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Recency: When is a Customer Not a Customer? 
Drilling Down Newsletter # 34: June 2003


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

# Question: Are Non-Members Customers?

# Question: Retention and Defection Scoring

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

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

Hi again folks, Jim Novo here.  

This month we've got the usual "best of" Customer Marketing article links section.  And we have 2 deep questions from fellow Drillers.

For several months now, new subscribers to the newsletter have been receiving the first nine chapters of the Drilling Down book free by e-mail.  This has caused a flood of questions on how to use this info in specific day-to-day business operations.  That's OK with me, because I believe by going through examples of using these techniques in a whole variety of business situations, everyone will benefit.  

For some reason, people often do not see the "home run" applications for customer analysis in their own business.  But provide examples of how it works in a different business, and the "Ah-Ha! moment" all of a sudden is at hand.  I have seen this happen offline for years.  Want to bet we can make it happen online too?

OK then, 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.

Pay Attention to 12-Month-File, Forum Speakers Urge
Expires June 30, 2003  DM News
Sure, that's the "blunt force" way to do it.  People who have purchased last 12 months are much more likely to purchase than those who have not purchased last 12 months because they are more Recent.  But, people who purchased last 6 months are even more likely and past 3 months even more likely than those people.  So the "power" of past 12 months really comes from the past 3 months.  How can you test and measure this?  Divide customers into <3 month, 3-6 month, and 6-12 month buckets and promote to them; use the same approach as the 30-60-90 test.

Internet Can Prove Costly For Catalogs
Expires June 30, 2003  DM News
What we're really talking about here folks is the coming of true multi-channel marketing; and it really only works if you track the customer LifeCycle across all your channels.  Is it difficult?  Absolutely.  Is it impossible?  No.  Is it profitable?  Wildly so, if you understand the LifeCycle and follow the two fundamental rules of High ROI Customer Marketing and you have a system to track the LifeCycle and act on it.


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

Non-Members are Still Customers?

Q:  I just ordered the book too, so I am eager to learn more about SIMPLE ways to implement RFM-based strategies.

A:  Well, thank you for ordering!  I hope it fulfills your expectations.

Q:  In the continuity club (Jim's Note: flower of the month, book of the month, beer of the month) club business though, a little of the RFM process looks tricky because everyone has a certain Frequency built-in, because of the "repeat" nature of clubs.  Also, we're starting to see a  phenomenon where customers that drop out of our club continue to order from us.

A:  This is quite normal, depending on how the club is set up and whether or not you make it "easy" for people to continue.  In some clubs, you are either in or not (books, CD's, credit cards).  Most catalog-type clubs (pay a fee in exchange for ongoing discounts / added services) see continuation beyond club membership.  It's a volume-based thing and a "rational" decision by the consumer - if you need to buy a lot of stuff, joining the club makes sense, because the discount pays for the membership.  

In your case, it might be more attached to education, for example - you join the club to educate yourself about the products, then quit when you can "do it on your own".  Or, you get lots of  product to experience the variety, and settle into a specific usage pattern.  This is the customer LifeCycle at work.  If you can recognize these patterns, you can use them to predict what customers are likely to do next.  If you can predict behavior, you can create very high ROI customer marketing programs.

Q:  This challenges our traditional thinking that club-lapse is the end of the LTV contribution.  It leaves me wondering what really is the end of the LTV for any given customer.  The end-all goal for me is to learn everything possible about customer lapse and how to influence it.  I've been given explicit responsibility just recently to take charge of customer lapse and influence it to our advantage.  I'm analyzing the scope of the problem and putting together a plan of attack.

A:  Well, somebody has their thinking hat on at that company!  In your environment (if I understand it correctly from a brief review of the web site), I don't think the "club" really defines long-term behavior, it could be seen simply as a customer acquisition tool, which is also true of the catalog-type clubs I referred to above.  You have to be careful with this kind of club, because you can end up creating negative value customers if they buy a lot of low margin goods with a membership discount and then just simply abandon you.

The bottom line is this: you probably should not define LTV by club membership length.  It may be convenient to look at membership as the definition of a "customer", but being a "member" is probably just the first stage of the customer LifeCycle.  There is then a transition period where some stay members, some reject membership but remain customers, others quit entirely.  You need to find out what variables - media source of customer, creative / offer used, first product purchased, etc. cause customers to end up in these buckets and optimize for highest value.

If you want to be proactive on this LifeCycle transition, you need to predict which members will transition and remain customers, which ones need promotional "help" doing this, and which ones you should not bother spend on.  How?  You can check out how we did this at Home Shopping Network in the book, it's quite simple and works like a charm.  Track the customer LifeCycle using simple metrics like Recency or Latency and act only when you have to, and when you do act, act at the point of maximum impact.

Q:  What sort of work have you done on customer lapse studies, retention marketing, or in club environments like mine?

A:  I've done 100's of customer retention programs over the past 20 years.  Every one is different based on the industry, the business model, and the constraints of the specific business.  You will find many examples in the book, and more recent case studies are on the web site here and here.  Unfortunately, companies are not very willing to let me talk openly about solving their customer retention problems; they consider this info a "trade secret" because of the financial implications / competitive issues involved.

If you are interested in my services, the most cost-effective solution I can suggest is to read the book first; it provides a ton of "how to" information and could keep you busy for quite some time.  If you want to accelerate the learning process, I'd be glad to talk with you about this.  I have to tell you something first though - all my current clients read the book first, did some of the work outlined in the book, and then engaged me to help them push it forward.  Ask any questions as you review the book - you're a customer now!

Jim

Retention and Defection Scoring

Q:  Just read your book and I say full marks for such a practical and sensible approach!!! Start small and grow is the way to go. 

A:  Well, thanks for the kind words!

Q:  I am a part owner of a travel agency (not been the best area to be in lately).

A:  Eeeeek!

Q:  My first focus for Drilling Down is on our leisure customers.  But my head is spinning a bit with all the ideas I have from your book.  I can electronically access our: customer names etc., an ID number, when they purchased, how much the product cost, the supplier, the category (i.e. air only, cruise, tour etc.) and the final destination.  If you would be so kind as to give me a little steer in the right direction  in setting up the metrics and scores.

A:  Hmmm...  I of course don't know your business but would think that particularly in leisure, there is a natural cyclicality caused by vacation timing, anniversary events, and such.  So in terms of timing, you use a classic Latency approach, e.g. if a customer took a trip last July they are somewhat likely to take one this July.  If they took one last July AND the July before, they are very likely to take one this July.  If they have taken a trip the last 5 July's in a row, they are extremely likely to take one this July.  

So you can rank customers by likelihood to travel each month, and if you want, could assign them a "score" to represent this likelihood, in the case above, extremely likely = 5, very likely = 4, etc.  People who have not booked with you for a year might be a 2, not for 2 years a 1. 

Then you add a frequency / monetary component and you have a two-digit ranking quite similar to an RF score, but customized for your business.  My guess is due to the variance in prices on travel (e.g. plane flight versus ocean cruise) using monetary or total sales rather than frequency is the ticket, so to speak.  Even better would be margin dollars or profit, since as I understand it a person could take 10 flights and not deliver the profit you might make on 1 cruise; the profit margins vary enormously, so "sales" or "number of bookings" is probably not tracking the real issue, which is to identify most profitable customers.  Rank customers by value then divide customers into 5 equal "Quintiles" on this score as discussed in the book.

Once you have your rankings, first digit = likelihood to purchase, second digit = value of the customer (the RF score), you proceed with marketing as suggested in the book, using the scores to identify customers likely to buy and customers likely to defect.  

For example, under the likely to buy approach, you may have an idea of how many days a person books travel in advance of the trip (or you can get this from your records, date of sale versus trip date).  Let's say it averages 8 weeks.  It is currently June, so 8 weeks from now is August.  Find all customers who traveled last August, and look at their rankings.  If you were going to call them but can only make a few calls a day, start with the ones with the highest ranking - the ones who are most likely to buy and are also best customers, and work down the list.

This average number of weeks between booking and trip probably differs by type (cruise versus plane), so you might want to approach it like that, e.g. in June you call people you traveled by plane last July (plane = average 4 weeks booking to trip), and people who traveled by cruise last August (cruise = average 8 weeks booking to trip).  Follow?  Identify the behavior and then follow it, try to get it to repeat. This is the "when", the "timing".  The "who" to market is defined by your rankings; given limited resources, start with the ones most likely to result in a sale.

On the defection side, look at people with high rankings who failed to book when they were supposed to.  Back to using June as the current date, this would be customers with high rankings who booked last May.  They are now Latent, past the "trip wire", they failed to book when they were most likely to.  So you call them and find out if the trip was taken with somebody else, or perhaps delayed (highly likely) and would they like help with organizing it for later on in the year?

The above approaches (both sales and defection work) combined create a very systematic and directed way to just gradually push the whole thing forward every week, by specifically identifying customers who are likely to buy and likely to defect.  You end up concentrating your work where it is likely to be most effective, and as long as you are taking advantage of every opportunity to predict a sale or recapture defecting customers, all customers will eventually make it to your radar screen as an opportunity for profits.

Hope that helps!

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.  
-----------------------------------------

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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