Then you ACT!

Jim

New RFM Metrics: Take 10 on Retention
====================

If you would like to know more about how to use the new RFM metrics to improve your profitability on the web, check out the free "Take 10 on Retention" package I wrote.  It includes a 10 minute presentation on the strategy and reporting behind increasing web customer ROI using simple predictive models.

Here's the idea in a nutshell: when you make investments, you expect the value of them to rise in the future.  You have web investment choices to make - ad design, media, building out content, etc.  Retention metrics tell you which of these investments are the most likely to generate increased profits in the future.

Click here for the Take 10 on Retention

------------------------------------

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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